-----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, RHD3KD6EIQkoEYFqLpnO24dNxeTx9OLZeft+O5S+FQTn1GFcbFYDI3oZmPRa6kka TiXkBUwD9WCdqyihSDdaEg== 0000950109-02-001874.txt : 20020415 0000950109-02-001874.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950109-02-001874 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CEPHALON INC CENTRAL INDEX KEY: 0000873364 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 232484489 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-19119 FILM NUMBER: 02598488 BUSINESS ADDRESS: STREET 1: 145 BRANDYWINE PKWY CITY: WEST CHESTER STATE: PA ZIP: 19380 BUSINESS PHONE: 6103440200 MAIL ADDRESS: STREET 1: 145 BRANDYWINE PARKWAY CITY: WEST CHESTER STATE: PA ZIP: 19380 10-K405/A 1 d10k405a.txt FORM 10-K/405A FOR CEPHALON, INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 0-19119 Cephalon, Inc. (Exact name of registrant as specified in its charter) Delaware 23-2484489 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 145 Brandywine Parkway, 19380-4245 West Chester, Pennsylvania (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (610) 344-0200 Securities registered pursuant to Section 12(b) of the Act:
Title of each Name of each class exchange on which registered - ----- ---------------------------- None None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) ---------------- Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] . No [_] . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $2,749,374,321. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the Nasdaq National Market on March 20, 2002. For purposes of making this calculation only, the registrant has defined affiliates as including all directors, executive officers and beneficial owners of more than ten percent of the Common Stock of the Company. The number of shares of the registrant's Common Stock outstanding as of March 20, 2002 was 55,018,369. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement for its 2002 annual meeting of stockholders are incorporated by reference into Part III. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TABLE OF CONTENTS PART I ITEM 1. Business....................................................... 3 ITEM 2. Properties..................................................... 15 ITEM 3. Legal Proceedings.............................................. 15 ITEM 4. Submission of Matters to a Vote of Security Holders............ 15 PART II Market for Registrant's Common Equity and Related Stockholder ITEM 5. Matters........................................................ 16 ITEM 6. Selected Consolidated Financial Data........................... 17 Management's Discussion and Analysis of Financial Condition and ITEM 7. Results of Operations.......................................... 19 ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk...... 32 ITEM 8. Financial Statements and Supplementary Data.................... 33 Changes In and Disagreements with Accountants on Accounting and ITEM 9. Financial Disclosure........................................... 55 PART III ITEM 10. Directors and Executive Officers of the Registrant............. 56 ITEM 11. Executive Compensation......................................... 57 Security Ownership of Certain Beneficial Owners and ITEM 12. Management..................................................... 57 ITEM 13. Certain Relationships and Related Transactions................. 57 PART IV Exhibits, Financial Statement Schedules, and Reports on Form 8- ITEM 14. K.............................................................. 58 SIGNATURES............................................................... 63
2 PART I ITEM 1. BUSINESS In addition to historical facts or statements of current condition, this report contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. These may include statements regarding anticipated scientific progress in our research programs, development of potential pharmaceutical products, prospects for regulatory approval, manufacturing capabilities, market prospects for our products, sales and earnings projections, and other statements regarding matters that are not historical facts. Some of these forward-looking statements may be identified by the use of words in the statements such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" or other words and terms of similar meaning. Our performance and financial results could differ materially from those reflected in these forward-looking statements due to general financial, economic, regulatory and political conditions affecting the biotechnology and pharmaceutical industries as well as more specific risks and uncertainties such as those set forth above and in this report. Given these risks and uncertainties, any or all of these forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such forward- looking statements. Furthermore, we do not intend to update publicly any forward-looking statements, except as may be required by law. Risks that we anticipate are discussed in more detail in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Certain Risks Related to Our Business." This discussion is permitted by the Private Securities Litigation Reform Act of 1995. Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting an active research and development program, we market three products in the United States and a number of products in various countries throughout Europe. On December 28, 2001, we acquired Laboratoire L. Lafon and its affiliated entities, which we refer to as Group Lafon. The Group Lafon entities operate as subsidiaries of Cephalon. Our corporate and research and development headquarters are in West Chester, Pennsylvania, and we also have offices in Salt Lake City, Utah, France, the United Kingdom, Germany and Switzerland. We operate manufacturing facilities in France for the production of modafinil, which is the active drug substance in our PROVIGIL(R) (modafinil) tablets [C-IV] and MODIODAL(R) (modafinil) products, and for which we have worldwide control of the intellectual property, marketing and manufacturing rights. We operate manufacturing facilities in Salt Lake City, Utah for the production of ACTIQ(R) (oral transmucosal fentanyl citrate) [C-II] for distribution and sale in the European Union. In the United States, we market three products, which constitute the majority of our total net sales. Outside of the United States, our commercial activities are concentrated in France and the United Kingdom. The following table summarizes by country our significant products:
Country Product Indication - ------------------------ -------------------------------------------- -------------------------------------------------------- United States........... PROVIGIL(R)(modafinil) Excessive daytime sleepiness associated with narcolepsy GABITRIL(R) (tiagabine hydrochloride) Partial seizures associated with epilepsy ACTIQ(R) (oral transmucosal fentanyl citrate) Breakthrough cancer pain management France.................. MODIODAL(R)(modafinil)1 Narcolepsy and hypersomnia SPASFON(R) (phloroglucinol) Biliary/urinary tract spasm and irritable bowel syndrome FONZYLANE(R) (buflomedil) Cerebral vascular disorders ACTIQ/2/ Breakthrough cancer pain management United Kingdom/3...../.. PROVIGIL Narcolepsy TEGRETOL(R) (carbamezepine) Epilepsy RITALIN(R) (methylphenidate) Attention Deficit/Hyperactivity Disorder
- -------- 1. MODIODAL is the French trade name for modafinil. 2. Expected launch in the second half of 2002. 3. Marketed, along with two other products, under a collaboration agreement with Novartis Pharma AG. In the United States, we market our PROVIGIL, ACTIQ and GABITRIL products through the following specialty sales forces: . an approximately 185-person sales force that details PROVIGIL and GABITRIL to neurologists, psychiatrists and sleep specialists; and . an approximately 60-person sales force that details ACTIQ to pain specialists and oncologists. Outside of the United States, we have a sales force in France numbering approximately 155 persons of which 150 are associated with Group Lafon, and a sales and marketing organization numbering approximately 25 persons supporting other European countries. We continue to explore the utility of PROVIGIL in patients suffering from sleepiness and fatigue associated with various clinical disorders, including sleep apnea, shift work sleep disorder, multiple sclerosis and depression. Our objective in conducting these 3 studies is to expand the approved labeling for PROVIGIL and allow us to market and promote its use in some or all of these patients. In December 2001, we acquired additional product rights to GABITRIL and now control rights worldwide, excluding Canada, Latin America and Japan. Following the transfer of regulatory approvals, we will begin marketing GABITRIL in France, the United Kingdom, Germany, Austria and Switzerland. We have initiated a series of exploratory studies to assess the use of GABITRIL for disorders such as anxiety and neuropathic pain. In addition to clinical programs focused on our marketed products, we have other significant research programs that seek to discover and develop treatments for neurological and oncological disorders. With respect to neurology, we have a program with a molecule, CEP-1347, that has entered Phase 2 clinical studies for the treatment of Parkinson's disease. In the cancer area, we have a program with a lead molecule, CEP-701, which is currently in Phase 2 clinical studies to treat pancreatic cancer, and a program with a molecule, CEP-7055, that is currently in Phase 1 clinical studies for the treatment of solid tumors. As part of our corporate strategy, we seek to share the risk of our research and development activities with corporate partners and, to that end, we have entered into a number of agreements to share the costs of developing and commercializing these compounds. For the year ended December 31, 2001, our total revenues and loss applicable to common shares were approximately $266.6 million and $61.1 million, respectively. The third quarter of 2001 was our first profitable quarter from commercial operations since inception. Our accumulated deficit at December 31, 2001 was approximately $576.7 million. These accumulated losses have resulted principally from costs incurred in research and development, including clinical trials, and from selling, general and administrative costs associated with our operations. To date, we have funded our operations from the proceeds of private and public sales of our equity and debt securities. While we seek to maintain and increase profitability and positive cash flow from commercial operations, we will need to continue to achieve product sales and other revenue sufficient for us to attain this objective. Moreover, our continued profitability may depend, in part, upon our ability to obtain additional required regulatory approvals, or successfully develop, commercialize, manufacture and market any other product candidates. U.S. COMMERCIAL OPERATIONS In the United States, we market PROVIGIL, ACTIQ and GABITRIL. For the year ended December 31, 2001, the U.S. revenues from these products accounted for approximately 98% of our total product sales revenues. Details of our U.S. product revenues for these three products are as follows:
Year Ended December 31, 2001 ----------------- PROVIGIL................................................ $146,282,000 ACTIQ................................................... 50,162,000 GABITRIL................................................ 24,630,000 ------------ Total U.S. product sales................................ $221,074,000 ============
PROVIGIL The FDA approved PROVIGIL for the treatment of excessive daytime sleepiness associated with narcolepsy in December 1998 and we launched the product in the United States in February 1999. PROVIGIL currently is supported by a dedicated U.S. sales force of approximately 185 persons. In December 2000, we acquired worldwide product rights to PROVIGIL through the acquisition of Group Lafon for approximately $450 million in cash. Through this transaction, we also acquired certain manufacturing facilities in France where modafinil, the active drug substance in PROVIGIL, is produced. Narcolepsy Narcolepsy is a debilitating, lifelong disorder whose symptoms often first arise in late childhood. Its most notable symptom is an uncontrollable propensity to fall asleep during the day. There is no cure for narcolepsy, which is estimated to affect about 200,000 people in the United States. Estimates indicate that only 35% of this population is currently diagnosed. PROVIGIL has been recognized by the American Academy of Sleep Medicine as a standard for the treatment of excessive daytime sleepiness associated with narcolepsy. Before we received FDA approval to market PROVIGIL, we conducted two Phase 3, double-blind, placebo-controlled, nine-week multi-center studies of PROVIGIL with more than 550 patients who met the American Sleep Disorders Association criteria for narcolepsy. Both studies demonstrated improvement in objective and subjective measures of excessive daytime sleepiness compared to placebo. PROVIGIL was found to be generally well tolerated, with a low incidence of adverse events relative to placebo. The most commonly observed adverse events were headache, infection, nausea, nervousness, anxiety and insomnia. Market expansion strategies Due to both the efficacy of PROVIGIL in reducing excessive daytime sleepiness associated with narcolepsy and the results of completed clinical trials, we believe that PROVIGIL may be useful in treating sleepiness and fatigue in disorders other than narcolepsy. The main focus of our ongoing clinical program is to further explore the potential use of PROVIGIL in treating excessive sleepiness that may be caused by a variety of clinical conditions. We have conducted exploratory studies in patients suffering from 4 other disorders that have fatigue as a significant symptom, including the chronic fatigue often experienced by patients suffering from multiple sclerosis. We cannot assure you that we will receive regulatory approval for any indication beyond the current label of excessive daytime sleepiness associated with narcolepsy. Under current FDA regulations, we cannot promote PROVIGIL outside its approved use. Excessive daytime sleepiness may be caused by a number of clinical conditions in addition to narcolepsy. For example, patients who suffer from obstructive sleep apnea often are tired during the day as a result of disturbed nighttime sleep. In addition, many people have work schedules that conflict with their normal circadian rhythm. Nightshift workers or people experiencing jet lag often are tired and suffer from impaired performance, even if they sleep a normal amount of time. Finally, excessive sleepiness is a significant side effect of many medications that are prescribed for pain or a variety of conditions such as Parkinson's disease. According to the National Sleep Foundation, approximately 40 million Americans suffer from excessive sleepiness. Clinical studies that have been conducted in patients suffering from obstructive sleep apnea, Parkinson's disease and sleep deprivation, as well as in shift workers, have shown that PROVIGIL may be useful in alleviating the excessive sleepiness in these patients. We are conducting additional clinical studies, specifically in patients suffering from obstructive sleep apnea and from shift work sleep disorder. The intent is to file a supplemental new drug application with the FDA that, if approved, may expand the approved uses of PROVIGIL to include all patients suffering from excessive daytime sleepiness resulting from clinical conditions. However, we cannot assure you that the studies we are conducting will have a positive outcome or that the FDA will grant any request to expand the approved use of PROVIGIL. We are also interested in exploring the utility of PROVIGIL in other areas, especially fatigue associated with multiple sclerosis and certain psychiatric disorders. A placebo-controlled study was completed in patients suffering from fatigue associated with multiple sclerosis which showed that 200 mg of PROVIGIL reduced fatigue in those patients. This reduction was statistically significant as measured by several validated fatigue rating scales. The most commonly reported side effects in this study potentially attributable to the drug were nausea, dry mouth, headache and diarrhea. Approximately 80% of the 250,000-350,000 people diagnosed with multiple sclerosis experience fatigue caused either by their disease or the therapeutics used to treat it. In many multiple sclerosis patients, fatigue may be the most prominent and disabling symptom. During 2002, we expect to conduct a number of pilot studies to examine whether PROVIGIL is useful in the treatment of other clinical conditions where the symptoms of excessive sleepiness and fatigue are present. However, these studies have not been designed and alone will not be sufficient to permit the expansion of the label to include any such indications. ACTIQ The FDA approved ACTIQ in November 1998 for the management of breakthrough cancer pain in opioid tolerant patients and ACTIQ was launched in the United States in March 1999 by Abbott Laboratories. In March 2000, Abbott relinquished the U.S. marketing rights to the product to Anesta Corp. We acquired Anesta Corp in October 2000, and in February 2001, we relaunched the product, which is now supported by a dedicated sales force of approximately 60 persons who are responsible for detailing ACTIQ to pain specialists and oncologists in the United States. Abbott continues to manufacture ACTIQ for distribution in the United States while we manufacture ACTIQ for markets outside the United States. ACTIQ uses our proprietary oral transmucosal delivery system (OTS(TM)) to deliver fentanyl citrate, a powerful, Schedule II opioid analgesic. Our OTS consists of a drug matrix that is mounted on a handle. The OTS is designed to achieve rapid absorption of certain potent drugs through the oral mucosa(the lining of the mouth) and into the bloodstream, producing rapid onset of the desired therapeutic effect. OTS allows the caregiver or patient to monitor the onset of pain relief and to remove the unit and stop administration of the drug once the desired therapeutic effect has been achieved or if side effects appear. Breakthrough Cancer Pain One of the most challenging components of cancer pain is breakthrough pain. Breakthrough pain is a sporadic flare of severe pain that "breaks through" the medication patients use to control their chronic pain. Breakthrough pain may be related to a specific activity, or may occur spontaneously and unpredictably. Breakthrough cancer pain typically develops rapidly and often reaches maximum intensity in three to ten minutes. It has a duration that varies from 30 minutes to several hours and can be extremely painful and debilitating. We believe that approximately 800,000 patients, or more than half of all cancer patients in the United States who experience moderate to severe pain, suffer from breakthrough pain. Cancer patients who suffer from breakthrough pain may suffer one to four episodes every day. Opioid tablets, capsules and elixirs are not optimal to treat breakthrough cancer pain because they typically require 30 minutes or more to produce pain relief. Physicians can attempt to manage breakthrough pain by increasing the dose of the around-the-clock, long-acting opioid analgesic until the patient no longer experiences breakthrough pain. However, this approach frequently leads to over-medication and an increase in undesirable side effects such as drowsiness or severe constipation. With ACTIQ, the fentanyl citrate is released for rapid absorption through the mucosal tissues into the blood stream and slower, more prolonged absorption through the gastro-intestinal tract; pain relief may begin in 15 minutes with maximum effect occurring in 45 minutes in some patients. We market ACTIQ under a comprehensive risk management program of educational and safe use messages that inform health care professionals, patients and their families of proper use, storage, handling and disposal of the product. The greatest risk of improper use of ACTIQ is the potential for respiratory depression, which can be life threatening. 5 Other than ACTIQ, the only currently available treatments that adequately match the rapid onset of pain relief to the rapid onset of breakthrough cancer pain are intravenous or subcutaneous infusions or intramuscular injections of potent opioids. In many settings, infusions or injections are unacceptable because they are invasive, uncomfortable, inconvenient for patients and caregivers, and more costly than less invasive methods. Market expansion strategies As discussed above, ACTIQ is indicated only for the management of breakthrough cancer pain in opioid tolerant patients. However, we believe that it may be effective in the management of breakthrough and other severe pain associated with other illnesses and conditions, and we are exploring regulatory requirements to expand the label to cover such uses. GABITRIL The FDA approved GABITRIL in September 1997 for the treatment of partial seizures associated with epilepsy and it was launched in the United States in 1998 by Abbott Laboratories. In late 2000, we acquired all U.S. rights to GABITRIL from Abbott in exchange for payments totaling $100 million over five years. We also will make an additional payment to Abbott of up to $10 million if Abbott obtains an extension of the composition patent covering the active drug substance contained in GABITRIL beyond its current 2008 expiration date. The product is currently supported by a 185-person sales force that also promotes PROVIGIL. In December 2001, we acquired product rights to GABITRIL worldwide, excluding Canada, Latin America and Japan, from Sanofi-Synthelabo and the product inventor, Novo Nordisk A/S. GABITRIL is a selective GABA reuptake inhibitor that is used as adjunctive therapy in the treatment of partial seizures in epileptic patients. GABA (gamma-amino butyric acid) is an important inhibitory transmitter in the central nervous system and is widely distributed in all regions of the brain. A GABA reuptake inhibitor increases the amount of available GABA in the body, which can be useful in treating conditions associated with abnormal GABA levels. The pharmaceutical market for the treatment of epileptic patients generally is well servedwith a number of available therapeutics, several of which are new entrants to the market. Growth of pharmaceutical products in this market tends to be slow both because of the number of therapies available and also because physicians are unlikely to change the medication of a patient whose condition is well controlled. Epilepsy Epilepsy is a chronic disorder characterized by seizures that cause sudden, involuntary, time limited alteration in behavior including changes in motor activities, autonomic functions, consciousness, or sensations, and accompanied by an abnormal electrical discharge in the brain. A partial seizure arises from a disorder emanating from a distinct, identifiable region of the brain and produces a given set of symptoms depending on the area of onset. A general seizure arises from a general dysfunction of biochemical mechanisms throughout the brain and may produce different types of convulsions. Epilepsy usually begins in early childhood, but can appear at any time during an individual's lifespan. It is estimated that more than 2 million Americans suffer from epilepsy, of which approximately 1.4 million are treated by physicians. Market expansion strategies We intend to conduct pilot clinical studies with GABITRIL in several neuro- psychological conditions, including anxiety, social phobia, panic disorder, post traumatic stress disorder, bipolar with co-morbid anxiety, insomnia, and neuropathic pain to identify whether GABITRIL could have a role in treating these disorders. Based upon the known mechanism of action of GABITRIL and preclinical study results, we believe GABITRIL may show an effect in treating these disorders. However, our studies may not demonstrate any such effect. Furthermore, the pilot studies that we are conducting are insufficient for us to apply to the FDA for a broader label that would include such indications. Based upon the results of these studies, we may decide to conduct larger controlled studies with GABITRIL with the objective of expanding the product label. INTERNATIONAL COMMERCIAL OPERATIONS In addition to our marketed products in the United States, we are engaged in the sale and marketing of a number of products in various overseas markets. In some of these territories we have established our own sales and marketing groups while in others we rely upon third parties to perform these functions on our behalf. Two transactions completed in 2001 substantially increased our international operations. Our acquisition of Group Lafon in December 2001 has dramatically increased our sales, marketing and manufacturing operations in France. Our December 2001 acquisition of product rights to GABITRIL worldwide, excluding Canada, Latin America and Japan, has added another global product to our portfolio and we expect to begin selling GABITRIL in France, the United Kingdom, Germany, Austria and Switzerland in 2002. For the year ended December 31, 2001, international operations accounted for approximately 2% of our total product sales revenues, not including any product sales by Group Lafon or any sales of GABITRIL outside the U.S. EUROPEAN COMMERCIAL OPERATIONS France We obtained our principal business in France when we acquired Group Lafon in December 2001. We currently have approximately 500 employees in France, including a 150-person sales force that details products to hospitals, doctors and 6 pharmacists. In addition to maintaining executive and research facilities located outside of Paris, we operate two manufacturing facilities, a packaging and distribution facility and various warehouses in France. We market a variety of pharmaceutical products with the most significant being MODIODAL (the brand name for modafinil in France) indicated for the treatment of narcolepsy and hypersomnia; SPASFON, a pain drug approved in France for biliary/urinary tract spasm and irritable bowel syndrome; and FONZYLANE, a vasodilator indicated for cerebral vascular disorders. In 2001, prior to our acquisition, Group Lafon generated approximately $98 million of pharmaceutical sales in France. In addition to our Group Lafon activities, we expect to launch ACTIQ in France in 2002. We also promote and market APOKINON(R) (apomorphine hydrochloride) to neurologists in France. APOKINON, which is injected subcutaneously by a unique metered dose injection, is indicated for the treatment of levadopa therapy fluctuations common in late-stage Parkinson's disease. Cephalon obtained marketing rights to APOKINON in 1997 from Laboratoire Aguettant S.A. We also market and sell OTRASEL(TM) (selegiline hydrochloride) in France. OTRASEL utilizes a fast dissolving oral formulation and is indicated for the treatment of Parkinson's disease. We obtained the rights to OTRASEL in France in June 2000 from Elan Pharma International Limited. United Kingdom In the United Kingdom, we market and sell five products under an exclusive collaboration arrangement with Novartis Pharma AG established in November 2000. Under this agreement, we exclusively market PROVIGIL for narcolepsy, TEGRETOL for epilepsy, RITALIN for Attention Deficit Hyperactivity Disorder, ANAFRANIL(R) (clomipramine hydrochloride) for depression and obsessive- compulsive disorders and LIORESAL(R) (baclofen) for spasticity. Under the 10- year agreement, the companies will share the financial outcome generated from sales of the Novartis products and PROVIGIL in the United Kingdom. Germany, Austria and Switzerland In Germany and Austria, we exclusively market and sell XILOPAR (selegiline hydrochloride). XILOPAR utilizes a fast dissolving oral formulation, and is indicated for the treatment of Parkinson's disease. We obtained the rights to XILOPAR in March 2000 from Elan Pharma International Limited and launched the product in July 2000. We paid Elan a license fee and have agreed to purchase all of our requirements for XILOPAR from Elan. The term of this agreement runs through July 2015. In Austria and Switzerland, we market and promote PROVIGIL for narcolepsy under an agreement with Merckle GmbH, a German pharmaceutical company, which we entered into in October 1998. We receive quarterly compensation based on sales levels achieved. The agreement with Merckle expires ten years from the effective date unless extended by the parties. INTERNATIONAL MARKETING COLLABORATIONS In territories where we have not established our own sales and marketing groups, such as Italy, Japan, Korea and Australia, among others, we have chosen to market our products through a select group of marketing collaborators with expertise in the development, marketing and sale of pharmaceuticals in those territories. In each case, we have granted rights to our collaboration partner to market, sell and distribute our products in its respective territory, and we supply either bulk or finished product for resale in the territory. The revenues and net income generated from these collaborations are not significant to our results of operations at this time. RESEARCH AND DEVELOPMENT In addition to our development programs focused on our marketed products, our research and development efforts focus primarily on two areas: neurodegenerative disorders and cancers. Neurodegenerative disorders are characterized by the death of neurons (the specialized conducting cells of the nervous system) that results in the loss of certain functions such as memory and motor coordination. Cancers are characterized by the uncontrolled proliferation of cells that form tumors. Our research strategy has focused on understanding the intracellular molecular events that underlie the processes of cell proliferation, cell survival and cell death. We utilize our technical expertise in molecular biology, molecular pharmacology, biochemistry, cell biology, tumor biology and chemistry to create novel, orally active, synthetic molecules to inhibit key targets in intracellular pathways that govern cell proliferation, survival and death. These novel molecules are designed either to enhance the survival of neurons in patients suffering from neurodegenerative diseases such as Alzheimer's and Parkinson's, or facilitate the death of cancer cells in patients suffering from cancers such as prostate, pancreatic and other cancers involving the formation of solid tumors as well as certain leukemias. Neurology A growing body of evidence, substantiated by our own research findings, suggests that neuronal death is caused by a series of biochemical events that are themselves precipitated by the activation of intracellular signaling pathways. Our research, and that of others, has demonstrated that one of the initial events involved in the cell death process is the activation of the stress activated protein kinase pathway. Thus, we believe inhibition of this pathway should lead to neuronal survival and result clinically in the inhibition of the progression of neurodegenerative diseases. Utilizing molecules we licensed from Kyowa Hakko Kogyo Co., Ltd. in 1992, and developing our own library of small molecules combined with molecular approaches, we have identified targets within this pathway known as mixed lineage kinases (MLK), whose inhibition in preclinical models results in inactivation of the cell death process. We are pursuing the development of certain potent inhibitors of the MLK for the treatment of Parkinson's disease, as described below. 7 Parkinson's and Alzheimer's Diseases We have discovered, in collaboration with H. Lundbeck A/S, a Danish pharmaceutical company, several proprietary compounds that are potent MLK inhibitors and that are also efficacious in preclinical models in preventing neuronal death. We are developing one such MLK inhibitor, CEP-1347, for use as a potential treatment for Parkinson's disease. Parkinson's disease is a progressive disorder of the central nervous system affecting over one million Americans. The primary pathology of the disease is the degeneration of the dopamine neurons in the substantia nigra region of the brain, which results in a slowing of spontaneous movements, gait difficulty, postural instability, rigidity and tremor. In preclinical models of Parkinson's disease, CEP-1347 has demonstrated therapeutic potential in the treatment of this disease. Specifically, in non-human primate models, CEP-1347 protected against loss of dopamine neurons in the regions of the brain affected by Parkinson's disease and prevented the appearance of the associated behavioral symptoms. We licensed rights to develop and market CEP-1347 from Kyowa Hakko, and have retained such rights in the United States. We entered into a collaborative agreement with Lundbeck in 1999 to discover, develop and market in Europe products to treat neurodegenerative disorders, such as Parkinson's and Alzheimer's disease. This collaboration covers the development and marketing of CEP-1347 and other proprietary small molecules that may be useful in treating these diseases. We recently completed a Phase 1 clinical program, two pilot Phase 2a studies and plan to initiate a large Phase 2 study later this year in Parkinson's disease. CEP-1347 or other small molecules from our research efforts also may be useful in treating Alzheimer's disease. Alzheimer's disease is an intractable, chronic, and progressively incapacitating disease characterized by the presence of core neuritic plaques, neurofibrillary tangles and gliosis in the brain that are associated with significant death and dysfunction of several types of neurons. Patients afflicted with this disease become severely demented. Alzheimer's disease afflicts an estimated 5% to 10% of the population over the age of 65, or approximately four million Americans, with more than 100,000 new cases diagnosed each year. The age-dependent nature of the disorder suggests that an increasing percentage of the population may be affected as the population ages. Oncology In normal tissues, cellular proliferation is balanced by cellular death and these processes are governed in part by a class of soluble protein molecules (growth factors) that serve as communication signals between cells. Cancer is a disease characterized by the uncontrolled proliferation of cells, which may be linked to inappropriate signaling from growth factors. Many of these growth factors bind to cell surface receptors (many of which are kinases) and trigger intracellular signals that maintain cell survival or direct the cell to proliferate. Inhibition of these kinases provides a unique therapeutic strategy for treating a variety of oncological disorders without the undesirable side effects associated with traditional chemotherapeutics. Pancreatic and Prostate Cancer We have synthesized a class of small, orally active molecules that are selective inhibitors of the nerve growth factor receptor tyrosine kinase (trk). Trk may play an important role in the development and propagation of prostate and pancreatic cancers; inhibiting trk antagonizes the "survival" signal elicited by this receptor in such tumors. In preclinical models, we have demonstrated that trk inhibitors prevent tumor growth in a variety of prostate and pancreatic cancers. Our lead compound in this area, CEP-701, is administered orally. We licensed rights to develop and market CEP-701 from Kyowa Hakko. We have successfully completed a Phase 1 clinical program. We have initiated a Phase 1/2 study in pancreatic cancer in combination with gemcitabine, a chemotherapeutic agent. Pancreatic cancer results in approximately 35,000 deaths in men and women each year in the United States. We completed a Phase 2 clinical trial in prostate cancer where CEP-701 appeared to confer clinical benefit in some patients, though certain side effects and a higher than anticipated drop out rate resulted in early termination of the study. We are continuing to evaluate the results of this study to determine if further prostate cancer studies are warranted with CEP- 701. We had previously been developing CEP-701 for prostate cancer in the United States with Takeda Abbott Pharmaceuticals. As of March 31, 2001, we ended our collaboration with TAP, and all rights to develop and market CEP-701 in the United States have reverted to us. In Europe and certain other territories outside the United States, we had been developing CEP-701 for prostate cancer with Schwartz Pharma AG, a German pharmaceutical company. We agreed to end our collaboration with Schwarz Pharma as of June 30, 2001 and all rights to develop and market CEP-701 have reverted to us. Prostate cancer is the most common form of cancer in men, affecting approximately one million men in the United States, and is the second leading cause of cancer death in men. Leukemia Our scientists recently discovered that CEP-701, in addition to its other activity, is also a potent inhibitor of the flt-3 kinase. Flt-3 kinase has been shown to be mutated in certain patients suffering from acute myelogenous leukemia (AML). Thus, inhibition of this kinase may lead to a novel treatment for AML. We have initiated Phase 1 clinical studies in AML with CEP-701. According to the American Cancer Society, approximately 10,000 new cases of AML are diagnosed in the United States each year. Solid Tumors As cancer cells aggregate and form solid tumors, they secrete growth factors that promote the formation of new blood vessels necessary for providing nutrients to the growing tumor; this process is called angiogenesis. Angiogenesis is promoted by a number of such growth factors but appears to be particularly dependent upon the vascular endothelial growth factor (VEGF). VEGF acts at its receptor kinase to initiate blood vessel growth into the tumor. We believe that inhibition of the receptor kinase for VEGF will result in 8 inhibition of the angiogenesis process thus starving the tumor of needed nutrients. We believe that this approach has potential utility in the treatment of solid tumors. We have synthesized a number of proprietary, orally active molecules that are potent and selective inhibitors of the VEGF receptor kinase. These molecules have been shown to slow the growth of a variety of tumors in preclinical models. Our lead compound in this area is CEP-7055. We have filed an Investigational New Drug application (IND) and initiated Phase 1 clinical trials with CEP-7055. In December 2001, we entered into a collaborative agreement with Sanofi-Synthelabo, a French pharmaceutical company, to discover, develop and market worldwide products that inhibit angiogenesis, excluding nervous system and opthalmic disorders. The collaboration covers the development and marketing of CEP-7055 and other proprietary small molecules. Neurotrophic Factors A major advance in neuroscience was the discovery of naturally occurring proteins, referred to as neurotrophic, trophic or growth factors that promote the survival of neurons. Several different neurotrophic factors have been identified that affect the survival of different types of neurons. We have focused our development efforts in this area on using the neurotrophic factor, recombinant human insulin-like growth factor (IGF-I), in disorders such as amyotrophic lateral sclerosis (ALS) and peripheral neuropathies, where the projections of the damaged neurons lie or extend outside the blood-brain barrier and are therefore accessible to trophic factors. ALS is a fatal disorder of the nervous system characterized by the chronic, progressive degeneration of motor neurons. The loss of the spinal (lower) motor neurons leads to muscle weakness, muscle atrophy and, eventually, to the patient's death. ALS usually progresses over a three to five-year period, with death usually resulting from loss of respiratory muscle control rendering the patient unable to breathe. ALS affects approximately 15,000-20,000 people in the United States. We believe that there is a proportionate incidence of ALS in the populations of Europe and Japan. Under a collaboration with Chiron Corporation that was terminated in February 2001, we conducted clinical trials using IGF-I, also known as MYOTROPHIN(R) (mecasermin) Injection, in ALS patients in North America and Europe. In February 1997, we submitted a New Drug Application (NDA) to the FDA for approval to market MYOTROPHIN in the United States for the treatment of ALS. In May 1998 the FDA issued a letter stating that the NDA was "potentially approvable," under certain conditions. We do not believe those conditions can be met without conducting an additional Phase 3 clinical study, and we have no plans to conduct such a study at this time. However, we have reached agreement with certain physicians who have obtained governmental and non-governmental funding to be used to conduct such a study. These physicians expect to commence the study in 2002. We have agreed to allow reference to our IND and have agreed to supply MYOTROPHIN in quantities sufficient to conduct the study in exchange for the right to use any clinical data generated by such study in support of FDA approval of our pending NDA. Even if this additional study is concluded, the results will not be available for several years and may not be sufficient to obtain regulatory approval to market the product. In August 1992, we exclusively licensed our rights to MYOTROPHIN for human therapeutic use within the United States, Canada and Europe to Cephalon Clinical Partners, L.P. (CCP). We developed MYOTROPHIN on behalf of CCP under a research and development agreement. Under this agreement, CCP granted an exclusive license to manufacture and market MYOTROPHIN for human therapeutic use within the United States, Canada and Europe, and we agreed to make royalty payments equal to a percentage of product sales and a milestone payment of approximately $16 million upon regulatory approval. We have a contractual option, but not an obligation, to purchase all of the limited partnership interests of CCP, which is exercisable upon the occurrence of certain events following the first commercial sale of MYOTROPHIN. If, and only if, we decide to exercise this purchase option, we would make an advance payment of approximately $40.3 million in cash or, at our election, approximately $42.4 million in shares of common stock or a combination thereof. Should we discontinue development of MYOTROPHIN, or if we do not exercise this purchase option, our license will terminate and all rights to manufacture or market MYOTROPHIN in the United States, Canada and Europe will revert to CCP, which may then commercialize MYOTROPHIN itself or license or assign its rights to a third party. In that event, we would not receive any benefits from such commercialization, license or assignment of rights. Oral Transmucosal System We are continuing our preclinical research and development of our OTS technology in several therapeutic areas. We expect to continue to evaluate additional products and compounds using the OTS technology and other related buccal delivery systems. We have developed our proprietary OTS products in collaboration with the University of Utah Research Foundation and Abbott. We currently have a research collaboration with a member of the Novartis group relating to our novel delivery technologies and expect that future development projects may involve collaboration with other research organizations and other established pharmaceutical companies. Our primary emphasis is on basic and applied research, product and process development, clinical research, regulatory interactions and filings and commercial market development and preparation. LYOC Delivery System We continue to develop our LYOC technology, which is used to create fast- dissolving oral tablets. We currently manufacture and sell several drugs using LYOC technology, including SPASFON LYOC, and are considering other compounds that may be suitable for formulation using the technology. Other Early Stage Research Efforts From our inception, we have been engaged in research to discover innovative medicines. To date, we have focused our efforts on neurodegenerative diseases and cancer. However, these efforts also have resulted in discoveries that may have the potential to 9 treat illnesses outside of these core research areas. In such cases, we seek to establish collaborative partnerships with companies whose clinical development and marketing capabilities will maximize the value of these discoveries. For example, in 2000, we entered into a research collaboration and license agreement with Johnson & Johnson Pharmaceutical Research & Development, L.L.C. to discover and develop selective inhibitors of certain protein kinases that may have applications extending beyond neurology and oncology. As described above, we have discovered a proprietary platform for the design of agents to inhibit or activate specific components of signaling pathways. These agents may be useful in the treatment of a number of diseases, including inflammatory disorders. INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGIES An important part of our product development strategy is to seek protection for our products and technologies through the use of U.S. and foreign patents and trademarks. As described below, we hold rights to issued patents and have filed applications for various U.S. and foreign patents. However, we cannot be certain that any of these patent applications will issue, or if issued, that any issued patent will not be challenged by third parties on the basis of invalidity or non-infringement, or that we will not be found to have infringed upon the rights of others. PROVIGIL PROVIGIL is a licensed trademark used in connection with pharmaceutical products containing the active drug substance modafinil. We hold exclusive license rights to the composition-of-matter patent claiming modafinil. This patent expired in the United States in November 2001. We have been granted a Supplemental Protection Certificate for the corresponding U.K. patent covering modafinil, extending the protection afforded by this patent until March 2003. This patent expired in the Republic of Ireland, Japan, Italy and Mexico in 1998. Other than Italy, where a patent extension remains possible based upon an earlier request filed with the regulatory authorities, we do not believe that extension of the protection conferred by the modafinil composition-of- matter patent is possible in any other of our licensed territories where modafinil products are currently approved. We hold worldwide patent rights to pharmaceutical formulations and uses of certain particle-sized modafinil claimed in a U.S. patent that was issued in 1997 and reissued in January 2002 as well as in issued and pending European patents. These patents are currently set to expire in 2014 and 2015, respectively. Other foreign patents claiming pharmaceutical formulations of modafinil also are pending or issued in other territories and will also expire in 2015. We also hold rights to other patents and patent applications directed to further pharmaceutical formulations and uses of modafinil. Since modafinil is a new chemical entity, the FDA has granted us a period of market exclusivity that prevents the submission of an abbreviated new drug application for any pharmaceutical product containing modafinil until December 2003 (or December 2002 if the ANDA applicant certifies that the patents covering PROVIGIL are invalid or will not be infringed by the ANDA product). The FDA also has designated PROVIGIL as an orphan drug for use in treatment of excessive sleepiness associated with narcolepsy, which prevents the approval of an ANDA or NDA for modafinil in this indication until December 2005. ACTIQ ACTIQ is our trademark used in connection with pharmaceuticals for oral transmucosal delivery containing fentanyl as the active drug substance. This product is covered by U.S. and foreign patents that are held by the University of Utah and its assignee, the University of Utah Research Foundation. We have exclusive worldwide licenses to these patents. Specifically, there are two U.S. patents covering the currently approved product that claim the approved formulation and methods for administering fentanyl via this formulation and a method of producing the approved product. Both of these patents are currently set to expire in 2005. We also hold patents to the compressed powder formulation that is currently being developed in the U.S. that will expire in 2006. Corresponding patents in foreign countries are set to expire between 2009 and 2010. The three-year period of market exclusivity for ACTIQ granted by the FDA for a new formulation of fentanyl expired in November 2001. Other issued patents and pending patent applications in the United States and foreign countries that are owned or licensed by us are directed to various processes of manufacturing the product, methods of using the product and disposal containers required by the FDA to be provided as part of the product. GABITRIL GABITRIL is our trademark that is used in connection with pharmaceuticals containing tiagabine as the active drug substance. This product is covered by U.S. and foreign patents that are held by Novo-Nordisk A/S and that were licensed in the United States exclusively to Abbott Laboratories. We have an exclusive sublicense from Abbott to these patents in the United States and exclusive licenses from Novo-Nordisk to corresponding foreign patents. There are two U.S. composition-of-matter patents covering the currently approved product: a patent claiming tiagabine, the active drug substance in GABITRIL; and a patent claiming crystalline tiagabine hydrochloride monohydrate and its use as an anti-epileptic agent. These patents are currently set to expire in 2008 and 2012, respectively. An extension of the tiagabine composition-of-matter patent under the terms of the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, as amended, to extend the term of this patent until 2011 is being sought. We cannot be certain that this patent extension will be obtained or that we will be able to take advantage of any other patent benefits of the patent restoration act. Supplemental Protection Certificates based upon corresponding foreign patents covering this product are set to expire in 2011. 10 MYOTROPHIN MYOTROPHIN is our trademark for IGF-I. We own or have licensed issued patents and pending patent applications directed to uses of IGF-I for the treatment of various diseases and to manufacturing and purification processes for IGF-I. These patents expire in the United States between 2009 and 2016. We are aware of a granted European patent and two issued U.S. patents, owned by Genentech, Inc. and Auckland Uniservices Limited, claiming the use of IGF-I in treating neuronal damage. We have successfully opposed the granted European patent resulting in the complete revocation of this patent by the European Patent Office. This decision has been appealed. We also have initiated interference proceedings against the U.S. patents. We cannot predict the outcome of the appeal of the European Patent Office decision or of the interference proceeding at this time. If the appeal overturns the European Patent Office revocation or the interference proceeding is unsuccessful, we could be prevented from selling MYOTROPHIN in Europe and/or the United States unless we obtain a license to any granted or issued patents. We may be unable to obtain a license at all or under terms acceptable to us. We are aware of other third party patents or patent applications directed to various manufacturing processes of IGF-I. If necessary, we intend to either seek licenses under such patents or modify the current manufacturing process. We may be unable to obtain any required licenses at all or on acceptable terms, and it may be difficult or impossible to successfully implement a modified manufacturing process. If neither approach is feasible, we could be prevented from manufacturing or selling this product. Other Programs We also own issued and pending U.S. patents and applications claiming compositions and/or uses of certain kinase inhibitors including two novel classes of small molecules referred to as "indolocarbazoles" and "fused pyrrolocarbazoles." We have filed foreign counterparts of these patents in other countries, as appropriate. We also own issued and pending U.S. and foreign patents and applications claiming compositions and/or uses of inhibitors of certain proteases, including novel classes of small molecules for inhibition of calpain, and novel classes of small molecules for inhibition of the multicatalytic protease. Through collaborative agreements with researchers at several academic institutions, we have licenses to or the right to license, generally on an exclusive basis, patents and patent applications issued or filed in the United States and certain other countries arising under or related to such collaborations. We also have licensed U.S. and European composition-of-matter and use patents and applications for novel compositions under our collaborative agreement with Kyowa Hakko, including compositions and uses of certain indolocarbazoles for the treatment of pathological conditions of the prostate (including prostate cancer) and for the treatment of neurological disorders. Additional patents may never be issued on any of the patent applications we own or license from third parties. Furthermore, even if such patents are issued, the validity of the patents might be successfully challenged by a third party. The patents might not provide protection against competitive products or otherwise be commercially valuable, or the applications filed by others might result in patents that would be infringed by the manufacture, use or sale of our products. Our products could infringe the patent rights of others. If licenses required under any such patents or proprietary rights of third parties are not obtained, we could encounter delays in product market introductions, or could find that the development, manufacture or sale of products requiring such licenses is foreclosed. In addition, patent litigation is both costly and time-consuming, even if the outcome is favorable to us. In the event that we are a defendant in such litigation, an adverse outcome would subject us to significant liabilities to third parties, require us to license disputed rights from third parties, or require us to stop selling our products. We also rely on trade secrets, know-how and continuing technological advancements to support our competitive position. Although we have entered into confidentiality and invention rights agreements with our employees, consultants, advisors and collaborators, these parties could fail to honor such agreements or we could be unable to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, others could independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. In addition, many of our scientific and management personnel have been recruited from other biotechnology and pharmaceutical companies where they were conducting research in areas similar to those that we now pursue. As a result, we could be subject to allegations of trade secret violations and other claims. MANUFACTURING AND PRODUCT SUPPLY Our ability to conduct clinical trials on a timely basis, to obtain regulatory approvals and to commercialize our products will depend in part upon our ability to manufacture our products, either directly or through third parties, at a competitive cost and in accordance with applicable FDA and other regulatory requirements, including current Good Manufacturing Practice regulations. At our three manufacturing facilities in France, we produce the active drug substance modafinil and certain other commercial products. At our facility in Salt Lake City, Utah, we manufacture ACTIQ for international markets. For the remainder of our products, we rely on third parties for product manufacturing. Abbott is required to supply us with ACTIQ and GABITRIL for the United States until at least March 2003 and October 2005, respectively. After those dates, we may have to make other arrangements to provide such supply, which could include the 11 manufacture of ACTIQ and/or GABITRIL in-house for the United States, or establishing supply arrangements with third parties. We depend upon sole suppliers for active drug substances contained in most of our products, and we depend upon single manufacturers that are qualified to manufacture finished commercial supplies of most products. We have two qualified manufacturers for finished commercial supplies of PROVIGIL. We rely solely upon Abbott to supply a key chemical intermediate found in several important compounds now in clinical development, including CEP-1347 and CEP-701. This intermediate is supplied to Lundbeck for use in the synthesis of clinical and commercial supplies of CEP-1347, or is used by Abbott to manufacture CEP-701 for clinical trials. We rely upon Chiron for all of our manufacturing requirements for MYOTROPHIN. COMPETITION We face intense competition and rapid technological change in the pharmaceutical marketplace. Large and small companies, academic institutions, governmental agencies, and other public and private research organizations conduct research, seek patent protection, and establish collaborative arrangements for product development in competition with us. Products developed by any of these entities may compete directly with those we develop or sell. In addition, many of the companies and institutions that compete against us have substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. These entities represent significant competition for us. In addition, competitors who are developing products for the treatment of neurological or oncological disorders might succeed in developing technologies and products that are more effective than any that we develop or sell or that would render our technology and products obsolete or noncompetitive. Competition and innovation from these or other sources potentially could negatively affect sales of our products or make them obsolete. Advances in current treatment methods also may adversely affect the market for such products. In addition, we may be at a competitive marketing disadvantage against companies that have broader product lines and whose sales personnel are able to offer more complementary products than we can. Any failure to maintain our competitive position could adversely affect our business and results of operations. All of the products we market in the United States face competition in the market place. We cannot be sure that we will be able to demonstrate the potential advantages of our products to prescribing physicians and their patients on an absolute basis and/or in comparison to other presently marketed products. With respect to PROVIGIL, there are several other products used for the treatment of narcolepsy in the United States, including methylphenidate, and in our other licensed territories, all of which have been available for a number of years and many of which are available in inexpensive generic forms. With respect to ACTIQ, we face competition from inexpensive oral opioid tablets and more expensive but quick-acting invasive (intravenous, intramuscular and subcutaneous) opioid delivery systems. Other technologies for rapidly delivering opioids to treat breakthrough pain are being developed, at least one of which is in clinical trials. With respect to GABITRIL, there are several products, including gabapentin, used as adjunctive therapy for the partial seizure market. Some are well-established therapies that have been on the market for several years while others have recently entered the partial seizure marketplace. In addition, several treatments for partial seizures are available in inexpensive generic forms. Thus we will need to demonstrate to physicians, patients and third party payors that the cost of our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient. With respect to the collaboration with Novartis Pharma AG in the United Kingdom, we now face potential competition from generic versions of the branded products included in the collaboration. In most cases, these generic versions are priced below our branded version. European Union pricing laws allow the parallel importation of branded drugs between member countries. Due to pricing variations within the European Union, it is possible that we will face competition in one country from our own branded drug that is imported from other member countries. GOVERNMENT REGULATION The manufacture and sale of therapeutics are subject to extensive regulation by U.S. and foreign governmental authorities. In particular, pharmaceutical products are subject to rigorous preclinical and clinical trials and other approval requirements as well as other post-approval requirements by the FDA under the Federal Food, Drug, and Cosmetic Act and by analogous agencies in countries outside the United States. As an initial step in the FDA regulatory approval process, preclinical studies are typically conducted in animals to identify potential safety problems and, in some cases, to evaluate potential efficacy. The results of the preclinical studies are submitted to regulatory authorities as a part of an IND that is filed with regulatory agencies prior to beginning studies in humans. However, for several of our drug candidates, no animal model exists that is potentially predictive of results in humans. As a result, no in vivo indication of efficacy is available until these drug candidates progress to human clinical trials. Clinical trials are typically conducted in three sequential phases, although the phases may overlap. Phase 1 typically begins with the initial introduction of the drug into human subjects prior to introduction into patients. In Phase 1, the compound is tested for safety, dosage tolerance, absorption, biodistribution, metabolism, excretion and clinical pharmacology, as well as, if possible, to gain early information on effectiveness. Phase 2 typically involves studies in a small sample of the intended patient population to assess the efficacy of the drug for a specific indication, determine dose tolerance and the optimal dose range, and to gather additional 12 information relating to safety and potential adverse effects. Phase 3 trials are undertaken to further evaluate clinical safety and efficacy in an expanded patient population, generally at multiple study sites, to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for physician labeling. Each trial is conducted in accordance with certain standards under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. In the United States, each protocol must be submitted to the FDA as part of the IND. Further, one or more independent Institutional Review Boards must evaluate each clinical study. The Institutional Review Board considers, among other things, ethical factors, the safety of the study, the adequacy of informed consent by human subjects, and the possible liability of the institution. Similar procedures and requirements must be fulfilled to conduct studies in other countries. The process of completing clinical trials for a new drug is likely to take a number of years and require the expenditure of substantial resources. Promising data from preclinical and clinical trials are submitted to the FDA in an NDA for marketing approval and to foreign regulatory authorities under applicable requirements. Preparing an NDA or foreign application involves considerable data collection, verification, analyses and expense, and there can be no assurance that the applicable regulatory authority will accept the application or grant an approval on a timely basis, if at all. The marketing of pharmaceuticals in the United States may not begin without FDA approval. The approval process is affected by a number of factors, including primarily the safety and efficacy demonstrated in clinical trials and the severity of the disease. Regulatory authorities may deny an application in their sole discretion, if they determine that applicable regulatory criteria have not been satisfied or if additional testing or information is required. One of the conditions for initial marketing approval, as well as continued post-approval marketing, is that a prospective manufacturer's quality control and manufacturing procedures conform to the current Good Manufacturing Practice regulations of the regulatory authority. In complying with these regulations, a manufacturer must continue to expend time, money and effort in the area of production, quality control and quality assurance to ensure full compliance. Manufacturing establishments, both foreign and domestic, also are subject to inspections by or under the authority of the FDA and by other federal, state, local or foreign agencies. Discovery of previously unknown problems with a product or manufacturer may result in restrictions on such product or manufacturer, including withdrawal of the product from the market. Even after regulatory approval has been obtained, further studies, including Phase 4 post-marketing studies, may be required to provide additional data on safety, to validate surrogate efficacy endpoints, or for other reasons, and the failure of such studies can result in expedited market withdrawal. Further studies will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially approved. Results of post-marketing programs may limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including any change in indication, manufacturing process, labeling or manufacturing facility, it may be necessary to submit an application seeking approval of such changes to the FDA or foreign regulatory authority. Finally, the FDA can place restrictions on approval and marketing utilizing its authority under applicable regulations. For example, ACTIQ was approved subject to these restrictions, which include mandating compliance with a rigorous Risk Management Program. This program gives the FDA authority to pre- approve promotional materials and permits an expedited market withdrawal procedure if issues arise regarding the safe use of ACTIQ. Moreover, marketed products are subject to continued regulatory oversight and the failure to comply with applicable regulations could result in financial penalties or other sanctions. Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of commercial sales of the product in such countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval may be longer or shorter than that required for FDA approval. Although there are procedures for unified filings for most European countries, in general, each country also has its own additional procedures and requirements, especially related to pricing of new pharmaceuticals. Further, the FDA regulates the export of products produced in the United States and, in some circumstances, may prohibit the export even if such products are approved for sale in other countries. In the United States, the Orphan Drug Act provides incentives to drug manufacturers to develop and manufacture drugs for the treatment of either rare diseases, currently defined as diseases that affect fewer than 200,000 individuals in the United States, or for a disease that affects more than 200,000 individuals in the United States, where the sponsor does not realistically anticipate its product becoming profitable. The FDA has granted PROVIGIL orphan drug status for use in treating excessive daytime sleepiness associated with narcolepsy and has designated MYOTROPHIN as an orphan drug for use in treating ALS, because each indication currently affects fewer than 200,000 individuals in the United States. Under the Orphan Drug Act, a manufacturer of a designated orphan product can seek certain tax benefits, and the holder of the first FDA approval of a designated orphan product will be granted a seven-year period of marketing exclusivity for that product for the orphan indication. While the marketing exclusivity of an orphan drug would prevent other sponsors from obtaining approval of the same drug compound for the same indication unless the subsequent sponsors could demonstrate clinical superiority or a market shortage occurs, it would not prevent other sponsors from obtaining approval of the same compound for other indications or the use of other types of drugs for the same use as the orphan drug. Orphan drug designation generally does not confer any special or preferential treatment in the regulatory review process. The U.S. Congress has considered, and may consider in the future, legislation that would restrict the duration or scope of the market exclusivity of an orphan drug and, thus, we cannot be sure that the benefits of the existing statute will remain in effect. Additionally, we cannot be sure that other governmental regulations applicable to our products will not change. In addition to the market exclusivity period under the Orphan Drug Act, the U.S. Drug Price Competition and Patent Term Restoration Act of 1984 permits a sponsor to apply for a maximum five-year extension of the term of a patent for a period of time following the initial FDA approval of an NDA for a New Chemical Entity (NCE). The statute specifically allows a patent owner acting 13 with due diligence to extend the term of the patent for a period equal to one- half the period of time elapsed between the approval of the IND and the filing of the corresponding NDA, plus the period of time between the filing of the NDA and FDA approval, up to a maximum of five years of patent term extension. Any such extension, however, cannot extend the patent term beyond a maximum term of fourteen years following FDA approval and is subject to other restrictions. Additionally, under this statute, five years of marketing exclusivity is granted for the first approval of an NCE. During this period of exclusivity, sponsors generally may not file and the FDA may not approve an abbreviated New Drug Application or a 505(b)(2) application for a drug product equivalent or identical to the NCE. An ANDA is the application form typically used by manufacturers seeking approval of a generic version of an approved drug. Under the statute, subsequent approved indications for the NCE are eligible if certain criteria are met, to three years of limited marketing exclusivity for the indication. During any three-year exclusivity period, a third party may file an ANDA or a 505(b)(2) application seeking approval of their version of the drug for the original indication, if the five-year exclusivity granted to the NCE has expired. However, the third party would not obtain marketing approval for a subsequently developed indication for the three years of exclusivity. We intend to seek the benefits of this statute as applicable, but there can be no assurance that we will be able to obtain any such benefits. There is also a possibility that Congress will revise the underlying statute in the next few years, which may affect these provisions in ways that we cannot foresee. Additionally, the FDA regulates the labeling, storage, record keeping, advertising and promotion of prescription pharmaceuticals. Drug manufacturing establishments must register with the FDA and list their products with the FDA. The Controlled Substances Act imposes various registration, record-keeping and reporting requirements, procurement and manufacturing quotas, labeling and packaging requirements, security controls and a restriction on prescription refills on certain pharmaceutical products. A principal factor in determining the particular requirements of this act, if any, applicable to a product is its actual or potential abuse profile. A pharmaceutical product may be listed as a Schedule I, II, III, IV or V substance, with Schedule I substances considered to present the highest risk of substance abuse and Schedule V substances the lowest. Modafinil, the active drug substance in PROVIGIL, has been scheduled under the Controlled Substances Act as a Schedule IV substance. Schedule IV substances are allowed no more than five prescription refills during a six-month period and are subject to special handling procedures relating to the storage, shipment, inventory control and disposal of the product. Fentanyl, the active ingredient in ACTIQ, is a Schedule II controlled substance. Schedule II substances are subject to even stricter handling and record keeping requirements and prescribing restrictions than Schedule III or IV products. In addition to federal scheduling, both PROVIGIL and ACTIQ are subject to state controlled substance regulation, and may be placed in more restrictive schedules than those determined by the U.S. Drug Enforcement Agency and FDA. However, to date, neither modafinil nor fentanyl has been placed in a more restrictive schedule by any state. In addition to the statutes and regulations described above, we also are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other federal, state and local regulations. SCIENTIFIC AND MEDICAL ADVISORY BOARD We maintain a Scientific and Medical Advisory Board consisting of individuals with expertise in neuroscience and oncology research, as well as related fields. Members of the Scientific and Medical Advisory Board advise us on issues concerning long-term scientific planning, research and development, and also periodically evaluate our research programs, clinical development plans and clinical trials. We compensate the members for their services. The current members of our Scientific and Medical Advisory Board are as follows: Stanley H. Appel, M.D., Baylor College of Medicine Arthur K. Asbury, M.D., University of Pennsylvania Medical Center Robert L. Barchi, M.D., Ph.D., University of Pennsylvania Medical Center Bruce A. Chabner, M.D., Massachusetts General Hospital Stanley Cohen, Ph.D., retired, Vanderbilt University School of Medicine Steven T. DeKosky, M.D., University of Pittsburgh Medical Center John T. Isaacs, M.D., Johns Hopkins Oncology Center Richard Johnson, M.D., Johns Hopkins Hospital 14 Robert Y. Moore, M.D., Ph.D., University of Pittsburgh Robert H. Roth, Ph.D., Yale University School of Medicine EMPLOYEES As of December 31, 2001, we had a total of 1,127 full-time employees, of which 597 were employed in the United States and 530 were located at our facilities in Europe. We believe that we have been successful in attracting skilled and experienced personnel; however, competition for such personnel is intense. Certain of our employees located in France are covered by collective bargaining agreements. ITEM 2. PROPERTIES We own our corporate headquarters which are located in West Chester, Pennsylvania and which consist of approximately 160,000 square feet of administrative offices and research facilities. In Salt Lake City, Utah, we house administrative, research, manufacturing and warehousing operations in approximately 115,000 square feet that we lease. We lease office space for our European operations in Surrey, England and also satellite offices in France, Switzerland and Germany. As part of the acquisition of Group Lafon, we acquired a headquarters and research facility, two manufacturing facilities, a packaging facility and various warehouses located in France. We believe that our current facilities are adequate for our present purposes. ITEM 3. LEGAL PROCEEDINGS In August 1999, the U.S. District Court for the Eastern District of Pennsylvania entered a final order approving the settlement of a class action alleging that statements made about the results of certain clinical studies of MYOTROPHIN were misleading. A related complaint has been filed with the Court by a small number of plaintiffs who decided not to participate in the settlement. This related complaint alleges that we are liable under common law for misrepresentations concerning the results of the MYOTROPHIN clinical trials, and that we and certain of our current and former officers and directors are liable for the actions of persons who allegedly traded in our common stock on the basis of material inside information. We believe that we have valid defenses to all claims raised in this action. Moreover, even if there is a judgment against us, we do not believe it will have a material negative effect on our financial condition or results of operations. In February 2001, a complaint was filed in Utah state court by Zars, Inc. and one of its research scientists, against us and our subsidiary Anesta Corp. The plaintiffs are seeking a declaratory judgment to establish their right to develop transdermal or other products containing fentanyl and other pharmaceutically active agents under a royalty and release agreement between Zars and Anesta. The complaint also asks for unspecified damages for breach of contract and interference with economic relations. We believe that we have valid defenses to all claims raised in this action. In any event, we do not believe any judgment against us will have a material negative effect on our financial condition or results of operations. We are a party to certain other litigation in the ordinary course of our business, including matters alleging employment discrimination, product liability and breach of commercial contract. However, we are vigorously defending ourselves in all of these actions and do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS We did not submit any matters to the vote of security holders during the fourth quarter of fiscal 2001. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the NASDAQ National Market under the symbol "CEPH." The following table sets forth the range of high and low sale prices for the common stock as reported on the NASDAQ National Market for the periods indicated below.
High Low 2000 ----------------------------------------------------------------------------- First Quarter................................................ $74.38 $29.88 Second Quarter............................................... 66.88 32.50 Third Quarter................................................ 83.63 36.50 Fourth Quarter............................................... 63.38 40.13 2001 --------------------------------------------------------------- First Quarter................................................ $64.50 $36.38 Second Quarter............................................... 72.80 39.50 Third Quarter................................................ 73.92 43.40 Fourth Quarter............................................... 78.40 47.05
As of March 20, 2002, there were 679 holders of record of our common stock. On March 20, 2002, the last reported sale price of our common stock as reported on the NASDAQ National Market was $66.14 per share. In December 2001, we issued and sold in a private placement $500,000,000 aggregate principal amount of 2.50% convertible subordinated notes due 2006. In connection with this private placement, we granted the initial purchasers of the notes an option to purchase an additional $100,000,000 in aggregate principal amount of notes, which was exercised in December 2001, bringing the total amount sold to $600,000,000 in aggregate principal amount of notes. The commissions, discounts and other debt issuance costs in connection with this sale totaled approximately $21,250,000. The maturity date of the notes is December 15, 2006. We are obligated to pay interest at a rate of 2.50% per year on each of June 15 and December 15, beginning June 15, 2002. The notes are subordinated to our existing and future senior indebtedness. The notes are convertible into our common stock, at the option of the holder, at a price of $81.00 per share, subject to adjustment upon certain events. This is equivalent to a conversion rate of approximately 12.3458 shares per $1,000 principal amount of notes. The notes are redeemable by us at any time on or after December 20, 2004 at a redemption price equal to 100% of the principal amount of notes to be redeemed. Additionally, upon a change in control or upon the occurrence of an event of default, the holders may require us to repurchase the notes at 100% of the principal amount of the notes submitted for repurchase, plus accrued and unpaid interest. The notes were issued and sold in transactions exempt from registration requirements of the Securities Act of 1933 as amended, to persons reasonably believed by the initial purchasers to be "qualified institutional buyers" as defined in Rule 144A under the Securities Act. On February 14, 2002, we filed a registration statement on Form S-3 to register the resale of the notes and the shares of common stock issuable upon conversion thereof. 16 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA In October 2000, we completed a merger with Anesta under which we acquired all of the outstanding shares of Anesta in a tax-free, stock-for-stock transaction. The merger has been accounted for as a pooling-of-interests and, accordingly, all of our prior period consolidated financial statements have been restated to include the results of operations, financial position, and cash flows of Anesta. Information concerning common stock and per share data has been restated on an equivalent share basis. On December 28, 2001, we completed the acquisition of the outstanding shares of capital stock of Group Lafon. This acquisition has been accounted for as a purchase and, accordingly, the estimated fair value of assets acquired and liabilities assumed has been recorded as of the date of the acquisition. The results of operations for Group Lafon from the date of acquisition have not been included in our consolidated financial statements since operations between the date of acquisition and December 31, 2001 were immaterial.
Year Ended December 31, --------------------------------------------------------------------- 2001 2000 1999 1998 1997 Statement of Operations Data: - ----------------------------------------------------------------------------------------------- Total revenues.......... $266,643,000 $ 111,790,000 $ 51,434,000 $ 16,330,000 $ 23,329,000 Gross profit on product sales.................. 181,186,000 73,869,000 23,681,000 867,000 132,000 Loss before dividends on preferred stock, extraordinary gain (charge) and cumulative effect of a change in accounting principle... (58,500,000) (93,744,000) (68,245,000) (71,124,000) (72,968,000) Dividends on preferred stock.................. (5,664,000) (9,063,000) (3,398,000) -- -- Extraordinary gain (charge) for early extinguishment of debt................... 3,016,000 -- (11,187,000) -- -- Cumulative effect of adopting Staff Accounting Bulletin 101 (SAB 101).............. -- (7,434,000) -- -- -- ------------ ------------- ------------ ------------ ------------ Loss applicable to common shares.......... $(61,148,000) $(110,241,000) $(82,830,000) $(71,124,000) $(72,968,000) ============ ============= ============ ============ ============ Basic and diluted loss per common share: Loss before extraordinary gain (charge) and cumulative effect of adopting SAB 101.................... $ (1.33) $ (2.51) $ (2.00) $ (2.15) $ (2.42) Extraordinary gain (charge)............... 0.06 -- (.31) -- -- Cumulative effect of adopting SAB 101....... -- (.19) -- -- -- ------------ ------------- ------------ ------------ ------------ $ (1.27) $ (2.70) $ (2.31) $ (2.15) $ (2.42) ============ ============= ============ ============ ============ Weighted average number of shares outstanding.. 48,292,000 40,893,000 35,887,000 33,129,000 30,165,000 ============ ============= ============ ============ ============ The reconciliation of loss applicable to common shares to adjusted net income (loss) is presented below in order to highlight certain charges that materially impact the comparability of the information contained within the selected consolidated financial data. Items affecting 2001 include an extraordinary gain realized on the early payment of debt, and the following charges associated with the financing and acquisition of Group Lafon: (i) $1,500,000 attributable to the costs of obtaining short term financing, (ii) $20,000,000 attributable to the write off of acquired in-process research and development, and (iii) $52,444,000 attributable to the conversion of $217,000,000 of previously issued 5.25% convertible notes into common stock. Year Ended December 31, --------------------------------------------------------------------- 2001 2000 1999 1998 1997 Reconciliation of loss applicable to common shares to adjusted net income (loss):......... $(61,148,000) $(110,241,000) $(82,830,000) $(71,124,000) $(72,968,000) Certain charges: Royalty pre-payment on extinguished revenue sharing notes.......... -- 6,600,000 -- -- -- Short-term bridge financing and other merger related expenses............... 1,550,000 13,811,000 -- -- -- Acquired in-process research and development............ 20,000,000 22,200,000 -- -- -- Debt conversion expense................ 52,444,000 -- -- -- -- Extraordinary (gain) charge on early extinguishment of debt................... (3,016,000) -- 11,187,000 -- -- Cumulative effect of adopting SAB 101....... -- 7,434,000 -- -- -- ------------ ------------- ------------ ------------ ------------ Adjusted net income (loss)................. $ 9,830,000 $ (60,196,000) $(71,643,000) $(71,124,000) $(72,968,000) ============ ============= ============ ============ ============
17
As of December 31, --------------------------------------------------------------------- 2001 2000 1999 1998 1997 Balance Sheet Data: - ---------------------------------------------------------------------------------------------- Cash, cash equivalents and investments........ $ 603,884,000 $ 97,384,000 $272,340,000 $148,151,000 $147,363,000 Total assets............ 1,389,087,000 308,435,000 312,262,000 179,802,000 183,920,000 Long-term debt.......... 866,589,000 55,138,000 15,701,000 16,596,000 29,337,000 Accumulated deficit..... (576,691,000) (515,543,000) (405,302,000) (322,472,000) (251,348,000) Stockholders' equity.... 398,731,000 165,193,000 230,783,000 137,621,000 129,536,000
PRO FORMA RESULTS The following data represents pro forma financial results assuming a retroactive adoption of a change in accounting principle (SAB 101).
Year Ended December 31, ------------------------------------------------------- 2000 1999 1998 1997 Statement of Operations Data: - --------------------------------------------------------------------------------- Total revenues.......... $ 111,790,000 $ 44,391,000 $ 16,163,000 $ 23,392,000 Gross profit on product sales.................. 73,869,000 23,681,000 867,000 132,000 Loss before dividends on preferred stock, extraordinary gain (charge) and cumulative effect of a change in accounting principle... (93,744,000) (75,288,000) (71,291,000) (72,905,000) Dividends on preferred stock.................. (9,063,000) (3,398,000) -- -- Extraordinary charge for early extinguishment of debt................... -- (11,187,000) -- -- Loss applicable to common shares.......... $(102,807,000) $(89,873,000) $(71,291,000) $(72,905,000) Basic and diluted loss per common share....... $ (2.51) $ (2.50) $ (2.15) $ (2.42) Weighted average number of shares outstanding.. 40,893,000 35,887,000 33,129,000 30,165,000
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Year ended December 31, 2001 compared to year ended December 31, 2000 For the year ended December 31, revenues consisted of the following:
2001 2000 Product sales: ----------------------------------------------------------------------------- PROVIGIL.......................................... $150,305,000 $ 72,089,000 ACTIQ............................................. 51,197,000 15,169,000 GABITRIL.......................................... 24,630,000 4,379,000 ------------ ------------ Total product sales................................ 226,132,000 91,637,000 ------------ ------------ H. Lundbeck A/S................................... 11,941,000 10,395,000 Novartis Pharma AG................................ 10,428,000 -- Sanofi-Synthelabo................................. 5,052,000 -- Other revenues.................................... 13,090,000 9,758,000 ------------ ------------ Total other revenues............................... 40,511,000 20,153,000 ------------ ------------ Total revenues..................................... $266,643,000 $111,790,000 ============ ============
Revenues--Product sales in 2001 increased 147% to $226,132,000. The increase is attributable to a number of factors including: . Sales of PROVIGIL increased 108% from $72,089,000 in 2000 to $150,305,000 in 2001. PROVIGIL accounted for 66% and 79% of our 2001 and 2000 product sales, respectively. The 2001 sales increase was due to higher sales resulting from increased market acceptance, as well as a 5% domestic price increase that took effect in the second quarter of 2001. . Sales of ACTIQ increased 238% from $15,169,000 in 2000 to $51,197,000 in 2001. After our merger with Anesta in October 2000, we established a dedicated sales force for ACTIQ and significantly changed the marketing approach. An average domestic 6.6% price increase in the second quarter of 2001 also contributed to higher recorded sales. . Sales of GABITRIL increased from $4,379,000 in 2000 to $24,630,000 in 2001. We acquired all U.S. rights to GABITRIL from Abbott Laboratories during late 2000 and began selling GABITRIL effective January 1, 2001. Prior to 2001, our GABITRIL revenues represented compensation from Abbott under a collaborative agreement where we received a percentage of GABITRIL sales in excess of a base amount. Additionally, an average increase in domestic prices of 10% in the second quarter of 2001 also contributed to the sales increase. . Other revenues increased by $20,358,000, or 101%. This increase was due primarily to revenues recognized under our U.K. joint marketing agreement with Novartis Pharma AG, which we entered into in November 2000, and revenues recognized under our licensing, development and marketing collaborations with Sanofi-Synthelabo and H. Lundbeck A/S. Cost of Product Sales--Cost of product sales rose 153% in 2001 to $44,946,000 from $17,768,000 in 2000 primarily as a result of the increase in 2001 product sales volumes. Aggregate cost of product sales for all three products remained at 20% of product sales for both 2001 and 2000 due to decreased costs for U.S. production of ACTIQ offset by GABITRIL revenues of $4,379,000 in 2000 that did not have corresponding cost of product sales since it was being sold under a collaborative agreement with Abbott. Research and Development Expenses--Research and development expenses increased 24% in 2001 to $84,249,000 from $68,063,000 in 2000. The increase is attributable to higher expenditures on clinical trials including infrastructure costs to support the growing number of ongoing clinical trials including Phase 2 clinical studies for CEP-1347 and studies of PROVIGIL related to our efforts to expand the label for PROVIGIL beyond its current indication. In addition, research and development expenses also increased because of regulatory and intellectual property fees. Selling, General and Administrative Expenses--Selling, general and administrative expenses increased 19% in 2001 to $99,615,000 from $83,725,000 in 2000. The increase is primarily due to increases in expenditures of $13,755,000 associated with the growth of our internal sales force to promote and support PROVIGIL, ACTIQ, and GABITRIL in the United States. Depreciation and Amortization Expenses--Depreciation and amortization expenses increased to $14,434,000 in 2001 from $4,008,000 in 2000 primarily due to a full year of amortization expense in 2001 on intangible assets acquired during late 2000 relating to both our acquisition of GABITRIL product rights in the United States and our U.K. joint marketing agreement with Novartis. Debt Exchange Expense--In accordance with Statement of Financial Accounting Standards No. 84 "Induced Conversions of Convertible Debt," we recorded a non- cash charge of $52,444,000 in the fourth quarter of 2001 associated with the exchange of $217,000,000 of our 5.25% convertible notes for our common stock. Acquired In-Process Research and Development--In connection with our acquisition of Group Lafon in December 2001, we acquired the rights to certain early stage technologies. Based on an independent appraisal of the assets acquired from Group Lafon, the fair value of these technologies of $20,000,000 has been recorded as acquired in-process research and development expenses because, at the date of the acquisition, the technologies acquired had not progressed to a stage where they met technological 19 feasibility and there existed a significant amount of uncertainty as to our ability to complete the development of the technologies and achieve market acceptance within a reasonable timeframe. In addition, the acquired in-process technologies did not have an alternative future use to us that had reached technological feasibility. During 2000, we acquired U.S. marketing rights to GABITRIL in a transaction that resulted in us recording $22,000,000 as acquired in-process research and development expense. During 2001, development efforts on this in-process research and development have continued. We believe that expenses incurred to date associated with the development and integration of the in-process research and development projects are lower than our previous estimates. We have completed one project at the end of 2001 and will initiate several new projects in 2002. The majority of the projects are on schedule, but delays have occurred due to delays in the completion of a clinical plan and inherent complexity and breadth of the projects. The risks associated with these efforts are still considered high, and no assurance can be made that the projects in development will meet with market acceptance. Other Income and Expense--Interest income decreased to $12,170,000 in 2001 from $16,903,000 in 2000 primarily due to $4,008,000 of interest income recorded in 2000 associated with the waiver of an interest rate penalty by the Commonwealth of Pennsylvania on a loan used to finance the purchase of our West Chester facilities. The remaining decrease in interest income is due to lower average interest rates in 2001 as compared to 2000, offset in part by higher average investment balances. Interest expense increased in 2001 to $20,630,000 from $5,189,000 in 2000 due to interest on our convertible subordinated notes issued in May and December of 2001, a $1,500,000 fee associated with establishing a line of credit for the Group Lafon acquisition and interest recognized on our obligations to Abbott and Novartis. These increases were partially offset by a decrease in interest expense due to the retirement of revenue-sharing notes in the first quarter of 2000. A decrease in the exchange rate loss from $1,027,000 in 2000 to $545,000 in 2001, due to an increase in currency exchange value of the pound Sterling (GBP) relative to both the U.S. dollar and to our other foreign operations' currencies that are remeasured into the GBP for financial reporting purposes, is recorded as other expense. Dividends on Convertible Exchangeable Preferred Stock--Preferred dividends in 2001 were less than in 2000 due to the conversion during the second and third quarters of 2001 of all outstanding shares of preferred stock into an aggregate of 6,974,998 shares of our common stock. As of December 31, 2001, there were no shares of preferred stock outstanding. Extraordinary Gain on Early Extinguishment of Debt--In May 2001, we paid $24,438,000 to Novartis Pharma AG for deferred obligations due to them under our continuing November 2000 collaboration agreement. In connection with this payment, we recorded an extraordinary gain on the early extinguishment of debt of $3,016,000. Year ended December 31, 2000 compared to year ended December 31, 1999 Revenues--Total revenues increased 117% to $111,790,000 in 2000 as compared to $51,434,000 in 1999. This increase was primarily due to a $64,035,000, or 232%, increase in product sales, of which $46,719,000 was attributed to a PROVIGIL sales increase and $12,937,000 was attributed to an ACTIQ sales increase. This increase was offset slightly by a 15% decrease in other revenues recognized under our collaborative efforts with other companies. Cost of Product Sales--The cost of product sales associated with PROVIGIL in 2000 increased to 20% of net product sales from 13% in 1999. All of the PROVIGIL sold in the United States during 1999 was produced prior to its December 1998 FDA approval and the costs of producing that material were recorded as research and development expense in those prior periods. As a result, 2000 was the first year since the commercial launch of PROVIGIL to include a full year's recognition of product costs. Product sales of PROVIGIL are recognized upon shipment of product and are recorded net of reserves for returns and allowances. During 2000, we reduced our reserve for returns and allowances, which resulted in an increase to PROVIGIL net sales of $4,370,000 without any corresponding cost of product sales. The cost of ACTIQ product sales as a percentage of ACTIQ sales decreased from 31% in 1999 to 24% in 2000 due to increased recognition of ACTIQ sales as a result of the reacquisition of full marketing rights to ACTIQ during 2000. In 2000, there were no costs associated with the sales of GABITRIL since the product was being marketed under a co-promotion agreement with Abbott. Research and Development Expenses--For the year ended December 31, 2000, research and development expenses increased 24% to $68,063,000 from $54,892,000 in 1999. This change primarily resulted from an increase in expenditures associated with clinical development studies of PROVIGIL in areas other than narcolepsy and an increase in drug development and manufacturing costs for our compounds that have progressed into later stages of development. Selling, General and Administrative Expenses--The 40% increase in selling, general and administrative expenses to $83,725,000 for the year ended December 31, 2000 from $59,665,000 for 1999 was primarily due to increases in marketing expenses associated with the commercialization of PROVIGIL of $1,552,000 and our collaboration agreement with Abbott to market GABITRIL of $2,649,000, expenses relating to an increase in the size of our internal sales force to fully support both PROVIGIL and GABITRIL of $8,242,000, and increases in expenses associated with the hiring of a contract sales organization to promote ACTIQ of $6,911,000. This increase was partially offset by a one-time charge of $4,300,000 in 1999 associated with the settlement of the securities litigation. Depreciation and Amortization Expenses--The $1,929,000 increase in depreciation and amortization expenses in 2000 as compared to 1999 is due primarily to amortization expense associated with the intangible asset recorded when the U.S. marketing rights to ACTIQ were purchased from Abbott in March 2000. Other Expenses--We recorded a number of certain charges in the fourth quarter of 2000 including $6,600,000 representing the final royalty payment associated with the revenue sharing notes, $13,811,000 in merger and integration costs as a result of the merger 20 with Anesta and $22,200,000 for in-process research and development costs associated with the acquisition of U.S. product rights to GABITRIL from Abbott. Other Income and Expense--The $7,412,000 increase in interest income from 1999 to 2000 is primarily due to the recognition of $4,008,000 of interest income associated with the waiver of an interest rate penalty by the Commonwealth of Pennsylvania on a loan used to finance the purchase of our West Chester facilities. The $3,188,000 decrease in interest expense is due to the retirement of revenue-sharing notes in the first quarter of 2000. An increase in the exchange rate loss from $235,000 in 1999 to $1,072,000 in 2000 due to a decline in currency exchange value of the pound Sterling (GBP) relative to both the U.S. dollar and to our other foreign operations' currencies that are remeasured into the GBP for financial reporting purposes is recorded as other expense. Extraordinary Charge on Early Extinguishment of Debt--In connection with the restructuring of the revenue sharing notes, we recorded a loss in 1999 on the extinguishment of the notes of $11,187,000, which includes the prepayment penalty of $5,500,000 and the write-off of deferred financing costs and the remaining value of the associated warrants of $5,687,000. These notes were retired in the first quarter of 2000 for an aggregate payment of $35,500,000. Cumulative Effect of a Change in Accounting Principle--We adopted the U.S. Securities and Exchange Commission's Staff Accounting Bulletin No. 101 (SAB 101) on Revenue Recognition and, as a result, we recorded a charge of $7,434,000 in the fourth quarter of 2000 to defer upfront license fees associated with our collaborative alliances that were previously recognized in revenues. These payments will be recognized over the performance periods of the alliances. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. These estimates and assumptions are developed, and challenged periodically, by management based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K. Management considers the following policies to be the most critical in understanding the more complex judgments that are involved in preparing our consolidated financial statements and the uncertainties that could impact its results of operations, financial position and cash flows. Revenue recognition--Product sales are recognized upon shipment of product and are recorded net of estimated reserves for contractual allowances, discounts and returns. Contractual allowances result from sales under contracts with managed care organizations and government agencies. The reserve for contractual allowances is based on an estimate of prescriptions to be filled for individuals covered by government agencies and managed care organizations with whom we have contracts. The reserve for product returns is determined by reviewing the history of each product's returns and by utilizing reports purchased from external, independent sources which produce prescription data, wholesale stocking levels and wholesale sales to retail pharmacies. This data is reviewed to monitor product movement through the supply chain to identify remaining inventory in the supply chain that may result in chargebacks or returns. The reserves are reviewed at each reporting period and adjusted to reflect data available at that time. To the extent our estimate of contractual allowances is inaccurate, we will adjust the reserve which will impact the amount of product sales revenue recognized in the period of the adjustment. Product returns are permitted with respect to unused pharmaceuticals based on expiration dating of our product. To date, product returns have not been material. Revenue from collaborative agreements may consist of up-front fees, on going research and development funding and milestone payments. Effective January 1, 2000, we adopted the SEC's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). In accordance with SAB 101, non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate our performance period based on the specific terms of each collaborative agreement, but actual performance may vary. We adjust the performance periods based upon available facts and circumstances. Periodic payments for research and development activities are recognized over the period that we perform the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based upon the occurrence of a substantive element specified in the contract or as measure of substantive progress towards completion under the contract. Allowance for uncollectable accounts receivable--Accounts receivable are reduced by an allowance for amounts that may become uncollectable in the future. On an ongoing basis, management performs credit evaluations of our customers and adjusts credit limits based upon the customer's payment history and creditworthiness, as determined by a review of their current credit information. We continuously monitor collections and payments from our customers. Based upon our historical experience and any specific customer collection issues that are identified, management uses its judgment to establish and evaluate the adequacy of the our allowance for estimated credit losses. While such credit losses have been within our expectations and the allowance provided, we cannot guarantee that it will continue to experience the same credit loss rates as it has in the past. Also, as of December 31, 2001, approximately 58% of our accounts receivable were due from three pharmaceutical wholesalers. Any significant changes in the liquidity or financial position of these wholesalers could have a material adverse impact on the collectability of our accounts receivable and its future operating results. 21 Inventories--Our inventories are valued at the lower of cost or market, determined on a first-in, first-out basis, and include the cost of raw materials, labor and overhead. The majority of our inventories are subject to expiration dating. We continually evaluate the carrying value of our inventories and when in the opinion of management, factors indicate that impairment has occurred, either a reserve is established against the inventories' carrying value or the inventories are completely written off. Management bases these decisions on the level of inventories on hand in relation to our estimated forecast of product demand, production requirements over the next twelve months and the expiration dates of raw materials and finished goods. Although we make every effort to ensure the accuracy of its forecasts of future product demand, any significant unanticipated changes in demand could have a material impact on the carrying value of our inventories and our reported operating results. Valuation of Fixed Assets, Goodwill and Intangible Assets--Our fixed assets and intangible assets (which consist primarily of developed technology, trademarks, and product and marketing rights) have been recorded at cost and are being amortized on a straight-line basis over the estimated useful life those assets. In conjunction with acquisitions of businesses or product rights, we allocate the purchase price based upon the relative fair values of the assets acquired and liabilities assumed. In certain circumstances, fair value may be assigned to purchased in-process technology and immediately expensed. The valuation of goodwill and intangible assets and the estimation of appropriate useful lives to apply to them requires us to use our judgment. We continually assess the impairment of intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operating performance of our fixed assets and acquired businesses and products. Future events could cause us to conclude that impairment indicators exist and the carrying values of our fixed assets, intangible assets or goodwill are impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations. Income taxes--We have a history of losses, which has generated significant federal and state tax net operating loss (NOL) carryforwards of approximately $344,139,000 and $147,620,000, respectively as of December 31, 2001. Generally accepted accounting principles require us to record a valuation allowance against the deferred tax asset associated with this NOL carryforward if it is more likely than not that we will not be able to utilize the NOL carryforward to offset future taxes. Due to the size of the NOL carryforward in relation to our history of unprofitable operations, we have not recognized a net deferred tax asset. The third quarter of 2001 was our first profitable quarter from commercial operations since inception. Continued profitability in future periods could cause management to conclude that it is more likely than not that we will realize all or a portion of the NOL carryforward. Upon reaching such a conclusion, which is subject to management's judgment, we would immediately record the estimated net realizable value of the deferred tax asset at that time and would then begin to provide for income taxes at a rate equal to our combined federal and state effective rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period. JOINT VENTURE In December 2001, we formed a joint venture with unaffiliated third party investors to fund additional commercial activities in support of PROVIGIL and GABITRIL in the United States. In exchange for our transfer to the joint venture of certain intellectual property and other rights related to these two products, we received a Class B interest, representing a 50% interest in the joint venture. In exchange for its contribution of $50,000,000 in cash to the joint venture, the investors received Class A interests, also representing a 50% interest in the joint venture. On March 29, 2002, we acquired the investors' Class A interests and ended the joint venture by issuing to the investors, through a private placement, $55,000,000 aggregate principal amount of 3.875% convertible subordinated notes due March 2007. The notes are convertible into our common stock, at the option of the holder, at a price of $70.36 per share. As of December 31, 2001, the $50,000,000 investors' Class A interest was recorded on our balance sheet as a liability, and the joint venture's cash balance of $50,000,000 was included in our balance of cash and cash equivalents. The purchase of the investors' Class A interests in the joint venture will result in the recognition of a $7,100,000 extraordinary charge during the first quarter of 2002, which includes the write-off of $4,600,000 of costs capitalized in connection with the formation of the joint venture. In addition, our statement of operations for the three months ended March 31, 2002 will include certain charges totaling approximately $7,000,000 related to the operations of the joint venture. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and investments at December 31, 2001 were $603,884,000, representing 43% of total assets, an increase from $97,384,000 at December 31, 2000. Net Cash Provided by (Used for) Operating Activities Net cash provided by operating activities was $12,274,000 in 2001 as compared to net cash used for operating activities of $106,492,000 in 2000. The main factors that contributed to the net cash provided by operating activities in 2001 are as follows: . The net loss before preferred dividends was $55,484,000 in 2001, as compared to $101,178,000 in 2000, as a result of the increase in product sales. In addition, we recognized the following non-cash transactions in 2001: $14,434,000 of depreciation 22 and amortization expense, $5,158,000 of non-cash interest expense on our convertible subordinated notes, $6,631,000 of non-cash compensation expense, $20,000,000 of purchased in-process research and development expense relating to the Group Lafon acquisition, $52,444,000 of debt exchange expense related to the exchange of $217,000,000 of convertible subordinated notes and $3,016,000 of gain on the early extinguishment of debt. . Accounts receivable increased $30,434,000 due primarily to a 147% increase in product sales from 2000 to 2001. . Accounts payable increased $10,310,000 and accrued expenses increased $9,928,000. The increase in accrued expenses is due primarily to an increase of $6,413,000 of expenses related to the Lafon acquisition and $2,789,000 of accrued interest related to the convertible notes. Net Cash (Used for) Provided by Investing Activities A summary of net cash (used for) provided by investing activities is as follows:
Year ended December 31, ------------------------------------------ 2001 2000 1999 ------------- ------------ ------------- Purchases of property and equipment........................ $ (12,481,000) $ (7,462,000) $ (1,029,000) Acquisition of Group Lafon, net of cash acquired.................... (447,717,000) -- -- Acquisition of intangible assets.. (21,063,000) (56,627,000) -- Sales and maturities (purchases) of investments, net.............. 6,200,000 186,449,000 (162,772,000) ------------- ------------ ------------- Net cash (used for) provided by investing activities............. $(475,061,000) $122,360,000 $(163,801,000) ============= ============ =============
--Acquisition of Group Lafon, net of cash acquired The acquisition of Group Lafon effective December 28, 2001 consisted of a total purchase price of $450,000,000 plus $7,000,000 of direct transaction costs and other purchase price adjustments, less $9,283,000 of cash acquired. --Acquisition of intangible assets
Year ended December 31, -------------------------------- 2001 2000 1999 ------------ ------------ ---- Acquisition of U.S. GABITRIL product rights.. $ -- $(17,800,000) $-- Acquisition of European GABITRIL product rights...................................... (20,666,000) -- -- Acquisition of ACTIQ marketing rights........ (397,000) (23,850,000) -- Acquisition of Novartis product rights....... -- (14,977,000) -- ------------ ------------ ---- Net cash used for acquisition of intangible assets...................................... $(21,063,000) $(56,627,000) $-- ============ ============ ====
The acquisition of intangible assets during the year ended December 31, 2001 primarily consists of amounts paid for the acquisition of European product rights to GABITRIL. The acquisition of intangible assets during the year ended December 31, 2000 includes an initial payment of $40,000,000 made to Abbott for the acquisition of U.S. product rights for GABITRIL, of which $22,200,000 was recorded as in- process research and development expense and $17,800,000 was recorded as an intangible asset. Under a separate agreement, we also paid $23,850,000 to Abbott in 2000 to acquire the U.S. marketing rights to ACTIQ. Additionally, we also entered into a collaboration agreement with Novartis Pharma AG in 2000 to consolidate the sales and marketing efforts of four Novartis CNS products with PROVIGIL in the United Kingdom. In connection with this transaction, we made an initial payment of $14,977,000 which was recorded as an intangible asset. Net Cash Provided by (Used for) Financing Activities A summary of net cash provided by (used for) financing activities is as follows:
Year ended December 31, ---------------------------------------- 2001 2000 1999 ------------- ----------- ------------ Proceeds from issuance of preferred stock............................... $ -- $ -- $120,028,000 Proceeds from issuance of common stock............................... -- -- 12,000,000 Proceeds from exercises of common stock options, warrants and employee stock purchase plan................. 28,221,000 39,448,000 36,034,000 Payments to acquire treasury stock... (3,629,000) (2,829,000) (803,000) Net proceeds from issuance of long- term debt........................... 1,009,080,000 -- 30,500,000 Preferred dividends paid............. (6,797,000) (9,063,000) (2,265,000) Principal payments on and retirement of long-term debt................... (52,300,000) (32,766,000) (1,989,000) ------------- ----------- ------------ Net cash provided by (used for) financing activities................ $ 974,575,000 $(5,210,000) $193,505,000 ============= =========== ============
23 --Proceeds from issuance of preferred stock During 1999, we completed a sale of 2,500,000 shares of convertible exchangeable preferred stock at $50 per share. As of December 31, 2001, all 2,500,000 shares have been converted into an aggregate of 6,974,998 shares of our common stock. --Proceeds from issuance of common stock In connection with a May 1999 collaborative agreement, H. Lundbeck A/S purchased 1,000,000 shares of our common stock at a price of $12.00 per share, which was the average market price for the five trading days prior to the closing of the agreement. --Proceeds from exercises of common stock options and warrants The following is a summary of proceeds from exercises of common stock options, warrants and employee stock purchase plan for each of the years ended December 31:
2001 2000 1999 Proceeds from exercises of: - ------------------------------------------------------------------------------- Common stock options...................... $25,542,000 $12,934,000 $ 8,958,000 Warrants.................................. 2,679,000 26,436,000 26,984,000 Employee stock purchase plan.............. -- 78,000 92,000 ----------- ----------- ----------- $28,221,000 $39,448,000 $36,034,000 =========== =========== =========== Total number of shares issued.............. 1,605,180 3,458,223 2,751,280 =========== =========== ===========
At December 31, 2001, options to purchase approximately 5,608,000 shares of our common stock at various exercise prices were outstanding. The extent and timing of future option exercises, if any, are primarily dependent upon the market price of our common stock and general financial market conditions, as well as the exercise prices and expiration dates of the options. At December 31, 2001, no warrants to purchase common stock remained outstanding. In November 1993, Anesta Corp. adopted the Employee Stock Purchase Plan authorizing the issuance of 250,000 shares pursuant to purchase rights granted to employees of Anesta. Participants could elect to use up to 10% of their compensation to purchase Anesta's common stock at the end of each year at a price equal to 85% of the lower of the beginning or ending stock price in the plan period. The plan terminated in October 2000 upon the merger of Cephalon and Anesta. --Payments to acquire treasury stock Under our Equity Compensation Plan, we may grant restricted stock awards to employees. Upon vesting, shares of Cephalon common stock are withheld from the employee's stock award and returned to the treasury for the corresponding dollar value of payroll-related taxes paid on behalf of the employee. --Net proceeds from issuance of long-term debt In the second quarter of 2001, we completed a private placement of $400,000,000 of 5.25% convertible subordinated notes due May 2006. Debt issuance costs of $14,364,000 have been capitalized and are being amortized over the term of the notes. In the fourth quarter of 2001, we completed a private placement of $600,000,000 of 2.50% convertible subordinated notes due December 2006. Debt issuance costs of $21,250,000 have been capitalized and are being amortized over the term of the notes. In connection with our joint venture, $50,000,000 in cash received from the Investor was recorded as a liability as of December 31, 2001. During 1999, we completed a private placement $30,000,000 of revenue sharing notes that were subsequently retired in 2000. In July 1999, we borrowed $500,000 on a term loan in connection with the remodeling of the facility in Salt Lake City, Utah. --Preferred dividends paid These amounts represent preferred dividends paid on our $3.625 convertible exchangeable preferred stock. As of December 31, 2001, all 2,500,000 shares of the preferred stock had been converted into an aggregate of 6,974,998 shares of our common stock. --Principal payments on long-term debt In July 2001, we made a payment of $1,667,000 to retire a variable-rate term note payable. In May 2001, we made a payment of $24,000,000 to Abbott Laboratories due under our licensing agreement for U.S. product rights to GABITRIL. Also in May 2001, we paid $24,438,000 to Novartis Pharma AG for deferred obligations due to them under our continuing November 2000 collaboration agreement. In the first quarter of 2000, we retired $30,000,000 of revenue sharing notes issued in a private placement in 1999. In addition, for all periods presented, principal payments on long-term debt include payments on mortgage and building improvements loans and payments on capital lease obligations. OUTLOOK Cash, cash equivalents and investments at December 31, 2001 were $603,884,000. Prior to 2001, we historically have had negative cash flows from operations and have used the proceeds of public and private placements of our equity and debt securities to fund 24 operations. We currently believe that projected increases in sales of our three U.S. marketed products, PROVIGIL, ACTIQ and GABITRIL, in combination with other revenues, will allow us to achieve continued profitability and positive cash flows from operations in 2002. At this time, we cannot accurately predict the effect of certain developments on future product sales such as the degree of market acceptance of our products, competition, the effectiveness of our sales and marketing efforts and our ability to demonstrate the utility of our products in indications beyond those already included in the FDA approved labels. Other revenues include receipts from collaborative research and development agreements and co-promotion agreements. The continuation of any of these agreements is subject to the achievement of certain milestones and to periodic review by the parties involved. We expect to continue to incur significant expenditures associated with manufacturing, selling and marketing PROVIGIL, ACTIQ and GABITRIL and conducting additional clinical studies to explore the utility of these products in treating disorders beyond those currently approved in their respective labels. We also expect to continue to incur significant expenditures to fund research and development activities for our other product candidates. We may seek sources of funding for a portion of these programs through collaborative arrangements with third parties. However, we intend to retain a portion of the commercial rights to these programs and, as a result, we still expect to spend significant funds on our share of the cost of these programs, including the costs of research, preclinical development, clinical research and manufacturing. We may have significant fluctuations in quarterly results based primarily on the level and timing of: . product sales and cost of product sales; .achievement and timing of research and development milestones; .co-promotion and other collaboration revenues; .cost and timing of clinical trials; and .marketing and other expenses. In December 2001, we acquired Group Lafon, which gave us worldwide control of the intellectual property, marketing, and manufacturing rights related to modafinil, the active drug substance in PROVIGIL. PROVIGIL accounted for approximately 66% of our total product sales for the year ended December 31, 2001. By consolidating our financial results with those of Group Lafon, we expect to reduce significantly our cost of goods sold related to PROVIGIL. While the bulk of these cost savings result from eliminating the effect of preexisting contractual arrangements between us and Group Lafon, there could be unanticipated costs associated with our operation and management of the Group Lafon business that could limit these expected cost savings or other anticipated benefits of the Group Lafon acquisition. As a result, our actual cost savings, if any, and other anticipated benefits could differ from or their impact could be delayed compared to our expectations. In the second quarter of 2001, we completed a private placement of $400,000,000 of 5.25% convertible subordinated notes due May 2006. In the fourth quarter of 2001, $217,000,000 of these convertible subordinated notes were exchanged into 3,691,705 shares of common stock. The annual interest payments on the remaining notes will be $9,608,000. Additionally, in December 2001, we completed a private placement of $600,000,000 of 2.50% convertible subordinated notes due December 2006. The annual interest payments on these notes will be $15,000,000, payable semiannually. Based on our current level of operations and projected sales of our products combined with other revenues and interest income, we believe that we will be able to service our existing debt and meet our capital expenditure and working capital requirements for the next several years. However, we cannot be sure that our anticipated revenue growth will be realized or that we will continue to generate positive cash flow from operations. We may need to obtain additional funding for our operational needs, or for future significant strategic transactions, and we cannot be certain that funding will be available on terms acceptable to us, or at all. The following table summarizes our obligations to make future payments under current contracts:
Payments due by period ------------------------------------------------------------ Less Than 1 After 5 Total Year 1-3 Years 4-5 Years Years ------------ ----------- ----------- ------------ ---------- Long-term debt......... $ 75,545,000 $10,981,000 $53,747,000 $ 3,784,000 $7,033,000 Capital lease obligations........... 2,852,000 1,027,000 1,243,000 156,000 426,000 Operating leases....... 10,600,000 3,000,000 5,500,000 2,100,000 -- Convertible notes...... 783,000,000 -- -- 783,000,000 -- Other long-term obligations........... 37,392,000 20,192,000 16,651,000 549,000 -- ------------ ----------- ----------- ------------ ---------- Total contractual cash obligations............ $909,389,000 $35,200,000 $77,141,000 $789,589,000 $7,459,000 ============ =========== =========== ============ ==========
The following table summarizes future payments under contingent or other potential commitments:
Amount of commitment expiration per period ----------------------------------------------- Less Than 1 Over 5 Total Year 1-3 Years 4-5 Years Years -------- ----------- --------- --------- ------ Standby letters of credit...... $800,000 $800,000 $-- $-- $-- Total commitments............... $800,000 $800,000 $-- $-- $-- ======== ======== ==== ==== ====
25 COMMITTMENTS AND CONTINGENCIES Related Party --Cephalon Clinical Partners, L.P. In August 1992, we exclusively licensed our rights to MYOTROPHIN for human therapeutic use within the United States, Canada and Europe to Cephalon Clinical Partners, L.P. (CCP). Development and clinical testing of MYOTROPHIN is performed on behalf of CCP under a research and development agreement with CCP. CCP has granted us an exclusive license to manufacture and market MYOTROPHIN for human therapeutic use within the United States, Canada and Europe in return for royalty payments equal to a percentage of product sales and a milestone payment of approximately $16,000,000 that will be made if MYOTROPHIN receives regulatory approval. We have a contractual option, but not an obligation, to purchase all of the limited partnership interests of CCP, which is exercisable upon the occurrence of certain events following the first commercial sale of MYOTROPHIN. If, and only if, we decide to exercise this purchase option, we would make an advance payment of approximately $40,275,000 in cash or, at our election, approximately $42,369,000 in shares of common stock or a combination thereof. Should we discontinue development of MYOTROPHIN, or if we do not exercise this purchase option, our license will terminate and all rights to manufacture or market MYOTROPHIN in the United States, Canada and Europe will revert to CCP, which may then commercialize MYOTROPHIN itself or license or assign its rights to a third party. In that event, we would not receive any benefits from such commercialization, license or assignment of rights. Legal Proceedings In August 1999, the U.S. District Court for the Eastern District of Pennsylvania entered a final order approving the settlement of a class action in which plaintiffs alleged that statements made about the results of certain clinical studies of MYOTROPHIN were misleading. A related complaint has been filed with the Court by a small number of plaintiffs who decided not to participate in the settlement. This related complaint alleges that we are liable under common law for misrepresentations concerning the results of the MYOTROPHIN clinical trials, and that we and certain of our current and former officers and directors are liable for the actions of persons who allegedly traded in our common stock on the basis of material inside information. We believe that we have valid defenses to all claims raised in this action. Even if there is a judgment against us in this case, we do not believe it will have a material adverse effect on our financial condition or results of operations. In February 2001, a complaint was filed in Utah state court by Zars, Inc. and one of its research scientists, against us and our subsidiary Anesta. The plaintiffs are seeking a declaratory judgment to establish their right to develop transdermal or other products containing fentanyl and other pharmaceutically active agents under a royalty and release agreement between Zars and Anesta. The complaint also asks for unspecified damages for breach of contract, interference with economic relations, defamation and slander. We believe that we have valid defenses to all claims raised in this action. In any event, we do not believe any judgment against us will have a material adverse effect on our financial condition or results of operations. We are a party to certain other litigation in the ordinary course of our business, including matters alleging employment discrimination, product liability and breach of commercial contract. However, we are vigorously defending ourselves in all of these actions and do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition or results of operations. CERTAIN RISKS RELATED TO OUR BUSINESS In addition to historical facts or statements of current condition, this report contains forward-looking statements. Forward-looking statements provide our current expectations or forecasts of future events. These may include statements regarding anticipated scientific progress in our research programs, development of potential pharmaceutical products, prospects for regulatory approval, manufacturing capabilities, market prospects for our products, sales and earnings projections, and other statements regarding matters that are not historical facts. Some of these forward-looking statements may be identified by the use of words in the statements such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" or other words and terms of similar meaning. Our performance and financial results could differ materially from those reflected in these forward-looking statements due to general financial, economic, regulatory and political conditions affecting the biotechnology and pharmaceutical industries as well as more specific risks and uncertainties such as those set forth above and in this report. Given these risks and uncertainties, any or all of these forward-looking statements may prove to be incorrect. Therefore, you should not rely on any such forward- looking statements. Furthermore, we do not intend to update publicly any forward-looking statements, except as required by law. This discussion is permitted by the Private Securities Litigation Reform Act of 1995. A significant portion of our revenues is derived from U.S. sales of our three largest products and our future success will depend on the continued acceptance and growth of these products. For the year ended December 31, 2001, approximately 83% of our total revenues were derived from U.S. sales of PROVIGIL, GABITRIL and ACTIQ. We cannot be certain that these products will continue to be accepted in their markets. Specifically, the following factors, among others, could affect the level of market acceptance of PROVIGIL, GABITRIL and ACTIQ, including: . the perception of the healthcare community of their safety and efficacy, both in an absolute sense and relative to that of competing products; 26 . the effectiveness of our sales and marketing efforts; . unfavorable publicity regarding these products or similar products; . product price relative to other competing drugs or treatments; . changes in government and other third-party payor reimbursement policies and practices; and . regulatory developments affecting the manufacture, marketing or use of these products. Any material adverse developments with respect to the sale or use of PROVIGIL, GABITRIL or ACTIQ could significantly reduce our product revenues and have a material adverse effect on our ability to generate net income and positive net cash flow from operations. We may be unsuccessful in our efforts to expand the number and scope of authorized uses of PROVIGIL, GABITRIL or ACTIQ, which would hamper sales growth and make it more difficult to sustain profitability. The market for the approved indications of our three largest products is relatively small. We believe that a portion of our product sales is derived from the use of these products outside of their labeled indications. To a large degree, our future success depends on expansion of the approved indications for our products and physicians prescribing our products outside of the approved indications. Under current FDA and European medical authority regulations, we are limited in our ability to promote the use of these products outside their labeled use. Any label expansion will require FDA approval. We have initiated clinical studies to examine whether or not PROVIGIL and GABITRIL are effective and safe when used to treat disorders outside their currently approved uses. Although some study data has been positive, additional studies in these disorders will be necessary before we can apply to regulatory authorities to expand the authorized uses of these products. We do not know whether these studies will demonstrate safety and efficacy, or if they do, whether we will succeed in receiving regulatory approval to market PROVIGIL and GABITRIL for additional disorders. If the results of some of these studies are negative, or if adverse experiences are reported in these clinical studies or otherwise in connection with the use of these products by patients, this could undermine physician and patient comfort with the products, limit their commercial success, and diminish their acceptance. Even if the results of these studies are positive, the impact on sales of PROVIGIL and GABITRIL may be minimal unless we are able to obtain FDA and foreign medical authority approval to expand the authorized use of these products. FDA regulations limit our ability to communicate the results of additional clinical studies to patients and physicians without first obtaining approval for any expanded uses. We do not expect to conduct studies for the purpose of requesting an expansion of the authorized use of ACTIQ. Future sales growth, if any, of ACTIQ outside of the treatment of breakthrough cancer pain could come only from physician prescriptions outside this labeled use. Physicians may or may not prescribe ACTIQ for off-label uses and, in any event, sales from such prescriptions may not prove to be significant to our results of operations. As our products are used commercially, unintended side effects, adverse reactions or incidents of misuse may occur which could result in additional regulatory controls and reduced sales of our products. Prior to 1999, the use of our products had been limited principally to clinical trial patients under controlled conditions and under the care of expert physicians. The widespread commercial use of our products could produce undesirable or unintended side effects that have not been evident in our clinical trials or the relatively limited commercial use to date. In addition, in patients who take multiple medications, drug interactions could occur that can be difficult to predict. Additionally, incidents of product misuse may occur. These events, among others, could result in additional regulatory controls that could limit the circumstances under which the product is prescribed or even lead to the withdrawal of the product from the market. More specifically, ACTIQ has been approved under regulations concerning drugs with certain safety profiles, under which the FDA has established special restrictions to ensure safe use. Any violation of these special restrictions could lead to the imposition of further restrictions or withdrawal of the product from the market. We may not be able to maintain adequate protection for our intellectual property or market exclusivity for certain of our products and therefore potential competitors may develop competing products, which could result in a decrease in sales and market share, cause us to reduce prices to compete successfully, and limit our commercial success. We place considerable importance on obtaining patent protection for new technologies, products and processes. To that end, we file applications for patents covering the composition of matter or uses of our drug candidates or our proprietary processes. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. To date, there has emerged no consistent policy regarding breadth of claims in such companies' patents. Accordingly, the patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technology. Patent disputes are frequent and can preclude commercialization of products. If we ultimately lose any disputes, we could be subject to competition or significant liabilities, we could be required to enter into third party licenses or we could be required to cease using the technology or product in dispute. In addition, even if such licenses are available, the terms of the license requested by the third party could be unacceptable to us. The composition of matter patent for modafinil expired in 2001. We license or own U.S. and foreign patent rights covering the particles size pharmaceutical composition of modafinil that expire between 2014 and 2015. Ultimately, these particle size patents 27 might be found invalid if challenged by a third party or a potential competitor could develop a competing product or product formulation that would avoid infringement of these patents. If a competitor developed a competing product that avoided infringement, our revenues from our modafinil-based products could be significantly and negatively impacted. We also rely on trade secrets, know-how and continuing technological advancements to support our competitive position. Although we have entered into confidentiality and invention rights agreements with our employees, consultants, advisors and collaborators, these parties could fail to honor such agreements or we could be unable to effectively protect our rights to our unpatented trade secrets and know-how. Moreover, others could independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets and know-how. In addition, many of our scientific and management personnel have been recruited from other biotechnology and pharmaceutical companies where they were conducting research in areas similar to those that we now pursue. As a result, we could be subject to allegations of trade secret violations and other claims. We may incur additional losses. The quarter ended September 30, 2001 was our first profitable quarter from commercial operations since inception and our accumulated deficit was $576,691,000 at December 31, 2001. Our losses have resulted principally from costs incurred in research and development, including clinical trials, and from selling, general and administrative costs associated with our operations. In order for us to maintain profitability from commercial operations, we must continue to achieve product and other revenue at or above their current levels. Moreover, our future growth depends, in part, on our ability to obtain regulatory approvals for future products, or for existing products in new indications, and our ability to successfully develop, commercialize, manufacture and market any other product candidates. Manufacturing, supply and distribution problems may create supply disruptions that could result in a reduction of product sales revenue, and damage commercial prospects for our products. At our two manufacturing facilities in France, we produce the active drug substance modafinil and certain other commercial products. At our U.S. facility in Salt Lake City, Utah, we manufacture ACTIQ for international markets. For the remainder of our products, we rely on third parties for product manufacturing. In all cases, we must comply with all applicable regulatory requirements of the FDA and foreign authorities, including cGMP regulations. In addition, we must comply with all applicable regulatory requirements of the Drug Enforcement Administration, and analogous foreign authorities for certain products. The facilities used by us and third parties to manufacture, store and distribute our products are subject to inspection by regulatory authorities at any time to determine compliance with regulations. These regulations are complex, and any failure to comply with them could lead to remedial action, civil and criminal penalties and delays in production or distribution of material. We depend upon sole suppliers for active drug substances contained in our products, including our own French plant that manufactures modafinil, and Abbott Laboratories to manufacture finished commercial supplies of ACTIQ and GABITRIL for the U.S. market. We have two qualified manufacturers, Watson Pharmaceuticals and DSM Pharmaceuticals, for finished commercial supplies of PROVIGIL. The process of changing or adding a manufacturer or changing a formulation requires prior FDA and/or European medical authority approval and is very time-consuming. If we are unable to manage this process effectively, we could face supply disruptions that would result in significant costs and delays, undermine goodwill established with physicians and patients, and damage commercial prospects for our products. We maintain inventories of active drug substances and finished products to protect against supply disruptions. Nevertheless, any disruption in these activities could impede our ability to sell our products and could reduce sales revenue. We also rely on third parties to distribute, provide customer service activities and accept and process returns. Our activities and products are subject to significant government regulations and approvals, which are often costly and could result in adverse consequences to our business if we fail to comply. We currently have a number of products that have been approved for sale in either the United States, foreign countries or both. All of our approved products are subject to extensive continuing regulations relating to, among other things, testing, manufacturing, quality control, labeling, and promotion. The failure to comply with any rules and regulations of the FDA or any foreign medical authority, or the post-approval discovery of previously unknown problems relating to our products could result in, among others: . fines, recalls, or seizures of products; . total or partial suspension of product sales; . non-approval of product license applications; . restrictions on our ability to enter into strategic relationships; and . criminal prosecution. It can be both costly and time-consuming for us to comply with these regulations. Additionally, incidents of adverse drug reactions, unintended side effects or misuse relating to our products could result in additional regulatory controls or restrictions, or even lead to withdrawal of the product from the market. With respect to our product candidates and for new therapeutic indications for our existing products, we conduct research, preclinical testing and clinical trials. We cannot market these product candidates or these new indications in the United States or other countries without receiving approval from the FDA or the appropriate foreign medical authority. The approval process requires 28 substantial time, effort and financial resources, and we may never obtain approval in a timely manner, or at all. We cannot provide you with any assurance that required approvals will be obtained timely or at all. In addition, if the FDA or a foreign medical authority determines that we have not complied with regulations in the research and development of a product candidate or a new indication, they may not grant approval. Without these required approvals, our ability to substantially grow revenues in the future could be adversely affected. In addition, because PROVIGIL and ACTIQ contain active ingredients that are controlled substances, we are subject to regulation by the DEA and analogous foreign organizations relating to the manufacture, shipment, sale and use of the applicable products. These regulations also are imposed on prescribing physicians and other third parties, making the use of such products relatively complicated and expensive. Future products may contain controlled substances. The increased concern for safety by the FDA and the DEA with respect to products containing controlled substances can result in the imposition of restrictions on marketing or even withdrawal of regulatory approval for such products. In addition, negative publicity may bring about rejection of the product by the medical community. If the DEA, FDA or a foreign medical authority withdrew the approval of, or placed additional significant restrictions on the marketing of any of our products, our products sales and ability to promote our products could be substantially affected. The failure to successfully operate Group Lafon could negatively impact our results of operations. The operation of Group Lafon following our December 2001 acquisition involves a number of risks and presents financial, managerial and operational challenges, including: . diversion of management attention from our existing business and operations; . difficulty with integration of personnel, and financial and other systems; and . increased foreign operations that may be difficult to manage, especially since we have limited experience operating in France. In light of these challenges, we may not be able to successfully manage the operations and personnel of Group Lafon. Customer dissatisfaction or manufacturing, supply, or distribution problems associated with Group Lafon's products could cause our pharmaceutical business in France to underperform relative to our expectations, which could have a material adverse effect on our business. We also could experience financial or other setbacks if Group Lafon's businesses have problems or liabilities of which we were not aware or are substantially greater than we anticipated based on our evaluation of the business prior to the acquisition. We may not achieve the expected cost savings and other benefits of the Group Lafon acquisition. In acquiring Group Lafon, we secured worldwide control of the intellectual property, marketing, and manufacturing rights related to modafinil, the active drug substance in PROVIGIL. PROVIGIL accounted for approximately 66% of our total product sales for the year ended December 31, 2001. By consolidating our financial results with those of Group Lafon, we expect to reduce our cost of goods sold related to PROVIGIL from approximately 22% of net sales to approximately 7% of net sales. While the bulk of these expected cost savings result from eliminating the effect of preexisting contractual arrangements between us and Group Lafon, there could be unanticipated costs associated with our operation and management of the Group Lafon business that could limit or eliminate these expected cost savings or other anticipated benefits of the Group Lafon acquisition. As a result, our actual cost savings, if any, and other anticipated benefits could differ from, or their impact could be delayed compared to, our expectations as described herein. The efforts of government entities and third party payors to contain or reduce the costs of health care may adversely affect our sales and limit the commercial success of our products. In certain foreign markets, pricing or profitability of pharmaceutical products is subject to various forms of direct and indirect governmental control. In the United States, there have been, and we expect there will continue to be, various proposals to implement similar government controls. The commercial success of our products could be limited if federal or state governments adopt any such proposals. In addition, in the United States and elsewhere, sales of pharmaceutical products depend in part on the availability of reimbursement to the consumer from third party payors, such as government and private insurance plans. Third party and government payors increasingly challenge the prices charged for products and limit reimbursement levels offered to consumers for such products. Third party and government payors could focus their cost control efforts on our products, especially with respect to prices of and reimbursement levels for products prescribed outside their labeled indications. In these cases, these efforts could negatively impact sales of and profits, if any, on our products. We experience intense competition in our fields of interest, which may adversely affect our business. Large and small companies, academic institutions, governmental agencies, and other public and private research organizations conduct research, seek patent protection, and establish collaborative arrangements for product development in competition with us. Products developed by any of these entities may compete directly with those we develop or sell. The conditions that our products treat, and some of the other disorders for which we are conducting additional studies, are currently treated with several drugs, many of which have been available for a number of years or are available in inexpensive generic forms. With respect to PROVIGIL, there are several other products used for the treatment of narcolepsy in the United States including methylphenidate, and in our other licensed territories, all of which have been available for a number of years and many of which are available in inexpensive generic forms. With respect to ACTIQ, we face competition from inexpensive oral opioid tablets and more expensive but quick-acting invasive 29 (intravenous, intramuscular and subcutaneous) opioid delivery systems. Other technologies for rapidly delivering opioids to treat breakthrough pain are being developed, at least one of which is in clinical trials. With respect to GABITRIL, there are several products, including gabapentin, used as adjunctive therapy for the partial seizure market. Some are well-established therapies that have been on the market for several years while others have recently entered the partial seizure marketplace. In addition, several treatments for partial seizures are available in inexpensive generic forms. Thus we will need to demonstrate to physicians, patients and third party payors that the cost of our products is reasonable and appropriate in the light of their safety and efficacy, the price of competing products and the related health care benefits to the patient. In addition, many of our competitors have substantially greater capital resources, research and development staffs and facilities than we have, and substantially greater experience in conducting clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products. These entities represent significant competition for us. In addition, competitors who are developing products for the treatment of neurological or oncological disorders might succeed in developing technologies and products that are more effective than any that we develop or sell or that would render our technology and products obsolete or noncompetitive. Competition and innovation from these or other sources, including advances in current treatment methods, could potentially affect sales of our products negatively or make them obsolete. In addition, we may be at a competitive marketing disadvantage against companies that have broader product lines and whose sales personnel are able to offer more complementary products than we can. Any failure to maintain our competitive position could adversely affect our business and results of operations. We face significant product liability risks, which may have a negative effect on our financial performance. The administration of drugs to humans, whether in clinical trials or commercially, can result in product liability claims whether or not the drugs are actually at fault for causing an injury. Furthermore, our products may cause, or may appear to have caused, serious adverse side effects (including death) or potentially dangerous drug interactions that we may not learn about or understand fully until the drug has been administered to patients for some time. As our products are used more widely and in patients with varying medical conditions, the likelihood of an adverse drug reaction, unintended side effect or incidence of misuse may increase. Product liability claims can be expensive to defend and may result in large judgments or settlements against us, which could have a negative effect on our financial performance. We maintain product liability insurance in amounts we believe to be commercially reasonable, but claims could exceed our coverage limits or purchasing sufficient insurance could be expensive. Even if a product liability claim is not successful, the adverse publicity and time and expense of defending such a claim may interfere with our business. The results and timing of our research and development activities, including future clinical trials are difficult to predict, subject to future setbacks and, ultimately, may not result in any additional pharmaceutical products, which may adversely affect our business. In order to remain competitive, we are focused on the search for new pharmaceutical products. These activities include engaging in discovery research and process development, conducting preclinical and clinical studies, and seeking regulatory approval in the United States and abroad. In all of these areas, we have relatively limited resources and compete against larger multinational pharmaceutical companies. Moreover, even if we undertake these activities in an effective and efficient manner, regulatory approval for the sale of new pharmaceutical products remains highly uncertain since the majority of compounds discovered do not enter clinical studies and the majority of therapeutic candidates fail to show the human safety and efficacy necessary for regulatory approval and successful commercialization. Preclinical testing and clinical trials must demonstrate that a product candidate is safe and efficacious. The results from preclinical testing and early clinical trials may not be predictive of results obtained in subsequent clinical trials, and we cannot be sure that these clinical trials will demonstrate the safety and efficacy necessary to obtain regulatory approval for any product candidates. A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. In addition, certain clinical trials are conducted with patients having the most advanced stages of disease. During the course of treatment, these patients often die or suffer other adverse medical effects for reasons that may not be related to the pharmaceutical agent being tested. Such events can have a negative impact on the statistical analysis of clinical trial results. The completion of clinical trials of our product candidates may be delayed by many factors, including the rate of enrollment of patients. Neither we nor our collaborators can control the rate at which patients present themselves for enrollment, and the rate of patient enrollment may not be consistent with our expectations or sufficient to enable clinical trials of our product candidates to be completed in a timely manner or at all. In addition, we may not be permitted by regulatory authorities to undertake additional clinical trials for any of our product candidates. Even if such trials are conducted, our product candidates may not prove to be safe and efficacious or receive regulatory approvals. Any significant delays in, or termination of, clinical trials of our product candidates could impact our ability to substantially increase our product sales in the future. Our research and development and marketing efforts are often dependent on corporate collaborators and other third parties who may not devote sufficient time, resources and attention to our programs, and which may limit our efforts to successfully develop and market potential products. Because we have limited resources, we have entered into a number of collaboration agreements with other pharmaceutical companies, most importantly with Lundbeck and Sanofi-Synthelabo related to our research efforts in Parkinson's and Alzheimer's disease, and solid tumors, respectively. In some cases our collaboration agreements call for our partners to control: . the supply of bulk or formulated drugs for commercial use or for use in clinical trials; 30 . the design and execution of clinical studies; . the process of obtaining regulatory approval to market the product; and/or . marketing and selling of any approved product. In each of these areas, our partners may not support fully our research and commercial interests since our program may compete for time, attention and resources with the internal programs of our corporate collaborators. As such, our program may not move forward as effectively, or advance as rapidly as it might if we had retained complete control of all research, development, regulatory and commercialization decisions. We also rely on several of these collaborators and other third parties for the production of compounds and the manufacture and supply of pharmaceutical products. Additionally, we may find it necessary from time to time to seek new or additional partners to assist us in commercializing our products, though we might not be successful in establishing any such new or additional relationships. Our product sales and related financial results will fluctuate and these fluctuations may cause our stock price to fall, especially if they are not anticipated by investors. A number of analysts and investors who follow our stock have developed models to attempt to forecast future product sales and have established earnings expectations based upon those models. These models, in turn, are based in part on estimates of projected revenue and earnings that we disclose publicly. Forecasting revenue growth is difficult, especially when there is little commercial history and when the level of market acceptance of our products is uncertain or, in the case of Group Lafon, when we have just recently acquired a portfolio of products. Forecasting is further complicated by the difficulties in estimating stocking levels at pharmaceutical wholesalers and at retail pharmacies and in estimating potential product returns. As a result, it is likely that there will be significant fluctuations in revenues, which may not meet with market expectations and which also may adversely affect our stock price. There are a number of other factors that could cause our financial results to fluctuate unexpectedly, including: . the cost of product sales; . achievement and timing of research and development milestones; . co-promotion and other collaboration revenues; . cost and timing of clinical trials; . marketing and other expenses; and . manufacturing or supply disruption. The price of our common stock has been and may continue to be highly volatile. The market price of our common stock is volatile, and we expect it to continue to be volatile for the foreseeable future. For example, from January 1, 2001 through February 12, 2002, our common stock traded at a high price of $78.880 and a low price of $36.375. Negative announcements, including, among others: . adverse regulatory decisions; . disappointing clinical trial results; . disputes concerning patent or other proprietary rights; or . operating results that fall below the market's expectations could trigger significant declines in the price of our common stock. In addition, external events, such as news concerning our competitors, changes in government regulations that may impact the biotechnology or pharmaceutical industries or the movement of capital into or out of our industry, are also likely to affect the price of our common stock. A portion of our product sales and certain balance sheet items are subject to exchange rate fluctuations in the normal course of business that could adversely affect our reported results of operations. Historically, a portion of our product sales has been earned in currencies other than the U.S. dollar. As a result of our acquisition of Group Lafon, we expect that the portion of our product sales denominated in the euro and other local currencies will increase. We translate revenue earned from product sales into U.S. dollars at the average exchange rate applicable during the relevant period. A strengthening of the dollar could, therefore, reduce our earnings. Consequently, fluctuations in the rate of exchange between the U.S. dollar and the euro and other local currencies may affect period-to-period comparisons of our operating results. In addition, we may face exposure to the extent that exchange rate fluctuations affect the repayment of certain intercompany indebtedness. Finally, the balance sheet of our foreign operations will be translated into U.S. dollars at the period-end exchange rate. This latter exposure will result in changes to the translated value of assets and liabilities, with the impact of the translation included as a component of stockholders' equity. We are involved in or may become involved in the future in legal proceedings that, if adversely adjudicated or settled, could materially impact our financial condition. As a biopharmaceutical company, we are or may become a party to litigation in the ordinary course of our business, including matters alleging employment discrimination, product liability, patent infringement, or breach of commercial contract, among others. 31 In general, litigation claims can be expensive and time consuming to defend and could result in settlements or damages that could significantly impact results of operations and financial condition. We currently are vigorously defending ourselves against certain litigation matters. However, even if these existing lawsuits were adversely adjudicated or settled, we do not believe there would be a material impact on our results of operations or our financial condition. Our dependence on key executives and scientists could impact the development and management of our business. We are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. There is intense competition for qualified personnel in the pharmaceutical and biotechnology industries, and we cannot be sure that we will be able to continue to attract and retain the qualified personnel necessary for the development and management of our business. Although we do not believe the loss of one individual would materially harm our business, our research and development programs and our business might be harmed by the loss of the services of multiple existing personnel, as well as the failure to recruit additional key scientific, technical and managerial personnel in a timely manner. Much of the know-how we have developed resides in our scientific and technical personnel and is not readily transferable to other personnel. We do not have employment agreements with any of our key scientific, technical and managerial employees. We do not maintain "key man" life insurance on any of our employees. We may be required to incur significant costs to comply with environmental laws and regulations and our compliance may limit any future profitability. Our research and development activities involve the controlled use of hazardous, infectious and radioactive materials that could be hazardous to human health and safety or the environment. We store these materials and various wastes resulting from their use at our facility pending ultimate use and disposal. We are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials and wastes, and we may be required to incur significant costs to comply with both existing and future environmental laws and regulations. We believe that our safety procedures for handling and disposing of these materials comply with foreign, federal, state and local laws and regulations, but we cannot completely eliminate the risk of accidental injury or contamination from these materials. In the event of an accident, we could be held liable for any resulting damages, which could include fines and remedial costs. These damages could require payment by us of significant amounts over a number of years, which would be reflected in our results of operations and financial condition. Anti-takeover provisions may delay or prevent changes in control of our management or deter a third party from acquiring us, limiting our stockholders' ability to profit from such a transaction. Our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock, $0.01 par value, of which 1,000,000 have been reserved for issuance in connection with our stockholder rights plan, and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. Our stockholder rights plan could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 could have the effect of delaying or preventing a change of control of Cephalon. We also have adopted a "poison pill" rights plan that will dilute the stock ownership of an acquirer of our stock upon the occurrence of certain events. Section 203, the rights plan, and the provisions of our certificate of incorporation, our bylaws and Delaware corporate law, may have the effect of deterring hostile takeovers or delaying or preventing changes in control of our management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. We may be unable to service or repay our substantial indebtedness or other contingencies. As of December 31, 2001, we had significant levels of indebtedness that, among other things, could make it difficult for us to obtain financing in the future, limit our future flexibility and make us more vulnerable in the event of a downturn in our business. Unless we are able to generate sufficient cash flow from operations to service our indebtedness, we will be required to raise additional funds. Because the financing markets may be unwilling to provide funding to us or may only be willing to provide funding on terms that we would consider unacceptable, we may not have either cash available or be able to obtain funding to permit us to meet our debt service obligations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We do not hold any derivative financial instruments and we do not engage in any speculative or derivative trading activities. Therefore, our market risk exposure is limited to changes in interest rates and foreign currency fluctuations. Our exposure to market risk for a change in interest rates relates primarily to our investment portfolio, since all of our outstanding debt is fixed rate. Our investments are classified as short-term and as "available for sale." We do not believe that short-term fluctuations in interest rates would materially affect the value of our securities. Prior to our acquisition of Group Lafon, our exposure to market risk for fluctuations in foreign currency has related primarily to the intercompany balance with our U.K. subsidiary. Exchange gains and losses related to amounts due from the U.K. subsidiary have been included in our consolidated statement of operations. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cephalon, Inc.: We have audited the accompanying consolidated balance sheets of Cephalon, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 did not audit the financial statements of Anesta Corp., a company acquired during 2000 in a transaction accounted for as a pooling-of-interests, as discussed in Note 2. Such statements are included in the consolidated financial statements of Cephalon, Inc. and reflect total revenues of 13 percent in 1999 of the related consolidated revenues. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to amounts included for Anesta Corp., is based solely upon the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Cephalon, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Philadelphia, Pennsylvania February 11, 2002 (except with respect to the matter discussed in Note 3, as to which the date is March 29, 2002) 33 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Anesta Corp.: In our opinion, the statements of operations, of stockholder's equity and of cash flows for the year ended December 31, 1999 of Anesta Corp. (not presented separately herein) present fairly, in all material respects, the results of operations and cash flows of Anesta Corp. for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which requires 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 audit provides a reasonable basis for our opinion. We have not audited the financial statements of Anesta Corp. for any period subsequent to December 31, 1999. /s/ PricewaterhouseCoopers LLP Salt Lake City, Utah February 18, 2000, except as to the information presented in Note 14 (which is not presented herein) for which the date is March 13, 2000 34 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cephalon, Inc.: We have audited, in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Cephalon, Inc. and subsidiaries and have issued our report thereon dated February 11, 2002 (except with respect to the matter discussed in Note 3, as to which the date is March 29, 2002). Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule of valuation and qualifying accounts is presented for purposes of complying with the Securities and Exchange Commissions' rules and is not part of the basic financial statements. This schedule has been subject to the auditing procedures applied in the audit of the basic financial statements and, in our opinion based on our audit and the report of other auditors, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Philadelphia, Pennsylvania February 11, 2002 35 CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 2001 2000 ASSETS - ------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents....................... $ 548,727,000 $ 36,571,000 Investments..................................... 55,157,000 60,813,000 Receivables, net................................ 75,192,000 21,905,000 Inventory....................................... 47,513,000 20,161,000 Other current assets............................ 7,872,000 1,579,000 -------------- ------------ Total current assets............................ 734,461,000 141,029,000 PROPERTY AND EQUIPMENT, net...................... 64,706,000 29,730,000 GOODWILL......................................... 248,911,000 -- INTANGIBLE ASSETS, net........................... 298,269,000 135,794,000 DEBT ISSUANCE COSTS.............................. 26,720,000 -- OTHER ASSETS..................................... 16,020,000 1,882,000 -------------- ------------ $1,389,087,000 $308,435,000 ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------- CURRENT LIABILITIES: Current portion of long-term debt............... $ 32,200,000 $ 42,950,000 Accounts payable................................ 24,536,000 3,590,000 Accrued expenses................................ 49,370,000 32,758,000 Current portion of deferred revenues............ 824,000 1,469,000 -------------- ------------ Total current liabilities....................... 106,930,000 80,767,000 LONG-TERM DEBT................................... 866,589,000 55,138,000 DEFERRED REVENUES................................ 6,042,000 7,151,000 OTHER LIABILITIES................................ 10,795,000 186,000 -------------- ------------ Total liabilities............................... 990,356,000 143,242,000 -------------- ------------ COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 5,000,000 shares authorized, 2,500,000 issued and outstanding at December 31, 2000............... -- 25,000 Common stock, $.01 par value, 100,000,000 shares authorized, 54,909,533 and 42,478,225 shares issued, and 54,685,792 and 42,340,042 shares outstanding.................................... 549,000 425,000 Additional paid-in capital...................... 982,123,000 683,004,000 Treasury stock, 223,741 and 138,183 shares outstanding, at cost........................... (9,523,000) (4,119,000) Accumulated deficit............................. (576,691,000) (515,543,000) Accumulated other comprehensive income.......... 2,273,000 1,401,000 -------------- ------------ Total stockholders' equity...................... 398,731,000 165,193,000 -------------- ------------ $1,389,087,000 $308,435,000 ============== ============
The accompanying notes are an integral part of these consolidated financial statements. 36 CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ----------------------------------------- 2001 2000 1999 REVENUES: - ------------------------------------------------------------------------------- Product sales...................... $226,132,000 $ 91,637,000 $ 27,602,000 Other revenues..................... 40,511,000 20,153,000 23,832,000 ------------ ------------- ------------ 266,643,000 111,790,000 51,434,000 ------------ ------------- ------------ COSTS AND EXPENSES: - ------------------------------------ Cost of product sales.............. 44,946,000 17,768,000 3,921,000 Research and development........... 84,249,000 68,063,000 54,892,000 Selling, general and administrative.................... 99,615,000 83,725,000 59,665,000 Depreciation and amortization...... 14,434,000 4,008,000 2,079,000 Royalty pre-payment on revenue- sharing notes..................... -- 6,600,000 -- Merger and integration costs....... 50,000 13,811,000 -- Acquired in-process research and development....................... 20,000,000 22,200,000 -- ------------ ------------- ------------ 263,294,000 216,175,000 120,557,000 ------------ ------------- ------------ INCOME (LOSS) FROM OPERATIONS....... 3,349,000 (104,385,000) (69,123,000) ------------ ------------- ------------ OTHER INCOME AND EXPENSE Interest income.................... 12,170,000 16,903,000 9,491,000 Interest expense................... (20,630,000) (5,189,000) (8,377,000) Debt exchange expense.............. (52,444,000) -- -- Other expense...................... (945,000) (1,073,000) (236,000) ------------ ------------- ------------ (61,849,000) 10,641,000 878,000 ------------ ------------- ------------ LOSS BEFORE DIVIDENDS ON PREFERRED STOCK, EXTRAORDINARY GAIN (CHARGE) AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE............ (58,500,000) (93,744,000) (68,245,000) DIVIDENDS ON CONVERTIBLE EXCHANGEABLE PREFERRED STOCK....... (5,664,000) (9,063,000) (3,398,000) ------------ ------------- ------------ LOSS BEFORE EXTRAORDINARY GAIN (CHARGE) AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE..... (64,164,000) (102,807,000) (71,643,000) EXTRAORDINARY GAIN (CHARGE) ON EARLY EXTINGUISHMENT OF DEBT............. 3,016,000 -- (11,187,000) CUMULATIVE EFFECT OF ADOPTING STAFF ACCOUNTING BULLETIN 101 (SAB 101).. -- (7,434,000) -- ------------ ------------- ------------ LOSS APPLICABLE TO COMMON SHARES.... $(61,148,000) $(110,241,000) $(82,830,000) ============ ============= ============ BASIC AND DILUTED LOSS PER COMMON SHARE: Loss per common share before extraordinary gain (charge) and cumulative effect of adopting SAB 101............................... $ (1.33) $ (2.51) $ (2.00) Extraordinary gain (charge) on early extinguishment of debt...... 0.06 -- (0.31) Cumulative effect of adopting SAB 101............................... -- (0.19) -- ------------ ------------- ------------ $ (1.27) $ (2.70) $ (2.31) ============ ============= ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING................. 48,292,000 40,893,000 35,887,000 ============ ============= ============
The following data represents pro forma financial results assuming a retroactive adoption of a change in accounting principle (SAB 101): Pro forma loss applicable to common shares....... $(102,807,000) $(89,873,000) ============= ============ Pro forma basic and diluted loss per common share........................................... $ (2.51) $ (2.50) ============= ============
The accompanying notes are an integral part of these consolidated financial statements. 37 CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated Other Additional Comprehensive Accumulated Comprehensive Common Preferred Paid-in Treasury Loss Total Deficit Income Stock Stock Capital Stock ------------- ------------ ------------- ------------- -------- --------- ------------ ----------- BALANCE, JANUARY 1, 1999.......... $137,621,000 $(322,472,000) $ (28,000) $350,000 $ -- $460,258,000 $ (487,000) Loss............. $ (79,432,000) (79,432,000) (79,432,000) -- -- -- -- -- Foreign currency translation..... 192,000 Unrealized investment gains........... 402,000 ------------- Other comprehensive loss............ 594,000 594,000 -- 594,000 -- -- -- -- ------------- Comprehensive loss............ $ (78,838,000) ============= Issuance of common stock.... 12,000,000 -- -- 10,000 -- 11,990,000 -- Employee stock purchase plan... 92,000 -- -- -- -- 92,000 -- Stock options exercised....... 9,028,000 -- -- 8,000 -- 9,020,000 -- Stock purchase warrants exercised....... 26,984,000 -- -- 19,000 -- 26,965,000 -- Restricted stock award plan...... 1,023,000 -- -- 1,000 -- 1,022,000 -- Employee benefit plan............ 453,000 -- -- 1,000 -- 452,000 -- Convertible preferred stock issued.......... 120,028,000 -- -- -- 25,000 120,003,000 -- Dividends declared on convertible preferred stock........... (3,398,000) (3,398,000) -- -- -- -- -- Revenue-sharing notes issued.... 6,593,000 -- -- -- -- 6,593,000 -- Treasury stock acquired........ (803,000) -- -- -- -- -- (803,000) ------------ ------------- ---------- -------- ------- ------------ ----------- BALANCE, DECEMBER 31, 1999......... 230,783,000 (405,302,000) 566,000 389,000 25,000 636,395,000 (1,290,000) Loss............. $(101,178,000) (101,178,000) (101,178,000) -- -- -- -- -- ============= Foreign currency translation gain............ 1,015,000 Unrealized investment losses.......... (180,000) ------------- Other comprehensive income.......... 835,000 835,000 -- 835,000 -- -- -- -- ------------- Comprehensive loss............ $(100,343,000) ============= Employee stock purchase plan... 78,000 -- -- -- -- 78,000 -- Stock options exercised....... 13,615,000 -- -- 11,000 -- 13,604,000 -- Stock purchase warrants exercised....... 26,436,000 -- -- 24,000 -- 26,412,000 -- Restricted stock award plan...... 5,625,000 -- -- 1,000 -- 5,624,000 -- Employee benefit plan............ 891,000 -- -- -- -- 891,000 -- Dividends declared on convertible preferred stock........... (9,063,000) (9,063,000) -- -- -- -- -- Treasury stock acquired........ (2,829,000) -- -- -- -- -- (2,829,000) ------------ ------------- ---------- -------- ------- ------------ ----------- BALANCE, DECEMBER 31, 2000......... 165,193,000 (515,543,000) 1,401,000 425,000 25,000 683,004,000 (4,119,000) Loss............. $ (55,484,000) (55,484,000) (55,484,000) -- -- -- -- -- ------------- Foreign currency translation gain............ 368,000 Unrealized investment gains........... 504,000 ------------- Other comprehensive income.......... 872,000 872,000 -- 872,000 -- -- -- -- ------------- Comprehensive loss............ $ (54,612,000) ============= Conversion of preferred stock into common stock........... -- -- -- 70,000 (25,000) (45,000) -- Issuance of common stock upon conversion of convertible notes........... 262,590,000 -- -- 37,000 -- 262,553,000 -- Stock options exercised....... 25,542,000 -- -- 13,000 -- 27,304,000 (1,775,000) Stock purchase warrants exercised....... 2,679,000 -- -- 2,000 -- 2,677,000 -- Restricted stock award plan...... 5,349,000 -- -- 2,000 -- 5,347,000 -- Employee benefit plan............ 1,283,000 -- -- -- -- 1,283,000 -- Dividends declared on convertible preferred stock........... (5,664,000) (5,664,000) -- -- -- -- -- Treasury stock acquired........ (3,629,000) -- -- -- -- -- (3,629,000) ------------ ------------- ---------- -------- ------- ------------ ----------- BALANCE, DECEMBER 31, 2001......... $398,731,000 $(576,691,000) $2,273,000 $549,000 $ -- $982,123,000 $(9,523,000) ============ ============= ========== ======== ======= ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. 38 CEPHALON, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------ 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES: - ------------------------------------------------------------------------------- Loss.............................. $ (55,484,000) $(101,178,000) $(79,432,000) Adjustments to reconcile loss to net cash provided by (used for) operating activities: Cumulative effect of adoption of SAB 101.......................... -- 7,434,000 -- Depreciation and amortization..... 14,434,000 3,945,000 2,063,000 Non-cash interest expense......... 5,158,000 -- 2,823,000 Stock-based compensation expense.. 6,632,000 6,516,000 1,476,000 In-process research and development expense.............. 20,000,000 -- -- Debt exchange expense............. 52,444,000 -- -- Non-cash (gain) charge on early extinguishment of debt........... (3,016,000) -- 5,687,000 Loss on disposals of property, plant, and equipment............. 167,000 -- -- Other............................. 14,000 -- -- (Increase) decrease in operating assets, net of effect of acquisition: Receivables...................... (30,434,000) (13,689,000) (1,270,000) Inventory........................ (8,918,000) (15,903,000) (4,220,000) Other current assets............. (3,198,000) 417,000 (2,078,000) Other long-term assets........... (3,935,000) 1,785,000 (2,115,000) Increase (decrease) in operating liabilities, net of effect of acquisition: Accounts payable................. 10,310,000 (3,041,000) 1,595,000 Accrued expenses................. 9,928,000 12,635,000 4,337,000 Deferred revenues................ (1,754,000) (1,392,000) 2,051,000 Other long-term liabilities...... (74,000) (4,021,000) 712,000 ------------- ------------- ------------ Net cash provided by (used for) operating activities............ 12,274,000 (106,492,000) (68,371,000) ------------- ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: - ----------------------------------- Purchases of property and equipment........................ (12,481,000) (7,462,000) (1,029,000) Acquistion of Group Lafon, net of cash acquired.................... (447,717,000) -- -- Acquistion of intangible assets... (21,063,000) (56,627,000) -- Sales and maturities (purchases) of investments, net.............. 6,200,000 186,449,000 (162,772,000) ------------- ------------- ------------ Net cash (used for) provided by investing activities............ (475,061,000) 122,360,000 (163,801,000) ------------- ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: - ----------------------------------- Proceeds from issuance of preferred stock.................. -- -- 120,028,000 Proceeds from issuance of common stock............................ -- -- 12,000,000 Proceeds from exercises of common stock options, warrants and employee stock purchase plan..... 28,221,000 39,448,000 36,034,000 Payments to acquire treasury stock............................ (3,629,000) (2,829,000) (803,000) Net proceeds from issuance of long-term debt................... 1,009,080,000 -- 30,500,000 Preferred dividends paid.......... (6,797,000) (9,063,000) (2,265,000) Principal payments on and retirements of long-term debt.... (52,300,000) (32,766,000) (1,989,000) ------------- ------------- ------------ Net cash provided by (used for) financing activities............ 974,575,000 (5,210,000) 193,505,000 ------------- ------------- ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS......... 368,000 1,015,000 192,000 ------------- ------------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 512,156,000 11,673,000 (38,475,000) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................. 36,571,000 24,898,000 63,373,000 ------------- ------------- ------------ CASH AND CASH EQUIVALENTS, END OF YEAR.............................. $ 548,727,000 $ 36,571,000 $ 24,898,000 ============= ============= ============ Supplemental disclosures of cash flow information: - ----------------------------------- Cash payments for interest........ 14,092,000 4,352,000 4,191,000 Non-cash investing and financing activities: Capital lease additions........... 360,000 2,067,000 931,000 Long-term debt.................... -- 80,846,000 -- Conversion of convertible notes into common stock................ 217,000,000 -- --
The accompanying notes are an integral part of these consolidated financial statements. 39 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Cephalon is an international biopharmaceutical company dedicated to the discovery, development and marketing of products to treat sleep disorders, neurological disorders, cancer and pain. In addition to conducting an active research and development program, we market three products in the United States and a number of products in various countries throughout Europe. We are headquartered in West Chester, Pennsylvania and have offices in Salt Lake City, Utah, France, the United Kingdom, Germany and Switzerland. Our research and development headquarters are located in the United States. We operate manufacturing facilities in France for the production of modafinil, which is the active drug substance found in our PROVIGIL and MODIODAL products, and for which we have worldwide control of the intellectual property, marketing and manufacturing rights. Principles of Consolidation The consolidated financial statements include the results of our operations and our wholly owned subsidiaries. Intercompany transactions have been eliminated. In October 2000, we completed a merger with Anesta Corp. in a transaction accounted for as a pooling-of-interests. In December 2001, we acquired all of the outstanding shares of capital stock of Financiere Lafon S.A. and Organisation de Synthese Mondiale Orsymonde S. A. (collectively, Group Lafon) in a transaction accounted for as a purchase. See Note 2. Translation of Foreign Financial Statements In accordance with Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation," assets and liabilities of our foreign subsidiaries are translated at the year-end rate of exchange and the operating statements are translated at the average rate of exchange for the year. Gains or losses from translating foreign currency financial statements are accumulated in a separate component of stockholders' equity. Transaction gains and losses are included in other income (expenses) in the results of operations. The transaction loss for the years ended December 31, 2001 and 2000 was $546,000 and $1,073,000, respectively; amounts in prior years are not material. Pervasiveness of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements 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. Cash Equivalents and Investments Cash equivalents include investments in liquid securities with original maturities of three months or less from the date of purchase. In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," we consider our investments to be "available for sale." We classify these investments as short-term and carry them at fair market value. Unrealized gains and losses have been recorded as a separate component of stockholders' equity. As of December 31, 2001 and 2000, we had $752,000 and $248,000, respectively, of unrealized gains on our investments. All realized gains and losses on our available for sale securities are recognized in results of operations. Inventory Inventory is stated at the lower of cost or market value using the first-in, first-out, or FIFO, method. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to forty years. Property and equipment under capital leases are depreciated or amortized over the shorter of the lease term or the expected useful life of the assets. Expenditures for maintenance and repairs are charged to expense as incurred, while major renewals and betterments are capitalized. Fair Value of Financial Instruments The carrying values of cash, cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses approximate the respective fair values. None of our debt instruments that were outstanding as of December 31, 2001 have readily ascertainable market values; however, management believes that the carrying values approximate the respective fair values. 40 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) Revenue Recognition For the year ended December 31, revenues consisted of the following:
2001 2000 1999 Product sales: ----------------------------------------------------------------------------- PROVIGIL.............................. $150,305,000 $ 72,089,000 $25,370,000 ACTIQ................................. 51,197,000 15,169,000 2,232,000 GABITRIL.............................. 24,630,000 4,379,000 -- ------------ ------------ ----------- Total product sales.................... 226,132,000 91,637,000 27,602,000 Other revenues......................... 40,511,000 20,153,000 23,832,000 ------------ ------------ ----------- Total revenues......................... $266,643,000 $111,790,000 $51,434,000 ============ ============ ===========
Product sales are recognized upon shipment of product and are recorded net of estimated reserves for contractual allowances, discounts and returns. Contractual allowances result from sales under contracts with managed care organizations and government agencies. The reserve for contractual allowances is based on an estimate of prescriptions to be filled for individuals covered by government agencies and managed care organizations with whom we have contracts. The reserve for product returns is determined by reviewing the history of each product's returns and by utilizing reports purchased from external, independent sources which produce prescription data, wholesale stocking levels and wholesale sales to retail pharmacies. This data is reviewed to monitor product movement through the supply chain to identify remaining inventory in the supply chain that may result in chargebacks or returns. The reserves are reviewed at each reporting period and adjusted to reflect data available at that time. To the extent our estimate of contractual allowances is inaccurate, we will adjust the reserve which will impact the amount of product sales revenue recognized in the period of the adjustment. Product returns are permitted with respect to unused pharmaceuticals based on expiration dating of our product. To date, product returns have not been material and, as a result, we decreased the reserve for returns in 2000 and recognized $4,370,000 in related PROVIGIL revenue. Product royalty expense is recognized concurrently with the recognition of product revenue. Royalty expense included in cost of sales, was $16,050,000, $6,322,000 and $2,320,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Revenue from collaborative agreements may consist of up-front fees, on going research and development funding and milestone payments. Effective January 1, 2000, we adopted the SEC's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). In accordance with SAB 101, non-refundable up-front fees are deferred and amortized to revenue over the related performance period. We estimate our performance period based on the specific terms of each collaborative agreement, but actual performance may vary. We adjust the performance periods based upon available facts and circumstances. Periodic payments for research and development activities are recognized over the period that we perform the related activities under the terms of the agreements. Revenue resulting from the achievement of milestone events stipulated in the agreements is recognized when the milestone is achieved. Milestones are based upon the occurrence of a substantive element specified in the contract or as a measure of substantive progress towards completion under the contract. Costs incurred related to collaborative agreements were $21,771,000, $15,445,000 and $16,793,000 for the years ended December 31, 2001, 2000 and 1999, respectively. As of December 31, 2001, we have recorded $6,866,000 of deferred revenues of which $824,000 is classified as current. These deferred revenues will be recognized over future periods in accordance with the revenue recognition policies mentioned above. Research and Development All research and development costs are charged to expense as incurred. Impairment of Long-Lived Assets In accordance with SFAS No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), if indicators of impairment exist, we assess the recoverability of the affected long-lived assets, which include property and equipment and intangible assets, by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value of the assets to the present value of the expected future cash flows associated with the use of the asset. Management believes the future cash flows to be received from the long-lived assets will exceed the assets' carrying value, and, accordingly, we have not recognized any impairment losses through December 31, 2001. Other Comprehensive Income (Loss) We follow SFAS No. 130, "Reporting Comprehensive Income." This statement requires the classification of items of other comprehensive income (loss) by their nature and disclosure of the accumulated balance of other comprehensive income (loss), separately within the equity section of the balance sheet. 41 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) Loss Per Common Share Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding during the period. For the years ended December 31, 2001, 2000, and 1999, diluted loss per common share is the same as basic loss per common share since the calculation of diluted loss per share excludes stock options, restricted stock awards, warrants and the conversion of convertible preferred stock and convertible notes because the inclusion would be antidilutive. Stock-based Compensation We account for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost is not required to be recognized for options granted to employees and directors at the then fair market value. We follow the disclosure requirements with respect to fair value measurement methods of options issued to employees and directors prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation." Reclassifications Certain reclassifications of prior year amounts have been made to conform to the current year presentation. Recent Accounting Pronouncements In June 2001, the FASB finalized SFAS No. 141, "Business Combinations" (SFAS 141), and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), which are effective for fiscal years beginning after December 15, 2001. SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method. SFAS 142 no longer requires the amortization of goodwill; rather, goodwill will be subject to a periodic assessment for impairment by applying a fair-value-based test. In addition, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intent to do so. Such acquired intangible assets will be amortized over their estimated useful lives or contractual lives as appropriate. In October 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 changes the accounting for long-lived assets by requiring that all long-lived assets be measured at the lower of the carrying amount or fair value less cost to sell whether included in reporting continuing operations or in discontinued operations. SFAS 144, which replaces SFAS 121, "Accounting for Impairment of Long-Lived Assets and for Assets to be Disposed of," is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 did not have an impact on our financial position or results of operations. 2. MERGERS AND ACQUISITIONS Anesta Corp. On October 10, 2000, we completed a merger with Anesta Corp. under which we acquired all of the outstanding shares of Anesta in a tax-free, stock-for- stock transaction. Under the terms of the merger agreement, each stockholder of Anesta received 0.4765 shares of our common stock for each share of Anesta common stock. The merger has been accounted for as a pooling-of-interests and, accordingly, all of our prior period consolidated financial statements have been restated to include the results of operations, financial position, and cash flows of Anesta. Information concerning common stock, employee stock plans, and per share data has been restated on an equivalent share basis. There were no material adjustments required to conform the accounting policies of the two companies. Certain amounts of Anesta have been reclassified to conform to our reporting practices. 42 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) The reconciliations of revenues, loss from continuing operations, and loss applicable to common shares of Cephalon and Anesta for the periods prior to the merger are as follows. Amounts for the nine months ended September 30, 2000 have been restated to give effect to the implementation of SAB 101 in the fourth quarter of 2000 retroactively to January 1, 2000.
Nine Months Ended Year Ended September 30, December 31, 2000 1999 Revenues: ----------------------------------------------------------------------------- Cephalon................................... $ 61,442,000 $ 44,919,000 Anesta..................................... 9,654,000 6,515,000 ------------ ------------ Combined................................... $ 71,096,000 $ 51,434,000 ============ ============ Loss from continuing operations: -------------------------------------------- Cephalon................................... $(27,373,000) $(58,757,000) Anesta..................................... (13,359,000) (9,488,000) ------------ ------------ Combined................................... $(40,732,000) $(68,245,000) ============ ============ Loss applicable to common shares: -------------------------------------------- Cephalon................................... $(34,170,000) $(73,342,000) Anesta..................................... (13,359,000) (9,488,000) ------------ ------------ Combined................................... $(47,529,000) $(82,830,000) ============ ============
In connection with the merger, we recorded merger and integration costs of $13,811,000 in the fourth quarter of 2000. The categories of costs incurred, the actual cash payments made in 2001 and 2000, and the accrued balances at December 31, 2001 and 2000 are as follows:
Accrued at Amounts paid Accrued at Amounts paid December 31, or reversed December 31, Total in 2000 2000 in 2001 2001 Cash costs: ---------------------------------------------------------------------------------- Merger costs........... $ 8,752,000 $8,752,000 $ -- $ -- $-- Integration costs...... 4,585,000 507,000 4,078,000 4,078,000 -- ----------- ---------- ---------- ---------- ---- Total--cash costs...... 13,337,000 $9,259,000 $4,078,000 $4,078,000 $-- ========== ========== ========== ==== Non-cash costs.......... 474,000 ----------- Total costs............. $13,811,000 ===========
Merger costs of $8,752,000 include investment banking, legal, accounting, printing, and other direct costs of the merger. All such amounts were incurred and paid in 2000. Integration costs of $4,585,000 represent severance payments made to employees whose responsibilities were deemed redundant due to the merger. Integration costs of $3,769,000 and $507,000 were paid in 2001 and 2000, respectively. The remaining accrued integration costs of $309,000 were credited to merger and integration costs in the fourth quarter of 2001. The non-cash costs of $474,000 generally relate to write-offs of fixed assets and intangibles rendered obsolete due to the merger. Group Lafon On December 28, 2001, we completed our acquisition of the outstanding shares of capital stock of Group Lafon. With this acquisition, we control worldwide rights to our product PROVIGIL. The acquisition is expected to increase our product sales, significantly improve gross margins for PROVIGIL by eliminating payments to Group Lafon, improve profitability and provide us with an important research, commercial and manufacturing infrastructure in France. The results of operations for Group Lafon have not been included in our consolidated statements since operations between the acquisition date and December 31, 2001 were immaterial. The purchase price consisted of approximately $457,000,000. The purchase price was funded in part by the proceeds of our December 11, 2001 offering of $600,000,000 of our 2.50% convertible subordinated notes. Of the purchase price, $450,000,000 was paid in cash to the sellers, $8,500,000 represents transaction costs of the acquisition and severance payments for the involuntary termination of a Group Lafon employee, and $1,500,000 represents an estimate of the amount expected to be refunded by the seller under the terms of the acquisition agreement. At December 31, 2001, $6,413,000 of the $8,500,000 transaction costs were accrued, and the $1,500,000 was recorded as a receivable in our consolidated balance sheets. All such amounts are expected to be paid or received in 2002. 43 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition. The allocation of the purchase price is based in part on estimates and is subject to refinement.
At December 31, 2001 --------------- Current assets........................................... $ 63,407,000 Property, plant and equipment............................ 25,281,000 Intangible assets........................................ 148,000,000 Acquired in-process research and development............. 20,000,000 Goodwill................................................. 248,911,000 Other assets............................................. 4,898,000 ------------ Total assets acquired................................... 510,497,000 ------------ Current liabilities...................................... (38,148,000) Other liabilities........................................ (15,349,000) ------------ Total liabilities assumed............................... (53,497,000) ------------ Net assets acquired..................................... $457,000,000 ============
Of the $148,000,000 of acquired intangible assets, $16,000,000 was assigned to trademarks and tradenames with an estimated useful life of 15 years with the remaining $132,000,000 assigned to developed technology for existing pharmaceutical products with a weighted average estimated useful life of approximately 14 years. The $248,911,000 of goodwill was assigned to the European pharmaceutical segment. In accordance with SFAS 142, goodwill is not amortized, but will be subject to a periodic assessment for impairment by applying a fair-value-based test. None of this goodwill is expected to be deductible for income tax purposes. In connection with the acquisition of Group Lafon, we allocated approximately $20,000,000 of the purchase price to in-process research and development projects. This allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were charged to expense as of the acquisition date. At the acquisition date, Group Lafon's ongoing research and development initiatives included next-generation Modiodal drug delivery technologies; a Phase IV clinical trial for Fonzylane; CRL 41789, an innovative anti- depressant drug candidate ready for Phase II clinical trials; and several other ongoing research and development projects. At the acquisition date, Group Lafon had spent approximately $10,000,000 on the in-process research and development projects, and expected to spend significantly more to complete all phases of the research and development. Completion dates for the development work are anticipated to range from 2004 through 2006, at which time we expect to begin benefiting from the developed technologies. The estimated revenues for the in-process projects were expected to peak within 10-12 years of acquisition. In determining the purchase price allocation, management considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process technology was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projections used to value the in-process research and development were, in some cases, reduced based on the probability of developing a new drug, and considered the relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by Cephalon and our competitors. The resulting net cash flows from such projects are based on management's estimates of cost of sales, operating expenses, and income taxes from such projects. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, discount rates ranging from 25 to 40 percent were considered appropriate for the in-process research and development. These discount rates were commensurate with the projects' stage of development and the uncertainties in the economic estimates described above. If these projects are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. We believed that the foregoing assumptions used in the in- process research and development analysis were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. 44 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) The following unaudited pro forma information shows the results of the our operations for the years ended December 31, 2001 and 2000 as though the acquisition had occurred as of the beginning of the years presented:
For the years ended December 31, --------------------------- 2001 2000 ------------ ------------- Total revenues................................... $364,691,000 $ 217,678,000 Net loss before cumulative effect of accounting change.......................................... $(73,333,000) $(106,371,000) Net loss......................................... $(73,333,000) $(113,805,000) Basic and diluted net loss per common share: Before cumulative effect of accounting change... $ (1.52) $ (2.60) Net loss........................................ $ (1.52) $ (2.78)
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisition taken place as of the beginning of the periods presented, or the results that may occur in the future. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the acquisition. In connection with the acquisition, we recorded merger and acquisition costs of $359,000 in the fourth quarter of 2001. These amounts represent negotiation and consulting costs that were incurred during this period. 3. JOINT VENTURE In December 2001, we formed a joint venture with unaffiliated third party investors to fund additional commercial activities in support of PROVIGIL and GABITRIL in the United States. In exchange for our transfer to the joint venture of certain intellectual property and other rights related to these two products, we received a Class B interest, representing a 50% interest in the joint venture. In exchange for its contribution of $50,000,000 in cash to the joint venture, the investors received Class A interests, also representing a 50% interest in the joint venture. On March 29, 2002, we acquired the investors' Class A interests and ended the joint venture by issuing to the investors, through a private placement, $55,000,000 aggregate principal amount of 3.875% convertible subordinated notes due March 2007. The notes are convertible into our common stock, at the option of the holder, at a price of $70.36 per share. As of December 31, 2001, the $50,000,000 investors' Class A interest was recorded on our balance sheet as a liability, and the joint venture's cash balance of $50,000,000 was included in our balance of cash and cash equivalents. The purchase of the investors' Class A interests in the joint venture will result in the recognition of a $7,100,000 extraordinary charge during the first quarter of 2002, which includes the write-off of $4,600,000 of costs capitalized in connection with the formation of the joint venture. In addition, our statement of operations for the three months ended March 31, 2002 will include certain charges totaling approximately $7,000,000 related to the operations of the joint venture. 4. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
For the years ended December 31, ------------------------------------ 2001 2000 1999 Revenues from major customers: ---------------------------------------------------------------------------- Pharmaceutical wholesaler #1........... $ 55,515,000 $10,910,000 $ 4,743,000 Pharmaceutical wholesaler #2........... $ 98,805,000 $27,933,000 $10,569,000 Pharmaceutical wholesaler #3........... $ 67,869,000 $19,379,000 $10,100,000 ------------ ----------- ----------- Total.................................. $222,189,000 $58,222,000 $25,412,000 ============ =========== ===========
Three pharmaceutical wholesalers accounted for approximately 98%, 64% and 92% of revenues from product sales for the years ended December 31, 2001, 2000 and 1999, respectively. During 2001, two major wholesalers merged their businesses. These same three pharmaceutical wholesalers represented 58% and 38% of net receivables at December 31, 2001 and 2000, respectively. We control credit risk through credit approvals, credit limits and by performing ongoing credit evaluations of our customers. The loss of one of these customers could have a material adverse effect on our business. 45 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 5. CASH, CASH EQUIVALENTS AND INVESTMENTS At December 31, cash, cash equivalents and investments consisted of the following:
2001 2000 Cash and cash equivalents: ---------------------------------------------------------------------------- Demand deposits................................... $ 4,364,000 $10,730,000 Repurchase agreements............................. 155,817,000 18,213,000 U.S. government agency obligations................ 79,985,000 -- Commercial paper.................................. 245,158,000 6,628,000 Asset backed securities........................... 4,636,000 -- Bonds............................................. 58,767,000 -- Certificates of deposit........................... -- 1,000,000 ------------ ----------- 548,727,000 36,571,000 ------------ ----------- Short-term investments (at market value): --------------------------------------------------- U.S. government agency obligations................ 8,076,000 13,569,000 Commercial paper.................................. 17,135,000 17,940,000 Asset backed securities........................... 2,878,000 15,289,000 Bonds............................................. 26,068,000 12,315,000 Certificates of deposit........................... 1,000,000 1,700,000 ------------ ----------- 55,157,000 60,813,000 ------------ ----------- $603,884,000 $97,384,000 ============ ===========
The contractual maturities of our investments in cash, cash equivalents, and investments at December 31, 2001 are as follows: Less than one year............................................. $565,952,000 Greater than one year but less than two years.................. 8,581,000 Greater than two years but less than three years............... 29,401,000 ------------ $603,884,000 ============
Some of our lease agreements contain covenants that obligate us to maintain minimum cash and investment balances. 6. RECEIVABLES At December 31, receivables consisted of the following:
2001 2000 ----------- ----------- Trade receivables................................ $40,790,000 $14,951,000 Reserve for sales discounts, returns and allow- ances........................................... (6,826,000) (1,890,000) Receivables from collaborations.................. 16,438,000 6,913,000 Other receivables................................ 24,790,000 1,931,000 ----------- ----------- $75,192,000 $21,905,000 =========== ===========
7. INVENTORY At December 31, inventory consisted of the following:
2001 2000 ----------- ----------- Raw material......................................... $19,666,000 $ 6,401,000 Work-in-process...................................... 7,632,000 5,325,000 Finished goods....................................... 20,215,000 8,435,000 ----------- ----------- $47,513,000 $20,161,000 =========== ===========
46 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 8. PROPERTY AND EQUIPMENT At December 31, property and equipment consisted of the following:
Lives 2001 2000 ----------- ----------- ----------- Land and improvements................... $ 3,370,000 $ 850,000 Buildings and improvements.............. 10-40 years 39,554,000 27,647,000 Laboratory, machinery and other equipment.............................. 3-10 years 36,099,000 19,604,000 Construction in progress................ 6,736,000 534,000 ----------- ----------- 85,759,000 48,635,000 Less accumulated depreciation and amortization........................... (21,053,000) (18,905,000) ----------- ----------- $64,706,000 $29,730,000 =========== ===========
Depreciation and amortization expense was $2,979,000, $2,266,000, and $2,079,000 for the years ended December 31, 2001, 2000, and 1999, respectively. 9. INTANGIBLE ASSETS At December 31, intangible assets consisted of the following:
2001 2000 ------------ ------------ Developed technology acquired from Lafon......... $132,000,000 $ -- Trademarks/tradenames acquired from Lafon........ 16,000,000 -- GABITRIL product rights.......................... 92,648,000 71,982,000 Novartis CNS product rights...................... 41,641,000 41,641,000 ACTIQ marketing rights........................... 29,114,000 23,850,000 ------------ ------------ 311,403,000 137,473,000 Less accumulated amortization.................... (13,134,000) (1,679,000) ------------ ------------ $298,269,000 $135,794,000 ============ ============
In March 2000, we agreed to purchase the U.S. marketing rights to ACTIQ from Abbott, for payments totaling $23,850,000. In 2001, we increased the basis of this asset by $5,264,000, which represents the net present value of future minimum royalty payments due to Abbott through 2005 under the purchase. See Note 11. This asset is being amortized substantially over the 10-year life of the marketing rights acquired. In October 2000, we purchased the product rights to market and sell GABITRIL in the United States from Abbott, effective December 23, 2000, for payments totaling $100,000,000. In connection with the acquisition of GABITRIL product rights, we allocated $22,200,000 of the purchase price to in-process research and development projects. This allocation represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At the date of acquisition, the development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, these costs were charged to expense as of the acquisition date. At the acquisition date, we were committed to completing advanced clinical studies for GABITRIL and developing additional uses for the drug. Ongoing and proposed projects included plans to develop GABITRIL for additional indications including the treatment of neuropathic pain, spasticity, headaches, and other conditions. At the acquisition date, approximately $5,000,000 had been incurred toward completion of the in-process research and development projects, and we expected to spend an additional $25,000,000 to complete clinical testing and maintain the product. Initial results from the project completed in 2001 are expected to be released in 2002, at which time we expect to begin benefiting from the developed technologies. However, development is expected to continue in these areas for a period of three to five years. In determining the purchase price allocation, management considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items, an assessment of overall contributions, as well as project risks. The value assigned to purchased in-process projects was determined by estimating the costs to develop the acquired technologies into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. Estimated sales growth and operating expenses were based on management's experience with other GABITRIL indications, and were consistent in all material respects with the historical data. The rate utilized to discount the net cash flows to their present value was based on estimated cost of capital calculations. Due to the nature of the forecast and the risks associated with the projected growth and profitability of the developmental projects, a discount rate of 25% was considered appropriate for the in-process research and development. This rate is substantially higher than our overall weighted average cost of capital due to the additional risks associated with completing the ongoing clinical trials. 47 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) If these projects are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods. Additionally, the value of other acquired intangible assets may become impaired. We believed that the foregoing assumptions used in the in- process research and development analysis were reasonable at the time of the acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. We recorded an intangible asset of $71,982,000 at December 31, 2000 which represents the net present value of the payments using an incremental borrowing rate of 7.50%, less the $22,200,000 allocated to acquired in-process research and development. This asset is being amortized over the 15-year estimated useful life of the intangible asset acquired. In December 2001, we acquired expanded rights to GABITRIL from Sanofi- Synthelabo and Novo Nordisk A/S, the developer of the product, for $20,666,000. Under the agreements, we assumed rights to GABITRIL worldwide, excluding Canada, Latin America and Japan, countries that were not included in Sanofi-Synthelabo territory under its 1997 license with Novo Nordisk A/S. This intangible asset will be amortized over the 14-year estimated useful life of the product rights acquired. In November 2000, we entered into a collaboration agreement with Novartis to consolidate the sales and marketing efforts of four Novartis CNS products with PROVIGIL in the United Kingdom, effective January 1, 2001, for payments totaling approximately $45,000,000. We recognized an intangible asset of $41,641,000, which represents the net present value of the payments using an incremental borrowing rate of 7.50%. This asset is being amortized over the 10-year life of the agreement. Under the terms of the agreement, the companies will share the financial outcome generated from the sale of the five products in the United Kingdom. Amortization of intangible assets was $11,455,000 and $1,679,000 for the years ended December 31, 2001 and 2000, respectively. 10. ACCRUED EXPENSES At December 31, accrued expenses consisted of the following:
2001 2000 ----------- ----------- Accrued compensation and benefits.................. $ 9,042,000 $ 6,532,000 Accrued professional and consulting fees........... 3,384,000 3,822,000 Accrued clinical trial fees and related expenses... 8,397,000 6,582,000 Accrued payments associated with revenue sharing notes............................................. -- 2,200,000 Accrued license fees and royalties................. 9,199,000 5,489,000 Accrued merger and integration expenses............ 6,413,000 4,078,000 Accrued dividends on preferred stock............... -- 1,133,000 Accrued interest................................... 2,789,000 -- Other accrued expenses............................. 10,146,000 2,922,000 ----------- ----------- $49,370,000 $32,758,000 =========== ===========
11. LONG-TERM DEBT At December 31, long-term debt consisted of the following:
2001 2000 ------------ ----------- Capital lease obligations......................... $ 2,852,000 $ 2,342,000 Mortgage and building improvement loans........... 12,085,000 14,900,000 Joint venture restructuring....................... 50,000,000 -- Convertible notes................................. 783,000,000 -- Notes payable/Other............................... 13,460,000 -- Due to Abbott/Novartis............................ 37,392,000 80,846,000 ------------ ----------- Total debt........................................ 898,789,000 98,088,000 Less current portion.............................. (32,200,000) (42,950,000) ------------ ----------- Total long-term debt.............................. $866,589,000 $55,138,000 ============ ===========
Aggregate maturities of long-term debt for the next five years are as follows: 2002--$32,200,000; 2003--$63,251,000; 2004--$8,390,000; 2005-- $2,551,000; 2006--$784,938,000, 2007 and thereafter--$7,459,000. Capital Lease Obligations We currently lease certain property and laboratory, production and computer equipment with a cost of $10,469,000. Under the terms of the lease agreements, we must maintain a minimum balance in unrestricted cash and investments of $30,000,000 or deliver 48 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) to the lessor an irrevocable letter of credit in the amount of the then outstanding balance due on all equipment leased under the agreements. At December 31, 2001, the balance due under the lease agreements was $2,852,000. Our lease agreements provide us with an option to purchase the leased equipment at the conclusion of the lease. Mortgage and Building Improvement Loans In March 1995, we purchased the buildings housing our administrative offices and research facilities in West Chester, Pennsylvania for $11,000,000. We financed the purchase through the assumption of an existing $6,900,000 first mortgage and from $11,600,000 in state funding provided by the Commonwealth of Pennsylvania. The first mortgage has a 15-year term with an annual interest rate of 9.625%. The state funding has a 15-year term with an annual interest rate of 2%. The state loans contained a provision that would have allowed the rate on the loans to be increased to prime plus 2% if we did not meet targets for hiring new employees in Pennsylvania by the end of 1999. We were accruing interest at this higher rate over the life of the loan. Although we did not meet the hiring target, in April 2000, we and the Commonwealth reached an agreement under which the Commonwealth waived the interest penalty. As a result, we recognized interest income in 2000 for the interest differential of $4,008,000 that was previously accrued. The loans require annual aggregate principal and interest payments of $1,800,000. The loans are secured by the buildings and by all our equipment located in Pennsylvania that is otherwise unsecured. In July 2001, we paid $1,667,000 to retire a variable-rate term note payable. Joint Venture In connection with our joint venture, $50,000,000 in cash received from the Investor was recorded as a liability as of December 31, 2001. Revenue Sharing Notes In February 1999, we completed a private placement of $30,000,000 of revenue-sharing notes. In connection with the notes, we issued warrants to purchase 1,945,000 shares of common stock at an exercise price of $10.08 per share. The estimated fair value of the warrants of $6,593,000 was recorded as a discount to the notes and amortized over the term on the notes as interest expense. In December 1999, the notes were restructured whereby the maturity of the notes was accelerated and the principal was increased to include a $5,500,000 prepayment penalty, and, as a result, we recorded a loss in 1999 on the extinguishment of the notes of $11,187,000, which includes the prepayment penalty, the write-off of deferred financing costs and the amortization of the remaining debt discount of $5,687,000. The notes were retired during the first quarter of 2000 for an aggregate cash payment of $35,500,000. The former holders of the notes were to receive a payment of 6% of U.S. net sales of PROVIGIL through December 31, 2001. Under an amendment dated October 31, 2000, we agreed to pay the noteholders $6,600,000 and, in exchange, the noteholders agreed to relinquish royalty payments on all PROVIGIL net sales occurring after December 31, 2000. As of December 31, 2000, $2,200,000 was included in accrued expenses related to this royalty relinquishment. Subordinated Convertible Notes In the second quarter of 2001, we completed a private placement of $400,000,000 of 5.25% convertible subordinated notes due May 2006. Debt issuance costs of $14,364,000 have been capitalized in other assets and are being amortized over the term of the notes. Interest on the notes is payable each May 1 and November 1. The notes are convertible, at the holder's option, into our common stock at a conversion price of $74.00 per share, subject to adjustment in certain circumstances. We may redeem the notes on or after May 5, 2003. Prior to that date, we may redeem the notes if our common stock price exceeds 150% of the conversion price for a specified period of time. Upon early redemption, we are required to pay interest that would have been due up through May 5, 2003. During the fourth quarter of 2001, certain note holders approached us, and we agreed, to exchange $217,000,000 of the outstanding notes into 3,691,705 shares of our common stock. We recognized debt exchange expense of $52,444,000 in the fourth quarter of 2001 relating to these early exchanges in accordance with SFAS No. 84, "Induced Conversion of Convertible Debt." In December 2001, we completed a private placement of $600,000,000 of 2.50% convertible subordinated notes due December 2006. Debt issuance costs of $21,250,000 have been capitalized in other assets and are being amortized over the term of the notes. Interest on the notes is payable each June 15 and December 15, beginning June 15, 2002. The notes are convertible into our common stock at a conversion price of $81.00 per share, subject to adjustment in certain circumstances. We may redeem the notes on or after December 20, 2004. Notes Payable/Other In December 2001, we acquired Group Lafon, which included the assumption of $13,460,000 of notes payable, bank debt and outstanding amounts under lines of credit. These amounts have fixed and variable interest rates ranging from 4.2% to 6.0% at December 31, 2001 and are payable through 2008. 49 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) Due to Abbott/Novartis In October 2000, we agreed to purchase the product rights to market and sell GABITRIL in the United States from Abbott for payments totaling $100,000,000 due through 2004, of which $40,000,000 was paid immediately. At December 31, 2000, we recognized $54,182,000 which represents the net present value of the remaining $60,000,000 obligation based on an incremental borrowing rate of 7.5%. In May 2001, we made a payment of $24,000,000. In March 2000, we purchased the U.S. marketing rights to ACTIQ from Abbott for payments totaling $23,850,000. In 2001, we recognized $5,264,000, less a payment of $397,000, as the net present value of future minimum royalty payments due to Abbott through 2005 under the purchase agreement based on an incremental borrowing rate of 5.0%. In November 2000, we entered into a collaboration agreement with Novartis to consolidate the sales and marketing efforts of four Novartis CNS products with PROVIGIL in the United Kingdom. In connection with this agreement, we agreed to pay Novartis approximately $45,000,000, of which approximately $15,000,000 was paid immediately and approximately $30,000,000 was due in various installments through 2002. We recognized $26,664,000 at December 31, 2000 as the net present value of the remaining payments based on an incremental borrowing rate of 7.5%. In May 2001, we paid $24,438,000 to Novartis to satisfy our outstanding obligation and recorded an extraordinary gain on the early extinguishment of debt of $3,016,000. 12. COMMITMENTS AND CONTINGENCIES Leases We lease certain of our offices and automobiles under operating leases. Lease expense under all operating leases totaled $3,275,000, $2,242,000, and $2,721,000 in 2001, 2000, and 1999, respectively. We will continue to lease office space and automobiles under operating leases. Under these leases, we will pay rent of approximately $3,000,000 per year in 2002 and 2003, $2,500,000 in 2004 and $2,100,000 in 2005. Related Party --Cephalon Clinical Partners, L.P. In August 1992, we exclusively licensed our rights to MYOTROPHIN for human therapeutic use within the United States, Canada and Europe to Cephalon Clinical Partners, L.P. (CCP). Development and clinical testing of MYOTROPHIN is performed on behalf of CCP under a research and development agreement with CCP. CCP has granted us an exclusive license to manufacture and market MYOTROPHIN for human therapeutic use within the United States, Canada and Europe in return for royalty payments equal to a percentage of product sales and a milestone payment of approximately $16,000,000 that will be made if MYOTROPHIN receives regulatory approval. We have a contractual option, but not an obligation, to purchase all of the limited partnership interests of CCP, which is exercisable upon the occurrence of certain events following the first commercial sale of MYOTROPHIN. If, and only if, we decide to exercise this purchase option, we would make an advance payment of approximately $40,275,000 in cash or, at our election, approximately $42,369,000 in shares of common stock or a combination thereof. Should we discontinue development of MYOTROPHIN, or if we do not exercise this purchase option, our license will terminate and all rights to manufacture or market MYOTROPHIN in the United States, Canada and Europe will revert to CCP, which may then commercialize MYOTROPHIN itself or license or assign its rights to a third party. In that event, we would not receive any benefits from such commercialization, license or assignment of rights. Legal Proceedings In August 1999, the U.S. District Court for the Eastern District of Pennsylvania entered a final order approving the settlement of a class action in which plaintiffs alleged that statements made about the results of certain clinical studies of MYOTROPHIN were misleading. A related complaint has been filed with the Court by a small number of plaintiffs who decided not to participate in the settlement. This related complaint alleges that we are liable under common law for misrepresentations concerning the results of the MYOTROPHIN clinical trials, and that we and certain of our current and former officers and directors are liable for the actions of persons who allegedly traded in our common stock on the basis of material inside information. We believe that we have valid defenses to all claims raised in this action. Even if there is a judgment against us, we do not believe it will have a material adverse effect on our financial condition or results of operations. In February 2001, a complaint was filed in Utah state court by Zars, Inc. and one of its research scientists, against us and our subsidiary Anesta Corp. The plaintiffs are seeking a declaratory judgment to establish their right to develop transdermal or other products containing fentanyl and other pharmaceutically active agents under a royalty and release agreement between Zars and Anesta. The complaint also asks for unspecified damages for breach of contract, interference with economic relations, defamation and slander. We believe that we have valid defenses to all claims raised in this action. In any event, we do not believe any judgment against us will have a material adverse effect on our financial condition or results of operations. 50 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) We are a party to certain other litigation in the ordinary course of our business, including matters alleging employment discrimination, product liability and breach of commercial contract. However, we are vigorously defending ourselves in all of these actions and do not believe these matters, even if adversely adjudicated or settled, would have a material adverse effect on our financial condition or results of operations. 13. STOCKHOLDERS' EQUITY Convertible Exchangeable Preferred Stock During the third quarter of 1999, we completed a private offering to institutional investors of 2,500,000 shares of convertible exchangeable preferred stock at $50 per share. Proceeds from the offering, net of fees and expenses, totaled $120,028,000. Dividends on the preferred stock were payable quarterly and were cumulative at the annual rate of $3.625 per share. We recognized $5,664,000, $9,063,000 and $3,398,000 of preferred dividends during 2001, 2000 and 1999, respectively. The preferred stock was convertible into an aggregate of approximately 6,975,000 shares of our common stock at a conversion price of $17.92 per share, subject to adjustment in certain circumstances. In May 2001, the holders of 2,344,586 shares of the 2,500,000 shares outstanding of our convertible exchangeable preferred stock converted their preferred shares into an aggregate of 6,541,394 shares of our common stock. As an inducement to the holders to convert their preferred stock prior to August 2001, when we were initially permitted to redeem the preferred stock, we agreed to pay immediately all dividends accrued through the date of conversion as well as all dividends that would have accrued on the converted shares through the August 2001 redemption date. In the second quarter of 2001, we recorded an additional $1,063,000 of dividend expense associated with the early conversion. In September 2001, the remaining 155,414 shares of our convertible exchangeable preferred stock were converted into an aggregate of 433,604 shares of our common stock. Equity Compensation Plans We have established the Stock Option Plan and the Equity Compensation Plans for our employees, directors and certain other individuals. All grants and terms are authorized by the Compensation Committee of our Board of Directors. We may grant either non-qualified or incentive stock options under the plans, and also may grant restricted stock awards under the Equity Compensation Plan. The options and restricted stock awards generally become exercisable or vest ratably over four years from the grant date, and the options must be exercised within ten years of the grant date. The following tables summarize the aggregate option activity under the plans for the years ended December 31:
2001 2000 1999 -------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- -------- --------- -------- --------- -------- Outstanding, January 1,..................... 5,253,730 $28.44 4,601,272 $17.07 4,761,915 $14.43 Granted................ 2,035,100 70.32 1,796,200 49.69 1,008,143 24.43 Exercised.............. (1,339,380) 19.71 (945,023) 15.16 (792,989) 11.61 Canceled............... (341,855) 31.88 (198,719) 22.76 (375,797) 15.07 Outstanding, December 31,.................... 5,607,595 $45.36 5,253,730 $28.44 4,601,272 $17.07 Exercisable at end of year................... 1,937,125 $22.91 2,360,358 $17.95 2,404,025 $15.74 Weighted average fair value of options granted during the year................... $25.69 $29.25 $15.25
Options Options Outstanding Exercisable ------------------------------ ------------------ Weighted Average Weighted Weighted Remaining Average Average Contractual Exercise Exercise Range of Exercise Price Shares Life (yrs) Price Shares Price - ----------------------- --------- ----------- -------- --------- -------- $6.00-$17.99.................. 1,286,392 5.8 $10.69 1,070,868 $11.12 $18.00-$60.00................. 2,329,903 7.7 42.88 859,757 37.27 $60.01-$71.96................. 1,991,300 9.9 70.65 6.500 67.31 --------- --- ------ --------- ------ 5,607,595 8.0 $45.36 1,937,125 $22.91 ========= === ====== ========= ======
In December 2001, the 2000 Equity Compensation Plan was amended to increase the number of shares subject to the annual grants awarded under all of the plans by 1,100,000 shares. At December 31, 2001, 266,109 shares were available for future grants under all of the plans. 51 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) During 2001, 2000, and 1999, we received net proceeds of $25,542,000, $12,934,000, and $8,958,000, respectively, from the exercise of stock options. During 2001, some stock options were exercised by tendering mature shares as consideration for the exercise price, resulting in the recording of $1,775,000 of treasury stock. The following table summarizes restricted stock award activity for the years ended December 31:
2001 2000 1999 ---------- ---------- ---------- Outstanding, January 1,..................... 446,850 496,700 280,425 Granted.................................... -- 119,200 355,550 Vested..................................... (150,650) (146,725) (83,300) Canceled................................... (27,325) (22,325) (55,975) ---------- ---------- ---------- Outstanding, December 31,................... 268,875 446,850 496,700 ---------- ---------- ---------- Compensation expense recognized............. $5,349,000 $5,625,000 $1,023,000 ---------- ---------- ----------
We have opted to disclose only the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as they pertain to financial statement recognition of compensation expense attributable to option grants. As such, no compensation cost has been recognized for our stock option plans. If we had elected to recognize compensation cost based on the fair value of stock options as prescribed by SFAS 123, the pro forma loss and loss per share amounts would have been as follows:
For the years ended December 31, ----------------------------------------- 2001 2000 1999 ------------ ------------- ------------ As reported Loss applicable to common shares........................ $(61,148,000) $(110,241,000) $(82,830,000) Basic and diluted loss per share......................... $ (1.27) $ (2.70) $ (2.31) Pro forma Loss applicable to common shares........................ $(86,886,000) $(116,971,000) $(92,306,000) Basic and diluted loss per share......................... $ (1.80) $ (2.86) $ (2.57)
The fair value of the options granted during 2001, 2000 and 1999 were estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions:
2001 2000 1999 ------- ------- ------- Risk free interest rate........................... 4.56% 5.87% 5.89% Expected life..................................... 6 years 6 years 6 years Expected volatility............................... 27% 56% 56% Expected dividend yield........................... 0% 0% 0%
Warrants The following table summarizes warrant activity for the years ended December 31:
2001 2000 1999 -------- ---------- ---------- Outstanding, January 1,....................... 265,800 2,779,000 2,886,140 Granted...................................... -- -- 1,945,000 Exercised.................................... (265,800) (2,513,200) (1,958,291) Expired...................................... -- -- (93,849) -------- ---------- ---------- Outstanding, December 31,..................... -- 265,800 2,779,000 ======== ========== ==========
At December 31, 2001, no warrants to purchase common stock remained outstanding. During 1999 investors in CCP exercised warrants to purchase 1,958,291 shares of common stock. Proceeds associated with these exercises totaled $26,984,000. All outstanding warrants associated with CCP expired on August 31, 1999. The private placement of the revenue-sharing notes in 1999 included the issuance of warrants, expiring March 1, 2004, to purchase 1,945,000 shares of our common stock at an exercise price of $10.08 per share. During 2000, warrants to purchase 1,679,200 shares of common stock at an exercise price of $10.08 per share were exercised. During 2001, warrants to purchase the remaining 265,800 shares of common stock at an exercise price of $10.08 were exercised. In February 1994, Chiron was issued a warrant to purchase 750,000 shares of common stock with an exercise price of $18.50 per share. Chiron exercised this warrant in 2000. 52 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) In April 1997, we issued warrants to purchase 84,000 shares of our common stock at an exercise price of $24.77 per share to the placement agent in connection with the private placement of senior convertible notes. These warrants were exercised in 2000. Qualified Savings and Investment Plan We have a profit sharing plan pursuant to section 401(k) of the Internal Revenue Code whereby eligible employees may contribute up to 15% of their annual salary to the plan, subject to statutory maximums. The plan provides for discretionary matching contributions by us in cash or a combination of cash and shares of our common stock. Our contribution for the years 1999 through 2001 was 100% of the first 6% of employee salaries contributed in the ratio of 50% cash and 50% Cephalon stock. We contributed $2,985,000, $1,837,000, and $1,369,000, in cash and common stock to the plan for the years 2001, 2000, and 1999, respectively. Prior to the merger (see Note 2), Anesta had a 401(k) Plan whereby eligible employees were able to contribute up to 25% of their annual salary to the plan. Anesta had the option of making discretionary contributions equal to 25% of participant contributions up to 6% of participant compensation. Anesta contributed $58,000 and $53,000 for the years 2000 and 1999, respectively. Employee Stock Purchase Plan In November 1993, Anesta adopted the Employee Stock Purchase Plan authorizing the issuance of 250,000 shares pursuant to purchase rights granted to employees of Anesta. Participants could elect to use up to 10% of their compensation to purchase Anesta's common stock at the end of each year at a price equal to 85% of the lower of the beginning or ending stock price in the plan period. This plan terminated in October 2000 upon the merger of Cephalon and Anesta (see Note 2). Pro forma Aggregate Conversions or Exercises At December 31, 2001, the conversion or exercise of outstanding options, and convertible subordinated notes into shares of Cephalon common stock in accordance with their terms would increase the outstanding number of shares of common stock by approximately 15,489,000 shares, or 28%. Preferred Share Purchase Rights In November 1993, our Board of Directors declared a dividend distribution of one right for each outstanding share of common stock. In addition, a right attaches to and trades with each new issue of our common stock. Each right entitles each registered holder, upon the occurrence of certain events, to purchase from us a unit consisting of one one-hundredth of a share of our Series A Junior Participating Preferred Stock, or a combination of securities and assets of equivalent value, at a purchase price of $90.00 per unit, subject to adjustment. 14. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities recognized for financial reporting and income tax purposes, and operating loss and tax credit carryforwards. Significant components of our net deferred taxes as of December 31 are as follows:
2001 2000 ------------ ------------ Net operating loss carryforwards............... $140,536,000 $130,218,000 Capitalized research and development expenditures.................................. 69,505,000 52,452,000 Federal research and development tax credits... 12,833,000 9,903,000 Acquired product rights and intangible assets.. 7,544,000 -- Reserves....................................... 2,776,000 754,000 Deferred revenue............................... 2,783,000 3,311,000 Other--net..................................... 5,901,000 630,000 ------------ ------------ Total deferred tax assets...................... 241,878,000 197,268,000 Valuation allowance............................ (241,878,000) (197,268,000) ------------ ------------ Net deferred tax assets........................ $ -- $ -- ============ ============
The deferred tax asset valuation allowance increased by $44,610,000 during the year. This increase is primarily the result of our analysis of the likelihood of realizing the future tax benefit of tax loss carryforwards and additional temporary differences. A valuation allowance was established for 100% of the deferred tax assets, as realization of the tax benefits is not assured. At December 31, 2001, we had net operating loss carryforwards for U.S. federal income tax purposes of approximately $344,139,000 that will begin to expire in 2003, and state net operating losses of approximately $147,620,000 that will expire in varying years starting in 2001. We also have international net operating loss carryforwards of approximately $19,115,000 with indefinite expirations dates. The net operating loss carryforwards differ from the accumulated deficit principally due to differences in the 53 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) recognition of certain research and development expenses for financial and federal income tax reporting. Federal research tax credits of $12,833,000 are available to offset future tax payments, and begin to expire in 2003. The amount of U.S. federal net operating loss carryforwards which can be utilized in any one period will be limited by federal income tax regulations since a change in ownership as defined in Section 382 of the Internal Revenue Code occurred in the prior years. We do not believe that such limitation will have a material adverse impact on the utilization of our carryforwards. 15. SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
2001 Quarter Ended ----------------------------------------------------- December 31, September 30, June 30, March 31, Statement of Operations Data: -------------------------------------------------------------------------------- Total revenues.......... $ 79,550,000 $83,822,000 $56,199,000 $ 47,072,000 Gross profit on product sales.................. 54,037,000 59,612,000 35,013,000 32,524,000 Income (loss) before dividends and extraordinary gain on early extinguishment of debt................... (64,545,000) 21,577,000 (5,990,000) (9,542,000) Dividends on preferred stock.................. -- (70,000) (3,328,000) (2,266,000) Extraordinary gain on early extinguishment of debt................... -- -- 3,016,000 -- Income (loss) applicable to common shares....... $(64,545,000) $21,507,000 $(6,302,000) $(11,808,000) Basic income (loss) per common share: Income (loss).......... $ (1.23) $ 0.43 $ (0.19) $ (0.28) Extraordinary gain on early extinguishment of debt............... -- -- 0.06 -- ------------ ----------- ----------- ------------ $ (1.23) $ 0.43 $ (0.13) $ (0.28) ============ =========== =========== ============ Weighted average number of shares outstanding.. 52,422,000 50,269,000 47,725,000 42,732,000 Diluted income (loss) per common share: Income (loss).......... $ (1.23) $ 0.40 $ (0.19) $ (0.28) Extraordinary gain on early extinguishment of debt............... -- -- 0.06 -- ------------ ----------- ----------- ------------ $ (1.23) $ 0.40 $ (0.13) $ (0.28) ============ =========== =========== ============ Weighted average number of shares Outstanding- assuming dilution...... 52,422,000 53,412,000 47,725,000 42,732,000 ============ =========== =========== ============
2000 Quarter Ended ------------------------------------------------------- December 31, September 30, June 30, March 31, Statement of Operations Data: ---------------------------------------------------------------------------------- Total revenues.......... $ 40,694,000 $ 28,056,000 $ 23,385,000 $ 19,655,000 Gross profit on product sales.................. 26,669,000 18,838,000 14,219,000 14,143,000 Loss before dividends and cumulative effect of a change in accounting principle... (53,012,000) (15,030,000) (13,342,000) (12,360,000) Dividends on preferred stock.................. (2,266,000) (2,266,000) (2,265,000) (2,266,000) Cumulative effect of adopting Staff Accounting Bulletin 101(SAB 101)........... -- -- -- (7,434,000) Loss applicable to common shares.......... $(55,278,000) $(17,296,000) $(15,607,000) $(22,060,000) Basic and diluted loss per common share: Loss................... $ (1.32) $ (0.42) $ (0.39) $ (0.37) Cumulative effect of adopting SAB 101...... -- -- -- (0.19) ------------ ------------ ------------ ------------ $ (1.32) $ (0.42) $ (0.39) $ (0.56) ============ ============ ============ ============ Weighted average number of shares outstanding.. 41,801,000 41,298,000 40,427,000 39,141,000 ============ ============ ============ ============
54 CEPHALON, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-- (Continued) 16. SEGMENT AND SUBSIDIARY INFORMATION On December 28, 2001, we completed our acquisition of Group Lafon. As a result, we now have significant sales, manufacturing, and research operations conducted by several subsidiaries located in Europe. In 2001 and prior years, European operations were immaterial. United States product sales accounted for 98%, 97% and 98% of total product sales for the years ended December 31, 2001, 2000 and 1999, respectively. The following summarized information presents our long-lived assets by geographic segment. The summarized information of the European subsidiaries has been prepared from the books and records maintained by each subsidiary. The results of operations for Group Lafon have not been included in our consolidated statements since operations between the acquisition date and December 31, 2001 were immaterial. We have determined that all of our operations have similar economic characteristics and may be aggregated into a single segment for reporting purposes. Information concerning our geographic operations is provided below. Long-lived assets at December 31, 2001: United States............................................... $206,697,000 Europe...................................................... 447,929,000 ------------ Total....................................................... $654,626,000 ============
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 55 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by Item 10 on directors and nominees is incorporated by reference to the information under the caption "Proposal 1-- Nominees for Election" in our definitive proxy statement for the 2002 annual meeting of stockholders. The names, ages and positions held by our executive officers as of December 31, 2001 are as follows:
Name Age Position - ---- --- --------------------------------------------------------------- Frank Baldino, Jr., Ph.D................... 48 Chairman and Chief Executive Officer Paul Blake, F.R.C.P..... 54 Senior Vice President, Clinical Research and Regulatory Affairs J. Kevin Buchi.......... 46 Senior Vice President and Chief Financial Officer Peter E. Grebow, Ph.D... 55 Senior Vice President, Business Development John E. Osborn.......... 44 Senior Vice President, General Counsel and Secretary Robert P. Roche, Jr..... 46 Senior Vice President, Pharmaceutical Operations Carl A. Savini.......... 52 Senior Vice President, Human Resources Jeffry L. Vaught, Ph.D................... 51 Senior Vice President and President, Research and Development
All executive officers are elected by the Board of Directors to serve in their respective capacities until their successors are elected and qualified or until their earlier resignation or removal. Dr. Baldino founded Cephalon and has served as Chief Executive Officer and a director since its inception. He was appointed Chairman of the Board of Directors in December 1999. Dr. Baldino received his Ph.D. degree from Temple University and holds several adjunct academic appointments. Dr. Baldino currently serves as a director of, Pharmacopeia, Inc., a developer of proprietary technology platforms for pharmaceutical companies, ViroPharma, Inc., a biopharmaceutical company, Acusphere, Inc., a specialty pharmaceutical company, and NicOx S.A., a company engaged in the research, development and commercialization of nitric oxide therapeutics. Dr. Blake joined Cephalon in March 2001 as Senior Vice President, Clinical Research and Regulatory Affairs. From 1999 to 2001, Dr. Blake served as Chief Medical Officer for MDS Proteomics Inc., a Canadian health and life sciences company. From 1998-99 he served as President and Chief Executive Officer of Proliance Pharmaceuticals, Inc., a drug development company. Prior to that he spent six years with SmithKline Beecham Pharmaceuticals, most recently as Senior Vice President and Medical Director. Dr. Blake received his medical degree from London University, Royal Free Hospital and completed his clinical training in Internal Medicine and Cardiology. Dr. Blake is a fellow of the Royal College of Physicians (UK), a fellow of the Faculty of Pharmaceutical Medicine and a fellow of the American College of Clinical Pharmacology. Mr. Buchi joined Cephalon as Controller in March 1991 and held several financial positions with the Company prior to being appointed Senior Vice President and Chief Financial Officer in April 1996. Between 1985 and 1991, Mr. Buchi served in a number of financial positions with E.I. duPont de Nemours and Company. Mr. Buchi received his masters of management degree from the J.L. Kellogg Graduate School of Management, Northwestern University in 1982. Dr. Grebow joined Cephalon in January 1991 and served as Senior Vice President, Drug Development prior to holding his current position as Senior Vice President, Business Development. From 1988 to 1990, Dr. Grebow served as Vice President of Drug Development for Rorer Central Research, a division of Rhone-Poulenc Rorer Pharmaceuticals Inc., a pharmaceutical company. Dr. Grebow received his Ph.D. degree in Chemistry from the University of California, Santa Barbara. Mr. Osborn joined Cephalon in March 1997 as Vice President, Legal Affairs, was appointed Senior Vice President in September 1998, and has served as Senior Vice President, General Counsel and Secretary since January 1999. From 1992 to 1997, Mr. Osborn was employed by The DuPont Merck Pharmaceutical Company. Prior to that, he served in the first Bush administration with the U.S. Department of State, practiced corporate law with Hale and Dorr in Boston, and clerked for a U.S. Court of Appeals judge. Mr. Osborn received his law degree from the University of Virginia and also holds a masters degree in international studies from The Johns Hopkins University. Mr. Roche joined Cephalon in January 1995 and has served as Senior Vice President, Pharmaceutical Operations since November 2000. Prior to that he was appointed to Senior Vice President of Sales and Marketing in June 1999 and prior to that as Vice President, Sales and Marketing. Previously, Mr. Roche was Director and Vice President, Worldwide Strategic Product Development, for SmithKline Beecham's central nervous system and gastrointestinal products business, and held senior marketing and management positions with that company in the Philippines, Canada and Spain. Mr. Roche graduated from Colgate University and received a master of business administration degree from The Wharton School, University of Pennsylvania. Mr. Savini joined Cephalon in June 1993 and has served as Senior Vice President, Human Resources since January 2000. Prior to that he served as Director, Human Resources and was appointed Vice President, Human Resources in January 1995. From 1983 to 1993, Mr. Savini was employed by Bristol-Myers Squibb Company and from 1981 to 1983 he was employed by Johnson & Johnson's McNeil Pharmaceuticals. Mr. Savini graduated from Pennsylvania State University and received a master of business administration degree from La Salle College. 56 Dr. Vaught has been responsible for Cephalon's research operations since joining the Company in August 1991, and currently serves as Senior Vice President and President, Research and Development. Prior to joining Cephalon, Dr. Vaught was employed by the R. W. Johnson Pharmaceutical Research Institute, a subsidiary of Johnson & Johnson. Dr. Vaught received his Ph.D. degree from the University of Minnesota. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference to the information under the caption "Compensation of Executive Officers and Directors" in our definitive proxy statement for the 2002 annual meeting of stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference to the information under the caption "Security Ownership of Certain Beneficial Owners and Management" in our definitive proxy statement for the 2002 annual meeting of stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference to the information under the caption "Certain Relationships and Related Transactions" in our definitive proxy statement for the 2002 annual meeting of stockholders. 57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Financial Statements The following is a list of our consolidated financial statements and our subsidiaries and supplementary data included in this report under Item 8: Reports of Independent Public Accountants. Consolidated Balance Sheets as of December 31, 2001 and 2000. Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. Notes to Consolidated Financial Statements. FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation and Qualifying Accounts Schedules, other than those listed above, are omitted because they are not applicable or are not required, or because the required information is included in the consolidated financial statements or notes thereto. REPORTS ON FORM 8-K During the fiscal quarter ended December 31, 2001, we filed Current Reports on Form 8-K as follows: . November 13, 2001 announcing the exchange of $73 million principal amount of 5 1/4% Convertible Subordinated Notes; . December 3, 2001 announcing the agreement to acquire the French pharmaceutical company Group Lafon; . December 4, 2001 announcing the offering of $300 million convertible subordinated notes; and . December 6, 2001 announcing the private placement of $500 million of 2 1/2% Convertible Subordinated Notes. 58 EXHIBITS The following is a list of exhibits filed as part of this annual report on Form 10-K. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parenthesis.
Exhibit No. Description -------- ----------- 3.1 Restated Certificate of Incorporation, as amended. (Exhibit 3.1) (18). 3.2 Bylaws of the Registrant, as amended. (Exhibit 3.1) (18). 4.1 Specimen copy of stock certificate for shares of Common Stock of the Registrant. (Exhibit 4.1) (10). 4.2(a) Amended and Restated Rights Agreement, dated as of January 1, 1999 between Cephalon, Inc. and StockTrans, Inc. As Rights Agent. (Exhibit 1) (25). 4.2(b) First Amendment to Amended and Restated Rights Agreement, dated July 31, 2000 between Cephalon, Inc. and StockTrans, Inc. as Rights Agent. (Exhibit 1) (28). 4.3(a) Specimen Preferred Stock Certificate of Cephalon, Inc. (Exhibit 4.1) (22). 4.3(b) Certificate of the Powers, Designations, Preferences and Rights of the $3.625 Convertible Exchangeable Preferred Stock filed August 17, 1999. (Exhibit 4.2) (22). 4.3(c) Indenture, dated as of August 18, 1999 between Cephalon, Inc. and State Street Bank and Trust Company, as Trustee. (Exhibit 4.3) (22). 4.3(d) Form of Series A Warrant to purchasers of Units including a limited partnership interest in Cephalon Clinical Partners, L.P. (Exhibit 10.4) (6). 4.3(e) Form of Series B Warrant to purchasers of Units including a limited partnership interest in Cephalon Clinical Partners, L.P. (Exhibit 10.5) (6). 4.3(f) Incentive Warrant to purchase 115,050 shares of Common Stock of Cephalon, Inc. issued to PaineWebber Incorporated. (Exhibit 10.6) (6). 4.3(g) Fund Warrant to purchase 19,950 shares of Common Stock of Cephalon, Inc. issued to PaineWebber R&D Partners III, L.P. (Exhibit 10.7) (6). 4.4(a) Indenture, dated as of May 7, 2001 between Cephalon, Inc. and State Street Bank and Trust Company, as Trustee. (Exhibit 4.1) (35). 4.4(b) Registration Rights Agreement, dated May 7, 2001 between Cephalon, Inc. and Robertson Stephens, Inc., Adams, Harkness & Hill, Inc., Banc of America Securities LLC, CIBC World Markets Corp., SG Cowen Securities Corporation, UBS Warburg LLC, U.S. Bancorp Piper Jaffray Inc., as Purchasers. (Exhibit 4.2) (35). 4.5(a) Indenture, dated as of December 11, 2001 between Cephalon, Inc. and State Street Bank and Trust Company, as Trustee. (Exhibit 4.1) (36). 4.5(b) Registration Rights Agreement, dated as of December 11, 2001 between Cephalon, Inc. and Credit Suisse First Boston Corporation (the "LEAD PURCHASER"), Robertson Stephens, Inc., CIBC World Markets Corp., SG Cowen Securities Corporation, UBS Warburg LLC, U.S. Bancorp Piper Jaffray Inc., Adams, Harkness & Hill, Inc. and Banc of America Securities, as the Initial Purchasers. (Exhibit 4.2) (36). 10.1 Letter agreement, dated March 22, 1995 between Cephalon, Inc. and the Salk Institute for Biotechnology Industrial Associates, Inc. (Exhibit 99.1) (15). 10.2 Deliberately omitted. 10.3 Stock Purchase Agreement, dated July 28, 1995 between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 99.3) (16). 10.4(a) License Agreement, dated May 15, 1992 between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.6) (4) (23). 10.4(b) Letter agreement, dated March 6, 1995 amending the License Agreement between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.4(b)) (14) (23). 10.4(c) Letter agreement, dated May 11, 1999 amending the License Agreement between Cephalon, Inc. and Kyowa Hakko Kogyo Co., Ltd. (Exhibit 10.4(c)) (23) (26). +10.5(a) Cephalon, Inc. Amended and Restated 1987 Stock Option Plan. (Exhibit 10.7) (4). +10.5(b) Cephalon, Inc. Equity Compensation Plan. (Exhibit 10.6(b)) (17). +10.5(c) Cephalon, Inc. Non-Qualified Deferred Compensation Plan. (Exhibit 10.6(c)) (10). +10.5(d) Cephalon, Inc. 2000 Equity Compensation Plan For Employees and Key Advisors. (Exhibit 99.1) (29). 10.6(a) Amended and Restated Agreement of Limited Partnership, dated as of June 22, 1992 by and among Cephalon Development Corporation, as general partner, and each of the limited partners of Cephalon Clinical Partners, L.P. (Exhibit 10.1) (6).
59
Exhibit No. Description --------- ----------- 10.6(b) Amended and Restated Product Development Agreement, dated as of August 11, 1992 between Cephalon, Inc. and Cephalon Clinical Partners, L.P. (Exhibit 10.2) (6) (23). 10.6(c) Purchase Agreement, dated as of August 11, 1992 by and between Cephalon, Inc. and each of the limited partners of Cephalon Clinical Partners, L.P. (Exhibit 10.3) (6) (23). 10.6(d) Pledge Agreement, dated as of August 11, 1992 between Cephalon Clinical Partners, L.P. and Cephalon, Inc. (Exhibit 10.8) (6). 10.6(e) Promissory Note, dated as of August 11, 1992 issued by Cephalon Clinical Partners, L.P. to Cephalon, Inc. (Exhibit 10.9) (6). 10.6(f) Form of Promissory Note, issued by each of the limited partners of Cephalon Clinical Partners, L.P. to Cephalon Clinical Partners, L.P. (Exhibit 10.10) (6). 10.7 Supply, Distribution and License Agreement, dated as of July 27, 1993 between Kyowa Hakko Kogyo Co., Ltd. and Cephalon, Inc. (Exhibit 10.3) (11) (25). 10.8(a) Agreement, dated January 7, 1994 between Cephalon, Inc. and Chiron Corporation. (Exhibit 10.1) (12) (23). 10.8(b) Letter agreement, dated January 13, 1995 amending Agreement between Cephalon, Inc. and Chiron Corporation. (Exhibit 10.12(b)) (14) (23). 10.8c) Letter agreement, dated May 23, 1995 amending Agreement between Cephalon, Inc. and Chiron Corporation. (Exhibit 10.12(c)) (17) (23). 10.9(a) Agreement, dated May 17, 1994 between Cephalon, Inc. and TAP Holdings Inc. (formerly TAP Pharmaceuticals Inc.). (Exhibit 99.2) (13) (25). 10.9(b) Amendment, dated June 28, 1996 amending Agreement between Cephalon, Inc. and TAP Holdings Inc. (Exhibit 10.13(b)) (19) (23). 10.10 Toll Manufacturing and Packaging Agreement, dated February 24, 1998 between Cephalon, Inc. and Circa Pharmaceuticals, Inc. (Exhibit 10.12) (20) (23). 10.11(a) Marketing and Development Collaboration Agreement, dated June 10, 1999 between Cephalon, Inc. and Abbott Laboratories Inc. (Exhibit 10.13) (22) (24). 10.11(b) GABITRIL Product Agreement, dated October 31, 2000 between Cephalon, Inc. and Abbott Laboratories. (Exhibit 10.13(b)) (37) (23). 10.11(c) Toll Manufacturing and Packaging Agreement, dated October 31, 2000 between Cephalon, Inc. and Abbott Laboratories. (Exhibit 10.13(c)) (37) (23). 10.12 Joint Research, Development and License Agreement, dated May 28, 1999 between Cephalon, Inc. and H. Lundbeck A/S. (Exhibit 10.14) (20) (24). 10.13 Development and License Agreement, dated December 15, 1999 between Schwarz Pharma AG and Cephalon, Inc. (24). 10.14(a) Managed Services Agreement, dated November 27, 2000 between Cephalon (UK) Limited and Novartis Pharmaceuticals UK Limited. (Exhibit 10.17(a)) (34) (23). 10.14(b) License Agreement, dated November 27, 2000 between Cephalon, Inc. and Novartis AG. (Exhibit 10.17(b)) (34) (23). 10.14(c) Collaboration Agreement, dated November 27, 2000 between Cephalon, Inc. and Novartis AG. (Exhibit 10.17(c)) (34) (23). 10.14(d) Distribution Agreement, dated November 27, 2000 between Cephalon (UK) Limited and Novartis Pharmaceuticals UK Limited. (Exhibit 10.17(d)) (34) (23). 10.15(a) Agreement and Plan of Merger, dated July 14, 2000 by and among Cephalon, Inc., Anesta Corp. and C Merger Sub, Inc. (Exhibit 99.1) (27). 10.15(b) Distribution, License and Supply Agreement, dated December 7, 1999, between Anesta Corp. and Elan Pharma International Limited. (Exhibit 10.18) (23) (30). 10.15(c) Termination and Asset Sale and Purchase Agreement, dated March 13, 2000 between Abbott Laboratories, Inc. and Anesta Corp. (Exhibit 10.19) (23) (31). 10.15(d) Technology License Agreement, dated September 16, 1985, as amended through December 3, 1993 between Anesta Corp. and the University of Utah Research Foundation. (Exhibit 10.6) (23) (32). 10.15(f) Wiley Post Plaza Lease, dated December 7, 1994 between Anesta Corp. and Asset Management Services. (Exhibit 10.13) (33). *10.16(a) Toll Manufacturing and Packaging Agreement, dated August 24, 1999 between Cephalon, Inc. and Catalytica Pharmaceuticals, Inc. (24). *10.16(b) Amendment No. 1 to Toll Manufacturing and Packaging Agreement, dated July 3, 2001 between Cephalon, Inc. and Catalytica Pharmaceuticals, Inc. (24). *10.16(c) Amendment No. 2 to Toll Manufacturing and Packaging Agreement, dated October 9, 2001 between Cephalon, Inc. and Catalytica Pharmaceuticals, Inc. (24).
60
Exhibit No. Description --------- ----------- *10.17(a) Research, Development and License Agreement, dated October 31, 2001 between Cephalon, Inc. and Sanofi-Synthelabo Inc. (24). *10.17(b) Intellectual Property and Other Assets Purchase Agreement, dated December 13, 2001 between Sanofi-Synthelabo and Anesta GmbH. (24). *10.17(c) Intellectual Property and Other Asset Purchase Agreement, dated December 13, 2001 between Sanofi-Synthelabo and Cephalon France. (24). *10.18 Consulting Agreement dated October 1, 2001 between Cephalon, Inc. and Martyn D. Greenacre. *23.1 Consent of Arthur Andersen LLP. *23.2 Consent of PricewaterhouseCoopers LLP. *24 Power of Attorney (included on the signature page to this Form 10-K Report). *99.1 Letter responsive to Temporary Note 3T to Article 3 of Regulation S- X.
- -------- * Filed herewith. + Compensation plans and arrangements for executives and others. (1) Filed as an Exhibit to the Registration Statement on Form S-1 filed on March 15, 1991. (2) Filed as an Exhibit to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 33-39413) filed on April 19, 1991. (3) Filed as an Exhibit to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 33-39413) filed on April 22, 1991. (4) Filed as an Exhibit to the Transition Report on Form 10-K for transition period January 1, 1991 to December 31, 1991, as amended by Amendment No. 1 filed on September 4, 1992 on Form 8. (5) Filed as an Exhibit to the Company's Current Report on Form 8-K filed on December 31, 1992. (6) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration No. 33-56816) filed on January 7, 1993. (7) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration No. 33-58006) filed on February 8, 1993. (8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. (9) Filed as an Exhibit to the Company's Current Report on Form 8-K dated June 8, 1993. (10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. (11) Filed as an Exhibit to the Registration Statement on Form S-3 (Registration No. 33-73896) filed on January 10, 1994. (12) Filed as an Exhibit to the Company's Current Report on Form 8-K dated January 10, 1994. (13) Filed as an Exhibit to the Company's Current Report on Form 8-K dated May 17, 1994. (14) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (15) Filed as an Exhibit to the Registration Statement on Amendment No. 1 to Form S-3 (Registration No. 33-93964) filed on June 30, 1995. (16) Filed as an Exhibit to the Registration Statement on Amendment No. 2 to Form S-3 (Registration No. 33-93964) filed on July 31, 1995. (17) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (18) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. (19) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. (20) Filed as an Exhibit to the Company's Current Report on Form 8-K filed August 3, 1999. (21) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ending June 30, 1999. (22) Filed as an Exhibit to the Company's Registration Statement on Form S-8 (Registration No. 333-87421) filed September 20, 1999. (23) Filed as an Exhibit to the Company's Registration Statement on Form S-3 (Registration No. 333-88985) filed October 14, 1999. (24) Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment granted by the Securities and Exchange Commission. (25) Portions of the Exhibit have been omitted and have been filed separately pursuant to an application for confidential treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. (26) Filed as an Exhibit to the Company's Form 8-A/A (12G) filed on January 20, 1999. (27) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. (28) Filed as an Exhibit to the Company's Current Report on Form 8-K filed July 21, 2000. (29) Filed as an Exhibit to the Company's Form 8-A/12G filed on August 2, 2000. (30) Filed as an Exhibit to the Company's Registration Statement on Form S-8 (Registration No. 333-52640) filed on December 22, 2000. (31) Filed as an Exhibit to Anesta Corp.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1999. (32) Filed as an Exhibit to Anesta Corp.'s Quarterly Report on Form 10-Q for the period ending March 31, 2000. (33) Filed as an Exhibit to Anesta Corp.'s Registration Statement on Form S- 1 (File No. 33-72608) filed May 31, 1996. (34) Filed as an Exhibit to Anesta Corp.'s Annual Report on Form 10-K (File No. 0-23160) for the fiscal year ended December 31, 1994. (35) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. (36) Filed as an Exhibit to the Company's Registration Statement on Form S-3 (Registration No. 333-62234) filed June 4, 2001. (37) Filed as an Exhibit to the Company's Registration Statement on Form S-3 (Registration No. 333-82788) filed February 14, 2002. 61 CEPHALON, INC. AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Balance at Beginning of Additions Other End of the Year Ended December 31, the Year (Deductions) (1) Deductions Year - ----------------------- ------------ ---------------- ---------- ---------- Reserve for sales discounts, returns and allowances: 2001..................... $1,890,000 $14,459,000 $9,523,000 $6,826,000 2000..................... $5,949,000 $(1,980,000) $2,079,000 $1,890,000 1999..................... $ -- $ 6,607,000 $ 658,000 $5,949,000
- -------- (1) Amounts represent charges and reductions to expenses and revenue. 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: April 1, 2002 CEPHALON, INC. /s/ FRANK BALDINO, JR. By: _________________________________ Frank Baldino, Jr., Ph.D. Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person in so signing also makes, constitutes and appoints Frank Baldino, Jr. his true and lawful attorney-in-fact, with full power of substitution, to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report.
Signature Title Date --------- ----- ---- /s/ FRANK BALDINO, JR. Chairman and Chief April 1, 2002 ______________________________________ Executive Officer Frank Baldino, Jr., Ph.D. (Principal executive officer) /s/ J. KEVIN BUCHI J. Sr. Vice President and April 1, 2002 ______________________________________ Chief Financial Officer Kevin Buchi (Principal financial and accounting officer) /s/ WILLIAM P. EGAN Director April 1, 2002 ______________________________________ William P. Egan /s/ ROBERT J. FEENEY, PH.D. Director April 1, 2002 ______________________________________ Robert J. Feeney, Ph.D. /s/ MARTYN D. GREENACRE Director April 1, 2002 ______________________________________ Martyn D. Greenacre /s/ CHARLES A. SANDERS Director April 1, 2002 ______________________________________ Charles A. Sanders, M.D. /s/ HORST WITZEL Director April 1, 2002 ______________________________________ Horst Witzel, Dr.-Ing.
63 EX-10.16(A) 3 dex1016a.txt TOLL MANUFACTURING AND PACKAGING AGREEMENT Exhibit 10.16(a) TOLL MANUFACTURING AND PACKAGING AGREEMENT This Toll Manufacturing and Packaging Agreement (this "Agreement") is made as of this 24th day of August, 1999, by and between Cephalon, Inc., 145 Brandywine Parkway, West Chester, PA 19380-4245 ("CEPHALON") and Catalytica Pharmaceuticals, Inc., P.O. Box 1887, Greenville, NC 27835-1887 ("CATALYTICA"). WHEREAS, CEPHALON holds certain rights to manufacture, market and sell in certain countries the pharmaceutical product modafinil; WHEREAS, CEPHALON possesses certain know how and other confidential and proprietary information relating to the process of manufacturing and packaging modafinil in finished dosage form; WHEREAS, CEPHALON wishes to engage CATALYTICA to formulate and package modafinil tablets in dosage form for subsequent commercial sale by CEPHALON in certain countries and for certain clinical and other purposes; and WHEREAS, CATALYTICA has suitable facilities and equipment and sufficient qualified personnel at its plant in Greenville, North Carolina to formulate and package commercial quantities of modafinil in dosage form, and is willing to provide such services on the terms and conditions set forth below. NOW, THEREFORE, the parties hereto agree as follows: I. DEFINITIONS As used in this Agreement: 1.1 "Active Drug Substance" means the compound modafinil having those specifications as set forth on Schedule A hereto. 1.2 "Adverse Experience" or "AE" shall mean any unfavorable and unintended change in the structure, function, or chemistry of the body temporally associated with any use of a Product or of a derivative thereof, whether or not the adverse experience is considered to be related to the use of the Product, including but not limited to any of the following: an unexpected side effect, injury, toxicity or sensitivity reaction, which may include an experience of unexpected incidence and severity; an adverse experience occurring in the course of the use of a drug product in professional practice; an adverse experience occurring in clinical studies; an adverse experience occurring from drug overdose, whether accidental or intentional; an adverse experience occurring from drug abuse; an adverse experience occurring from drug withdrawal; and any significant failure of expected pharmacological action. **Certain portions of this document have been omitted based upon a request for confidential treatment that has been filed with the Commission. The omitted portions have been filed separately with the Commission. -1- 1.3 "Affiliate" means any corporation or other business entity which, directly or indirectly, is controlled by, controls, or is under common control with CEPHALON or CATALYTICA. For this purpose, "control" shall be deemed to mean ownership of fifty percent (50%) or more of the stock or other equity of such entity. 1.4 "Confidential Information" means all information, data, know-how and all other business, technical and financial data disclosed hereunder by one party or any of its Affiliates to the other party or any of its Affiliates, except any portion thereof which: (a) at the time of disclosure, is in the public knowledge; (b) after disclosure, becomes part of the public knowledge by publication or otherwise, except by breach of this Agreement by the recipient; (c) the recipient can demonstrate by its written records was in the recipient's possession at the time of such disclosure, and which was not acquired, directly or indirectly, from the disclosing party; (d) is lawfully disclosed to the recipient on a non-confidential basis by a third party who is not obligated to the disclosing party or any other third party to retain such Confidential Information in confidence; (e) results from research and development by the recipient independent of such disclosure as shown by competent evidence; or (f) is required to be disclosed by legal process; provided, in each case the party so disclosing information timely informs the other party and uses its best efforts to limit the disclosure and maintain confidentiality to the extent possible and, if possible, permits the other party to attempt by appropriate legal means to limit such disclosure. Written Confidential Information shall be identified by the disclosing party as being confidential by stamping the cover pages of such information "Confidential." Confidential Information disclosed orally, visually and/or in another tangible form shall be identified by the disclosing party to the receiving party as confidential at the time of such disclosure and confirmed to the receiving party within thirty (30) days after such disclosure in a writing marked "Confidential." 1.5 "Conversion Fee" means, for each unit of Product, the applicable tolling fee minus CATALYTICA's labor and materials costs directly relating thereto. -2- 1.6 "Product" means modafinil in final packaged dosage forms meeting the Product specifications set forth in Schedule B hereto. 1.7 "Starting Material" means the raw material necessary to formulate and package the Product as set forth in Schedule A hereto (but excluding the Active Drug Substance and magnesium silicate Compressil(R) (hereinafter Compressil)). 1.8 "Trademark" or "Trademarks" shall mean Provigil(R), as well as any other trademark owned or used by CEPHALON in connection with the Product and listed on Schedule A hereto. II. APPOINTMENT AND TERM 2.1 Appointment. CEPHALON hereby appoints CATALYTICA, and CATALYTICA hereby accepts appointment, as a toll manufacturer to formulate and package the Product at CATALYTICA'S Greenville, NC facility. 2.2 Manufacturing and Packaging Services. During the term of this Agreement, CATALYTICA shall formulate Product, which shall include the validation of commercial batches of the Product in accordance with the procedures set forth in Schedule D hereto, and the preparation of the Product for commercial sale to customers and for clinical and other purposes by CEPHALON. In addition, CATALYTICA shall label and package Product in accordance with those specifications and instructions set forth in Schedule A hereto, or otherwise as may be provided by CEPHALON and reasonably agreed to by Catalytica. CEPHALON will supply approved artwork for labels, package inserts and packaging. The content of the labels, package inserts and packaging shall be the sole and exclusive responsibility of CEPHALON. CATALYTICA will provide or procure, and test, inspect and approve all labels, package inserts and packaging used for the Product. CATALYTICA will submit artwork proofs of all new labels, package inserts and packaging used for Product to CEPHALON for approval prior to use, such approval not to be unreasonably withheld. 2.3 Cooperation. CEPHALON will cooperate with CATALYTICA as may be necessary and customary in consideration of industry practice, and will disclose all material information necessary to enable CATALYTICA to perform under this Agreement in a timely fashion. 2.4 Specific Duties. In addition to its general obligations relating to formulating and packaging, CATALYTICA shall perform the following services at CATALYTICA's cost, except where indicated: -3- (i) receiving and storing all Active Drug Substance and Compressil in accordance with instructions provided by CEPHALON and reasonably agreed upon by CATALYTICA; (ii) placing orders for, acquiring and storing all Starting Material and packaging components; (iii) quality control and testing of all Active Drug Substance, Compressil, Starting Material, in process materials, bulk tablets, finished dosage Product and packaging components, in order to monitor compliance with all applicable standards and specifications; (iv) at CEPHALON's cost, managing clearance of customs for all Starting Materials and packaging components, as necessary; (v) conducting stability testing of Product in accordance with the procedures set forth in Schedule D hereto; (vi) summarizing implemented changes and supplying latest versions of approved critical documentation, and, at CEPHALON's cost, preparing, submitting, and obtaining all regulatory filings relating to the manufacture of the Product under the terms of this Agreement, and as agreed upon in writing by the parties (preparation of transfer documentation is separately addressed at Section 10.2 of this Agreement); and (vii) performing such other services as agreed upon in writing by the parties. 2.5 Term. Unless terminated in accordance with the provisions of Article XXIII, this Agreement will remain in effect for a period of five (5) years from the date hereof (the "Initial Term"), and, unless either party gives written notice of non-renewal at least one hundred eighty (180) days prior to the end of the Initial Term (or any renewal term), this Agreement shall be renewed for consecutive terms of one year, subject to the mutual agreement of the parties regarding the terms of the renewal, including without limitation those pertaining to price and minimum purchase volumes. III. PRODUCT QUANTITY, QUALITY AND MANUFACTURING PROCESSES 3.1 Quantity. Subject to the terms and conditions of this Agreement, CATALYTICA will manufacture, package and supply to CEPHALON quantities of Product ordered by CEPHALON or an Affiliate thereof for subsequent sale by CEPHALON or an Affiliate or agent thereof in the United States, Mexico, Japan, the United Kingdom, Ireland, Italy and for certain other territories or for certain clinical or other purposes as may be determined by CEPHALON and agreed to by -4- CATALYTICA. CEPHALON agrees to place orders and CATALYTICA agrees to reserve capacity for the minimum quantities of Product as defined in Schedule F. If the actual annual quantity exceeds the minimum annual quantity by twenty-five percent (25%) or less in any year, this excess will reduce the minimum annual quantity in the following year. CATALYTICA shall have no obligation to supply quantities in excess of those set forth in Schedule F, but shall use its commercially reasonable efforts to accommodate CEPHALON demand for excess quantities. During each year of the Initial Term, CEPHALON shall purchase the minimum quantities for such year as set forth in Schedule F. The parties agree that if this Agreement is renewed beyond the Initial Term, they shall negotiate minimum quantities for years beyond the Initial Term in good faith. If CEPHALON does not purchase such minimum quantities in any year CEPHALON will pay CATALYTICA the Conversion Fee for the amount of such minimum quantities not purchased; provided, however, that if CATALYTICA sells its reserved capacity for such period, and the Conversion Fee on any such sales of reserved capacity shall be deducted from the amount CEPHALON would otherwise be obligated to pay pursuant to this Section 3.1. 3.2 Quality. All Product manufactured and packaged by CATALYTICA for CEPHALON under this Agreement will meet the Product and Packaging specifications set forth in Schedule B hereto (the "Specifications"), as well as the quality assurance standards established in Schedule C hereto (the "Quality Agreement"). Such Specifications, as well as the terms and conditions of the Quality Agreement, are subject to modification from time to time by mutual agreement of the parties. In the event CEPHALON changes the Specifications, CEPHALON shall promptly advise CATALYTICA in writing of such changes, and if such changes are reasonably acceptable to CATALYTICA, CATALYTICA shall promptly advise CEPHALON as to any scheduling and/or price adjustments which may result from such changes. CATALYTICA may suggest Specifications changes, which shall be subject to CEPHALON's written approval, which shall not be unreasonably withheld or delayed. Prior to implementation of any Specification changes, the Parties agree to negotiate in good faith in an attempt to reach agreement on (a) the new price for any Product manufactured hereunder by CATALYTICA which embodies such changes, based solely on the effect of such changes on CATALYTICA's manufacturing costs for the Product and (b) any other amendments to this Agreement which may be necessitated by such changes (i.e., an adjustment to the lead time for purchase orders). CEPHALON agrees to reimburse CATALYTICA for the reasonable expenses incurred by CATALYTICA as a result of such changes, including, but not limited to, reimbursing CATALYTICA for its validation and development costs, capital expenditure costs and costs for any packaging components or other materials and in-process materials rendered unusable as a result of such changes. If during the term of this Agreement CEPHALON amends or is required by law to amend the Specifications so as to render Starting Material and/or packaging components or -5- in-process materials for the Product obsolete, CEPHALON shall purchase from CATALYTICA, at CATALYTICA's cost, that amount of inventory of Starting Material, packaging components, in-process materials and/or Product, as the case may be, so rendered obsolete. 3.3 Manufacturing Processes. CATALYTICA has furnished CEPHALON with a copy of its production procedures and has identified to CEPHALON the equipment to be used to produce the Product, all as set forth in Schedule G hereto. CATALYTICA agrees that it will not modify these procedures, nor modify any method of formulating, packaging, labeling or testing the Product (including analytical procedures, components, process, Specifications, controls, storage, stability protocols), without notifying CEPHALON or obtaining CEPHALON's prior written consent as required in Schedule C hereto, which consent shall not be unreasonably withheld or delayed. Costs incurred by CATALYTICA as a result of any such changes or modifications requested by the FDA or by CEPHALON and relating primarily to the production of the Product will be borne by CEPHALON; costs for other changes affecting CATALYTICA's cGMP compliance or affecting products generally will be borne by CATALYTICA. 3.4 Documentation. CEPHALON shall provide CATALYTICA with initial methods and specifications for manufacturing and packaging the Product as set forth in the attached Schedules A, B, and D. CEPHALON shall also promptly provide CATALYTICA with all available safety data and information concerning the Product, process and related materials, including without limitation all MSDS'. After review, consideration and acceptance of such specifications and methods by CATALYTICA for all markets in which the Product manufactured hereunder will be sold, CATALYTICA will provide CEPHALON with any revised methods and specifications deemed necessary or appropriate by CATALYTICA. The parties will then use their good faith, commercially reasonable best efforts to establish mutually acceptable specifications and methods within a reasonable period of time. 3.5 Communication. CATALYTICA and CEPHALON will respond to requests for support, information and approvals within five (5) working days. If a complete response is not possible within such five (5)-day period, the party owing the response shall communicate within such five (5)-day period the reason for the delay and when the response will be available. IV. TOLLING FEES For each unit of Product (including each unit in connection with stability and validation batches) made and supplied to CEPHALON under this Agreement (provided it meets the quality requirements established herein), CEPHALON will pay CATALYTICA a tolling fee in -6- accordance with the terms established in Schedule E hereto. The tolling fee shall be increased each year during the Initial Term and any renewal term by the percentage increase in the Producer Price Index (PPI) during the prior year, Pharmaceutical Preparations, Ethical (Prescription), series code PCU-2834 #1, as published by the Bureau of Labor Statistics of the U.S. Department of Labor for the region in which the production facility is located, or comparable successor index. V. CONFIDENTIAL INFORMATION 5.1 The parties acknowledge that they have provided Confidential Information to each other in connection with the formulation and packaging of the Product, and further acknowledge that all such Confidential Information (as well as any additional Confidential Information provided by one party to the other hereunder) shall be subject to the provisions of this Article V. Any and all information, knowledge, technology, and trade secrets relating to the Product and provided by CEPHALON shall be deemed Confidential Information. 5.2 CATALYTICA will disclose to CEPHALON all Confidential Information concerning the Product developed by or for CATALYTICA during the term of this Agreement, promptly as it is developed. 5.3 During the term of this Agreement and for five (5) years thereafter, all Confidential Information disclosed or confirmed in writing and designated as confidential by the disclosing party, shall be held in confidence by the receiving party, shall not be used by the receiving party for any purpose except as provided hereunder and shall not be disclosed to third parties except for disclosure to its Affiliates or governmental authorities, or except as otherwise necessary to carry out the receiving party's obligations under this Agreement. If a receiving party finds it necessary to disclose such Confidential Information to a third party, the receiving party will not do so without first obtaining the written consent of the disclosing party (which shall not be unreasonably withheld) and entering into an agreement with the third party which binds the third party to the same obligations of restricted use and disclosure as are undertaken by the parties in this Agreement. 5.4 Neither party shall distribute any Confidential Information of the other except to its employees or agents who have a need to know in connection with the performance of their duties in satisfying the obligations of such party hereunder. Any employee or agent who receives Confidential Information shall be advised as to the confidential nature thereof and the prohibitions contained herein. All copies of any portions of any Confidential Information distributed as provided in this section will be identified as confidential. Upon termination of this Agreement, and upon the request of the disclosing party, the receiving party shall return or destroy all such Confidential Information and any copies thereof in its -7- possession, except that each party may retain one copy of Confidential Information solely for archival purposes. 5.5 CEPHALON acknowledges that CATALYTICA possesses certain inventions, processes, know-how, trade secrets, improvements, other intellectual properties and other assets, including but not limited to procedures and techniques, computer technical expertise, software, and certain technical expertise and conceptual expertise in the area of drug processing and manufacturing, which have been independently developed by CATALYTICA or its Affiliates without the benefit of any information provided by CEPHALON (collectively "CATALYTICA Property"). Subject to the provisions of Section XIX hereof, CEPHALON and CATALYTICA agree that any CATALYTICA Property or improvements thereto which are used, improved, modified or developed by CATALYTICA under or during the term of this Agreement are the product of CATALYTICA's technical expertise possessed and developed by CATALYTICA or its Affiliates prior to or during the performance of this Agreement and are the sole and exclusive property of CATALYTICA or its Affiliates, as the case may be. 5.6 If CATALYTICA is required to take specific actions to protect CEPHALON's Confidential Information, CEPHALON will be required to compensate CATALYTICA for the cost of such actions. 5.7 Termination of this Agreement shall not operate to extinguish either party's obligation to treat Confidential Information as provided herein, and the same shall continue in effect in accordance with this Article for five (5) years from the termination or expiration of this Agreement with respect to such Confidential Information. 5.8 Nothing contained herein shall be deemed to grant either party, either expressed or implied, a license or other right or interest in the Confidential Information of the other or in any patent, trademark or other similar property of the other, except as expressly provided hereunder. 5.9 CATALYTICA shall not use the name of CEPHALON, or disclose the existence of this Agreement for any marketing, advertising or promotional purpose, without CEPHALON's prior written consent, which shall not be unreasonably withheld or delayed. 5.10 During the term hereof, and for a period of one (1) year after the termination of this Agreement, CATALYTICA agrees not to manufacture pharmaceutical compositions comprising modafinil for any third party. VI. COMPONENT SUPPLY -8- 6.1 Active Drug Substance and Compressil. CEPHALON will provide free of charge, and deliver to CATALYTICA at its designated production facility not less than sixty (60) days in advance of the delivery date of Product, appropriate quantities of Active Drug Substance and Compressil which meet the specifications established in Schedule A. Following such delivery, CATALYTICA shall assume full responsibility for the safekeeping and safe handling, and shall bear all risk of loss (subject to the agreed yield loss as described below), of all such Active Drug Substance and Compressil that is in its possession. Legal title to all Active Drug Substance and Compressil will remain with CEPHALON, provided however, that CATALYTICA shall reimburse CEPHALON for the actual documented replacement cost of any Active Drug Substance and Compressil that is lost, contaminated, or destroyed while in the possession of CATALYTICA (subject to the agreed yield loss as described below). CATALYTICA will use its commercially reasonable best efforts to obtain maximum yield of Product from the Active Drug Substance provided by CEPHALON in connection with the formulation and packaging services provided hereunder. The parties anticipate that the combined yield loss suffered in the course of formulating and packaging the Product in any given lot will not exceed [**]. Yield loss is defined as: Yield Loss = 100 (modafinil - (tablets)(dose))/modafinil where modafinil = starting modafinil amount in granulation, gram tablets = total number of tablets produced = (total packages) (quantity per package) or for bulk tablets: = (total tablet weight, gram) / (nominal tablet weight, gram) [**] [**] Notwithstanding the above, if the yield loss over any given twelve-month period during the term hereof exceeds [ ], then CATALYTICA will reimburse CEPHALON for its actual documented costs for that amount of Active Drug Substance lost that exceeds the aforementioned [**] maximum threshold. 6.2 Starting Material. CATALYTICA will obtain at its expense Starting Material which meets the specifications established in Schedule A. CATALYTICA -9- assumes full responsibility and liability for the storage and handling of all Starting Material. 6.3 Packaging Components. Product will be labeled and packaged in accordance with instructions and specifications provided by CEPHALON. CATALYTICA will submit to CEPHALON artwork proofs of all labels, package inserts and packaging prior to use for approval by CEPHALON, which approval shall not be unreasonably withheld or delayed. Upon approval by CEPHALON, CATALYTICA will procure, test, inspect and approve all labels, package inserts and packaging used in connection with the Products. VII. FORECASTS AND ORDERS 7.1 Orders. CEPHALON will submit firm written purchase orders to CATALYTICA not less than ninety (90) days lead time in advance of the requested delivery date. CEPHALON shall deliver all Active Drug Substance and Compressil necessary to formulate Product for any given shipment to CATALYTICA not less than sixty (60) days in advance of said delivery date. If CEPHALON fails to provide such Active Drug Substance and Compressil within such period, CATALYTICA's lead time for the delivery of Product under the affected purchase order shall be extended for a period of two (2) days for each day of delay in the supply of Active Drug Substance and Compressil. CATALYTICA shall make deliveries within fourteen (14) days of the requested delivery date for orders giving at least the required minimum lead time. 7.2 Forecasts and Forecast Changes. Upon execution of this Agreement, CEPHALON will provide CATALYTICA with an initial volume forecast setting forth CEPHALON's anticipated quantity requirements for the forthcoming twelve (12) months on or about the effective date, and with rolling, updated volume forecasts on a quarterly basis thereafter. Except for the initial forecast provided upon execution of this Agreement, each forecast shall be for the twelve (12) months beginning three (3) months after the date the of the forecast. Other than the initial forecast provided upon execution of this Agreement, the first three (3) months of each forecast shall be binding on CEPHALON while the other nine (9) months of each forecast are for planning purposes only. CEPHALON can increase or decrease its firm order quantities with CATALYTICA's prior agreement and CATALYTICA can adjust its shipping quantities with CEPHALON's prior agreement. Both parties shall use their commercially reasonable best efforts to accommodate reasonable change requests from the other. VIII. SHIPMENT AND PAYMENT -10- 8.1 CATALYTICA's Responsibilities. CATALYTICA will properly prepare the Product so that it may be lawfully and safely shipped to warehouse locations in the United States, Mexico, Japan, the United Kingdom, Ireland, Italy, and other countries as designated by CEPHALON and agreed upon by CATALYTICA. CATALYTICA will prepare and execute all reasonably necessary shipping documents, consisting of Packing List, Dangerous Goods Declaration, and MSDS. CEPHALON will choose the carrier by indicating the same on its purchase order provided to CATALYTICA. 8.2 Terms of Shipment. CATALYTICA will ship Product F.O.B. CATALYTICA's Greenville, North Carolina plant to CEPHALON's warehouse or other designated sites. All transport costs and risk of loss during shipment will be borne by CEPHALON. 8.3 Terms of Payment. CEPHALON will pay CATALYTICA the toll fee within thirty (30) days after the date on which CEPHALON receives said invoice from CATALYTICA, together with copies of all documentation required for Product release as provided in Schedule C hereto. Late payments shall bear interest at the rate of 1 1/2 % per month, or if less, the highest rate permitted under applicable law. IX. INSPECTION AND ANALYSIS 9.1 Inspection by CATALYTICA. CATALYTICA will analyze each Product lot for compliance with the Specifications set forth in Schedule B. CATALYTICA will send to CEPHALON a certificate of analysis and a certificate of release (together with any other documentation required under the procedures set forth in Schedule C hereto) prior to, or together with, each shipment of Product. In this regard, CATALYTICA agrees to retain all records and documents necessary to fulfill the requirements established by all applicable regulatory agencies. The parties acknowledge that, subject to the terms set forth in Schedule C hereof, under the laws and regulations of the United Kingdom, Ireland and Italy, CEPHALON or its authorized agent shall serve as the designated "Qualified Person" under the laws and regulations of the European Union for purposes of releasing the Product into the market. 9.2 Inspection by CEPHALON. CEPHALON or its authorized representative will inspect all shipments upon their receipt and will report any reasonably discernible defects in the Product to CATALYTICA within thirty (30) days of its receipt of the Product and related records. Any defects not reasonably discernible will be reported to CATALYTICA by CEPHALON within ten (10) days of CEPHALON's discovery of the same. -11- 9.3 Non-Conforming Product. If any Product does not meet the Product Specifications set forth in Schedule B or in the Quality Agreement set forth in Schedule C as determined by CEPHALON's testing and inspection of the Product, then solely at its option CEPHALON may, as its sole remedy, either (i) demand that CATALYTICA remanufacture or repackage (as appropriate) said Product at no charge to CEPHALON and pay all round-trip shipping charges to and from the destination of the original shipment as well as pay for that portion of the acquisition cost of the Active Ingredients and other materials supplied by CEPHALON to CATALYTICA hereunder which are used in such nonconforming Product and which are lost or otherwise rendered unusable as a result of CATALYTICA's producing non-conforming Product, or (ii) be relieved of any obligation to pay CATALYTICA the toll fees otherwise payable for the manufacture of said Product, and CATALYTICA shall reimburse CEPHALON for the reasonable costs incurred by CEPHALON in properly disposing of the Product, as well as that portion of the acquisition cost of the Active Ingredients and other materials supplied by CEPHALON to CATALYTICA hereunder which are used in such nonconforming Product. Any notice given hereunder shall specify the manner in which the Product fails to conform to the purchase order therefor or fails to meet such warranty or the Specifications. If it is determined that the nonconformity (a) is due to damage to the Product (i) caused by CEPHALON or its agents or (ii) which occurs subsequent to delivery of such Product to the carrier at the point of origin, or (b) results from Active Ingredients or other materials supplied by CEPHALON, CATALYTICA shall have no liability to CEPHALON with respect thereto and CEPHALON shall pay for such Product in accordance with the terms of this Agreement. Nothing herein shall be construed to limit CATALYTICA's obligations established in Section 6.1 hereof. 9.4 Independent Testing. If CEPHALON notifies CATALYTICA that any Product does not meet applicable Specifications or quality assurance guidelines, and CATALYTICA does not agree with CEPHALON's position, the parties will attempt to reach a mutually acceptable resolution of the dispute. If they are unable to do so after a reasonable period of time (such period not to exceed one month from the date of original notification), the matter will be submitted to an independent testing laboratory acceptable to both parties. Both parties will accept the judgment of the independent laboratory. The cost of such testing will be borne by the party whose position is determined to have been in error. If the Product is determined by said independent laboratory to have been conforming, then the provisions of Section 9.3 hereof shall not apply, and CEPHALON shall not be relieved of its obligations to pay CATALYTICA for the production of such Product. X. REGULATORY MATTERS; REGULATORY FILINGS AND APPROVALS -12- 10.1 General. CATALYTICA shall be responsible for obtaining and maintaining all site licenses for the manufacture of the Product and shall comply on behalf of CEPHALON with other applicable regulations promulgated by, but not limited to, the Food and Drug Administration ("FDA"), Drug Enforcement Administration ("DEA"), Environmental Protection Agency ("EPA"), and Occupational Safety and Health Administration ("OSHA") in connection with CATALYTICA's manufacture of the Product. Should changes in applicable laws or regulations after the date of this Agreement and relating to the Product result in increased costs for CATALYTICA in connection with CATALYTICA's performance under this Agreement (other than changes affecting CATALYTICA's cGMP compliance or products generally), such costs shall be passed on to, and paid for by, CEPHALON on a dollar for dollar basis. 10.2 Scale-Up and Post-approval Changes. CATALYTICA agrees to prepare the chemistry, manufacturing, and controls documentation necessary for the SUPAC supplement to transfer manufacture of the Product to CATALYTICA. Preparation of that documentation will be charged to CEPHALON on an hourly basis. CEPHALON is responsible for the determination of the regulatory filing strategy and for filing the documentation with the FDA. 10.3 Import and Export Registrations. At CEPHALON's cost, CATALYTICA will prepare, obtain, and maintain all necessary DEA manufacturing, import, and export registrations necessary to perform its obligations under this Agreement. XI. REPRESENTATIONS AND WARRANTIES 11.1 General. CATALYTICA represents and warrants to CEPHALON that (i) it has and will maintain throughout the pendency of this Agreement, the expertise, with respect to personnel and equipment, to fulfill the obligations established hereunder, and has obtained all requisite licenses, authorizations and approvals required by federal, state or local government authorities including, but not limited to, the Food and Drug Administration ("FDA"), Drug Enforcement Administration ("DEA"), Environmental Protection Agency ("EPA"), Occupational Safety and Health Administration ("OSHA"), etc. to manufacture the Product; (ii) the production facility, equipment and personnel to be employed to formulate and package the Product will be qualified to manufacture product according to Current Good Manufacturing Practices, as defined in 21 U.S.C. ("cGMP") at the time each such batch of Product is produced, and that the production facility to be employed is in compliance with all applicable laws and regulations, provided however, that CEPHALON acknowledges that CATALYTICA shall not be required to establish or to maintain a dedicated production facility solely on the basis of this representation; (iii) there are no pending or uncorrected citations or adverse conditions noted in any inspection of the production facility to be employed which would cause the Product to be misbranded or adulterated within the meaning of -13- the federal Food, Drug and Cosmetic Act, as amended; (iv) it has provided to CEPHALON all FDA inspection reports and Form 483s received by CATALYTICA in the last two (2) years, and that the documents provided are true and complete copies thereof (except as noted); (v) the execution, delivery and performance of this Agreement by CATALYTICA does not conflict with, or constitute a breach of any order, judgment, agreement, or instrument to which CATALYTICA is a party; (vi) the execution, delivery and performance of this Agreement by CATALYTICA does not require the consent of any person or the authorization of (by notice or otherwise) any governmental or regulatory authority (other than those relating to the granting of approval to commercialize the Product); and (vii) CATALYTICA has not been debarred by the United States Food and Drug Administration under the Generic Drug Enforcement Act of 1992 (or by any analogous agency or under any analogous law or regulation), and neither it nor, to its knowledge, any of its officers or directors has ever been convicted of a felony under the laws of the United States for conduct relating to the development or approval of a drug product or relating to the marketing or sale of a drug product, and further, to its knowledge, that no individual or firm debarred by any governmental authority will participate in the performance, supervision, management or review of the production of Product supplied to CEPHALON under this Agreement. CEPHALON represents and warrants to CATALYTICA that (i) the execution, delivery and performance of this Agreement by CEPHALON does not conflict with, or constitute a breach of any order, judgment, agreement, or instrument to which CEPHALON is a party; and (ii) the execution, delivery and performance of this Agreement by CEPHALON does not require the consent of any person or the authorization of (by notice or otherwise) any governmental or regulatory authority (other than those relating to the granting of approval to commercialize the Product). 11.2 Manufacturing Warranty. CATALYTICA warrants that all Products supplied to CEPHALON will be manufactured in accordance with cGMPs in effect at the time of manufacture. A statement to this effect shall be printed on CATALYTICA's certificate of analysis for each batch of Product delivered. Moreover, CATALYTICA will provide to CEPHALON concurrent with each invoice the applicable batch records and test results establishing such compliance, as provided in Schedule C hereto. 11.3 Product Warranty. CATALYTICA hereby warrants that all Product delivered to CEPHALON (i) will not be adulterated, misbranded, or otherwise prohibited within the meaning of any European Union, national, state or local law or regulation, (ii) will be free from defects in materials, other than with respect to the Active Drug Substance and Compressil (a) unless defects therein are caused by CATALYTICA's negligence or willful misconduct or (b) unless defects therein are related solely to applicable standards and specifications for which CATALYTICA is testing pursuant to Section 2.4 (iii) hereof, and (iii) will conform to Specifications as established in Schedule B hereto. CEPHALON -14- hereby warrants that (i) the Product is not a product that may not be introduced into interstate commerce, (ii) Active Drug Substance and Compressil will not be adulterated, misbranded, or otherwise prohibited within the meaning of any European Union, national, state or local law or regulation, (iii) Active Drug Substance and Compressil will be free from defects, and (iv) Active Drug Substance and Compressil will be suitable for use by CATALYTICA in manufacturing the Product. 11.4 Environmental Warranty. CATALYTICA warrants that all waste generated in its operations under this Agreement will be stored, transported and disposed of in a safe and environmentally sound manner consistent with all federal, state and local laws and regulations. CATALYTICA further warrants that it will conduct its business so as to comply materially with the terms and conditions of all air pollution control permits, sanitary sewer discharge permits, and authorizations required by applicable federal, state and local laws, rules and regulations relating to the protection of the environment. CATALYTICA will not knowingly undertake any production or development activities for itself or on behalf of a third party, which, together with the emissions from activities under this Agreement, would cause air emissions from isopropyl alcohol or any other substance to exceed any applicable legal limits. 11.5 Technology Warranty. CEPHALON hereby represents and warrants to CATALYTICA that the technology established in the Specifications, or as otherwise disclosed hereunder (collectively, the "Technology") is sufficient to enable CATALYTICA to manufacture and package the Product as contemplated hereunder. Except as otherwise disclosed to CATALYTICA in writing, CEPHALON owns all right, title and interest to said Technology, free and clear of any adverse ownership claims. Except as otherwise disclosed to CATALYTICA in writing, CEPHALON has not received any notice that any portion of the Technology infringes upon the patent, trade secret or other intellectual property rights or interests of any third party and, to the best knowledge of CEPHALON, there has been no such infringement. 11.6 Warranty Disclaimer. NEITHER CATALYTICA NOR CEPHALON MAKES ANY WARRANTY THAT THE PRODUCT WILL BE MERCHANTABLE, AND CATALYTICA MAKES NO WARRANY THAT THE PRODUCT WILL BE FIT FOR ANY PARTICULAR PURPOSE. NEITHER PARTY MAKES ANY WARRANTIES WITH RESPECT TO THE PRODUCT, EXPRESS OR IMPLIED, EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT. XII. YEAR 2000 COMPLIANCE CATALYTICA will use all commercially reasonable efforts to ensure that there will be no failure or production of erroneous data as a consequence of the inability to -15- receive, store, process or output date information regardless of the date(s) utilized (including, without limitation, relating to the change of century) in any computer software, computer hardware, automation systems or other devices owned, licensed, or otherwise used by CATALYTICA or any suppliers of CATALYTICA that would result in the inability of CATALYTICA to either (i) successfully carry out any services hereunder or (ii) manufacture and supply Products and supporting documentation and information under this Agreement XIII. QUALITY CONTROL, RECORDS AND INSPECTIONS 13.1 Product and Component Samples. CATALYTICA will maintain a sample of each chemical component (including Active Drug Substance) as required by applicable regulatory standards or as otherwise mutually agreed by CEPHALON and CATALYTICA. CATALYTICA will be responsible for maintaining retention samples of the Product as may be required by applicable regulatory standards. 13.2 Validation. CATALYTICA will validate all process, methods, equipment, utilities, facilities and computers used in the formulation, packaging, storage, testing and release of Product in conformance with the provisions of Schedule D hereto, and all applicable laws and regulations. CEPHALON will have the right to review the results of said validation upon request. 13.3 Quality Compliance. CATALYTICA will provide CEPHALON with timely notification of all significant deviations, notes to file, and other deficiencies that may reasonably be expected to impact the quality of the Product, as well as all FDA reports regarding testing, manufacture, packaging or labeling of the Product. 13.4 Manufacturing Records. CATALYTICA will maintain complete and accurate records relating to the Product and the manufacture, packaging, labeling and testing thereof for the period required by applicable Regulatory Standards, and CATALYTICA shall provide copies thereof to CEPHALON upon CEPHALON's request. The records shall be subject to audit and inspection under this Article XIII. 13.5 Batch Records. CATALYTICA will supply for each batch of Product, including each pilot batch, complete batch production and control records. Records which include the information relating to the manufacturing, packaging and quality operation for each lot of Product will be prepared by CATALYTICA at the time such operations occur. The records will include, without limitation, mixing and filling records; container and component traceability records; equipment usage records; in-process and final laboratory testing results; in-process and final Product physical inspection results; yield reconciliation for bulk and finished Product; labeling and packaging records; and records relating to deviations from approved procedure, as well as CATALYTICA's investigation and corrective -16- actions. Copies of batch records will be forwarded to CEPHALON prior to or along with shipment of each Product lot. 13.6 Records Retention. CATALYTICA will retain records and documents for periods meeting all applicable regulations of the FDA and DEA. 13.7 Regulatory Inspections. CATALYTICA will promptly inform CEPHALON of any contact, inspection or audit by any governmental agency (other than EPA and OSHA inspections), related to or affecting the Product (other than contacts, inspections or audits affecting products generally). CATALYTICA will promptly provide CEPHALON with copies of any government-issued inspection observation reports (including without limitation FDA Form 483s and equivalent forms from other regulatory bodies) and agency correspondence, that may reasonably be expected to adversely affect the Product. CATALYTICA and CEPHALON will cooperate in resolving any concerns with any governmental agency. CATALYTICA will also inform CEPHALON of any action taken by any governmental agency against CATALYTICA or any of its officers and employees which may reasonably be expected to adversely affect the Product or CATALYTICA's ability to supply Product hereunder within 24 hours after the action is taken. 13.8 CEPHALON Inspections. No more than three (3) CEPHALON employees or CEPHALON authorized representatives will have the right during normal business hours, at reasonable intervals and on reasonable prior notice, to conduct one (1) inspection per year, at CEPHALON's sole expense, of CATALYTICA's facilities used in the manufacturing, packaging, storage, testing, shipping or receiving of Product and Product components. All such employees and representatives shall be qualified to conduct such inspections, shall be escorted by CATALYTICA employees or representatives at all times while at CATALYTICA's facility, shall be bound by the same confidentiality obligations as contained herein, and shall abide at all times with CATALYTICA's rules and regulations, including without limitation safety rules and regulations. Such inspections may include GMP inspections and system audits. Persons conducting such inspections will have access only to documents, records, reports, data, procedures, facilities, regulatory submissions, and all other information required to be maintained by applicable government regulations relating directly to the Product. CATALYTICA shall take appropriate actions to adopt reasonable suggestions of CEPHALON to correct any deficiencies identified by such inspection or audit. In addition, CEPHALON shall have the right to observe from time to time the manufacture, packaging and quality control testing of the Product by CATALYTICA, including without limitation, the right to arrange, at its cost and expense, to have a CEPHALON employee or other representative located on the premises of CATALYTICA's production facility to participate in the monitoring of Product production, testing, packaging and labeling under this Agreement. No testing of the Product by CEPHALON and no inspection or audit -17- by CEPHALON of the CATALYTICA production facility under this Agreement shall operate as a waiver of or otherwise diminish CATALYTICA's responsibility with respect to Product quality under this Agreement. The duration of an audit will be limited to no more than 3 days (audits that last over 3 days will be charged at CATALYTICA's specified FTE rates), and audits may not interfere with CATALYTICA's normal operations. XIV. COMPLAINTS, ADVERSE EXPERIENCES AND RECALLS 14.1 Product Complaints and AE's. CEPHALON shall maintain complaint files with respect to the Product in accordance with cGMPs. CATALYTICA will promptly notify CEPHALON by facsimile transmission of all Product complaints and AEs received by CATALYTICA within two (2) days of its receipt thereof. All such notices shall be sent to the attention of the Director, Medical Affairs at CEPHALON, facsimile number (610) 738-6313. CEPHALON shall promptly provide CATALYTICA with copies of any complaints received by CEPHALON relating to the manufacture or packaging of the Product. CEPHALON shall have responsibility for responding to all complaints, and for promptly providing CATALYTICA with a copy of any responses to complaints relating to the manufacture or packaging of the Product. CEPHALON or its affiliates shall have responsibility for reporting all complaints relating to the Product to the FDA and any other regulatory authorities, including, but not limited to, complaints relating to the manufacture or packaging of the Product as well as adverse experience (AE) reports. CEPHALON will correspond with complainants as to any complaints associated with Product, whether received during or after the term hereof. CATALYTICA will assist CEPHALON in investigating Product complaints relating to the manufacture or packaging of the Product by analyzing Product, manufacturing processes and components to determine the nature and cause of an alleged Product manufacturing defect or alleged Product failure. CATALYTICA will also assist CEPHALON in the investigation of any Adverse Experience (AE) reported to either party when such AEs are reasonably believed to be attributable to the manufacture or packaging of the Product. If CEPHALON determines that any reasonable physical, chemical, biological or other evaluation should be conducted in relation to an AE or Product complaint relating to the manufacture or packaging of the Product, CATALYTICA will conduct the evaluation and provide CEPHALON with a written report of such evaluation within thirty (30) days from receipt of CEPHALON's written request for same, together with samples of the Product from the relevant lot. 14.2 Recall Action. If CEPHALON should elect or be required to initiate a Product recall, withdrawal or field correction because of (i) supply by CATALYTICA of Product that does not conform to the Specifications and warranties established by this Agreement or (ii) the negligent or intentional wrongful act or omission of CATALYTICA, CEPHALON will notify CATALYTICA and provide -18- CATALYTICA a copy of its recall letter prior to initiation of the recall. CATALYTICA will assist CEPHALON (and its designated Affiliate) in an investigation to determine the cause and extent of the problem. All regulatory authority contacts and coordination of any recall activities will be initiated by, and will be the sole responsibility of, CEPHALON. 14.3 Recall Expenses. If any Product is recalled as a result of (i) supply by CATALYTICA of Product that does not conform to the warranties contained in Sections 11.1, 11.2 and 11.3 hereof or (ii) the negligent or intentional wrongful act or omission of CATALYTICA, then CATALYTICA will bear all reasonable costs and expenses of such recall. Recalls for any other reason will be at CEPHALON's sole expense. Notwithstanding the foregoing or any other provision of this Agreement, CATALYTICA's aggregate liability with regard to Product recalls shall not exceed the amount of consideration received by CATALYTICA from CEPHALON hereunder. 14.4 Recall Records. CATALYTICA will maintain complete and accurate records for such periods as may be required by applicable law or regulation. XV. EQUIPMENT Notwithstanding anything to the contrary herein, the parties acknowledge that CEPHALON will, promptly upon CATALYTICA's request, reimburse CATALYTICA for any out-of-pocket expenses incurred by CATALYTICA in connection with the purchase of certain tooling and other specialized equipment required for the manufacture, packaging and labeling of the Product (the "Equipment"), including without limitation punches and dies for tablet presses, and special change parts for bottle handling. The parties shall agree in writing on the need for, specifications and costs of any such Equipment and related materials prior to such purchase. CATALYTICA agrees to use said Equipment solely in connection with the performance of its duties and obligations established hereunder. CATALYTICA shall maintain all such Equipment in good working order. CEPHALON will be responsible for the cost of purchasing replacement Equipment at the end of its useful life, provided however, that CATALYTICA will be responsible for any such costs stemming from damage or premature or undue wear and tear to the Equipment based upon neglect or misuse by CATALYTICA. CEPHALON shall retain title to such Equipment, which will be returned by CATALYTICA at the request of CEPHALON following termination of this Agreement; provided, however, CATALYTICA, at its option, may purchase such Equipment at its depreciated book value upon termination of this Agreement. CEPHALON shall reimburse CATALYTICA for all costs incurred by CATALYTICA in connection with the removal and return of the Equipment, including CATALYTICA's facility restoration costs. A schedule of currently identified Equipment to be purchased by CEPHALON, along with certain other equipment for which CATALYTICA shall reimburse CEPHALON and which shall be owned by CATALYTICA, is provided in Schedule G, and such Equipment shall be purchased and delivered to CATALYTICA within two (2) months of the effective date of this Agreement. -19- XVI. TECHNOLOGY TRANSFER Within fifteen (15) days of the effective date, CEPHALON will transfer all necessary technology and documentation relating to the manufacture and packaging of Product to CATALYTICA to support CATALYTICA's technology transfer activities, including without limitation all documentation related to Product, process or material safety (including all MSDS'). CEPHALON will pay CATALYTICA's actual costs to perform the technology transfer and validation activities (hereafter "Activities") related to the manufacture of three validation batches of Product within a commercially reasonable period of time after the effective date of this Agreement (as described in CATALYTICA's proposal dated October 12, 1998, CATALYTICA estimates the cost of the Activities will be [**]). The Activities will include process evaluation at commercial scale, including evaluation of process parameters, sampling, and preparation of process evaluation batches, as well as the manufacture of three consecutively successful batches (with full testing per the validation protocol), and the preparation of mutually agreed upon process evaluation and validation reports. The aforementioned [**] cost estimate does not include the manufacturing of the validation batches, and these batches will be charged to CEPHALON at the commercial price per this Agreement. XVII. INSURANCE 17.1 During the term hereof, CATALYTICA shall maintain product liability/completed operations insurance, providing coverage of not less than TEN MILLION AND 00/100 DOLLARS ($10,000,000.00) per occurrence and in the aggregate, insuring CATALYTICA against all costs, fees, judgments, and liabilities arising out of or alleged to arise out of its obligations and representations and warranties under this Agreement. In addition, CATALYTICA will maintain at all times sufficient property casualty insurance to cover the total quantity of Active Drug Substance and Product on hand at its full cost of replacement. CATALYTICA will provide to CEPHALON, upon request, evidence of such insurance coverages. CATALYTICA further agrees to cause such policies to name CEPHALON as an additional insured at no cost to CEPHALON. 17.2 During the term hereof, CEPHALON agrees to maintain, and upon request, to provide evidence of product liability insurance for and providing coverage of not less than TEN MILLION AND 00/100 DOLLARS ($10,000,000.00) per occurrence and in the aggregate providing a defense for and insuring CEPHALON against all costs, fees, judgments and liabilities arising out of or alleged to arise out of its obligations and representations and warranties under this Agreement. CEPHALON will provide to CATALYTICA, upon request, evidence of such insurance coverages. CEPHALON further agrees to cause such policies to name CATALYTICA as an additional insured at no cost to CATALYTICA. -20- XVIII. TRADEMARKS 18.1 CATALYTICA shall have the non-exclusive right to use the Trademarks in packaging the Product in connection with fulfilling its obligations hereunder. The rights granted CATALYTICA hereunder to use the Trademarks shall in no way affect CEPHALON's ownership of such Trademarks. No other right, title or interest in the Trademarks is established hereby, and nothing herein shall be construed to grant any right or license to CATALYTICA to use the CEPHALON trademark or the name CEPHALON, other than as specifically set forth herein. 18.2 CATALYTICA shall not knowingly make any use or take any action with respect to the Trademarks to prejudice or infringe CEPHALON's rights thereto including the use of any confusingly similar trademark and shall forthwith, upon objection by CEPHALON, desist from any use thereof or action therewith which is demonstrated to be in violation of this Agreement. 18.3 CATALYTICA will only market the Product using the relevant Trademarks as listed in Schedule A during the term of this Agreement. Upon termination of this Agreement, CATALYTICA will cease all use of the Trademarks and cancel any license to such Trademarks granted hereunder. 18.4 CATALYTICA will use the Trademarks in strict accordance with the instructions given by CEPHALON, and shall refrain from making any changes in connection therewith without first obtaining CEPHALON's written consent. 18.5 In the event of any claim or litigation by a third party against CATALYTICA alleging that any of the Trademarks imitates or infringes a trademark of such third party or is invalid, CATALYTICA shall promptly give notice of such claims or litigation to CEPHALON and CEPHALON shall assume responsibility for and control of the handling, defense, or settlement thereof. CATALYTICA shall cooperate fully with CEPHALON during the pendency of any such claim or litigation. CEPHALON shall keep CATALYTICA notified of the current status of any trademark claim, litigation or infringement of any of the Trademarks and shall permit CATALYTICA to assume the handling, defense or settlement thereof if CEPHALON declines to do so. CEPHALON may at any time modify, adopt or withdraw from use any Trademark without any liability to CATALYTICA. XIX. INVENTIONS Any inventions, discoveries, improvements, or trade secrets made by CATALYTICA in the performance of this Agreement that relate to the Product (including any new use or any -21- change in the method of producing, testing or storing the Product) shall be owned by CEPHALON, and CATALYTICA shall have a non-exclusive, perpetual, royalty-free worldwide license to use any such invention, discovery, improvement, or trade secret, excluding, during the term of this Agreement and one (1) year thereafter, the right to use any such invention, discovery, improvement, or trade secret to manufacture or produce pharmaceutical compositions comprising modafinil. Any other invention, discovery, improvement, or trade secret made by CATALYTICA in the performance of this Agreement shall be owned by CATALYTICA, but CEPHALON shall have a nonexclusive, perpetual, nontransferable, royalty-free license to use any such invention, discovery, improvement, or trade secret to make or have made the Product in a facility owned by CEPHALON or a third party selected by CEPHALON, provided such third party agrees to use such invention, discovery, improvement, or trade secret solely for the purpose of manufacturing pharmaceutical compositions comprising modafinil for CEPHALON. Each party shall execute such instruments as shall be required to evidence or effectuate the other party's ownership of any such inventions, and shall cooperate upon reasonable request (and at the expense of the requesting party) in the prosecution of patents and other intellectual property rights related to any such invention. XX. INDEMNIFICATION 20.1 By CATALYTICA. CATALYTICA will indemnify and hold CEPHALON, its Affiliates, directors, officers, employees, agents, successors, and assigns harmless from any and all liability, damage, loss, cost, or expense (including reasonable attorneys' fees), including liability arising out of third-party claims, which arise from i) CATALYTICA's breach of any of the covenants, warranties, and representations contained herein, or ii) CATALYTICA's negligence or other willful misconduct. Notwithstanding the foregoing or any other provision of this Agreement, CATALYTICA's aggregate liability pursuant to this Section 20.1 provided that CATALYTICA'S conduct is not willful misconduct, shall not exceed the amount of consideration received by CATALYTICA from CEPHALON under this Agreement. 20.2 By CEPHALON. CEPHALON will indemnify and hold CATALYTICA, its Affiliates, directors, officers, employees, agents, successors, and assigns harmless from any and all liability, damage, loss, cost, or expense (including reasonable attorneys' fees), including liability arising out of third party claims, relating to this Agreement and either party's performance of its obligations hereunder, including without limitation claims relating to the infringement or violation of any patent or other intellectual property rights, other than that arising from i) CATALYTICA's breach of any of the covenants, warranties, and representations contained herein or ii) CATALYTICA's negligence or other willful misconduct. 20.3 By Each Party. In the event that negligence or willful misconduct of both CATALYTICA and CEPHALON contribute to any such loss, damage, claim, injury, cost or expense, CATALYTICA and CEPHALON will each indemnify -22- and hold harmless the other with respect to that portion of the loss, damage, claim, injury, cost or expense attributable to its negligence or willful misconduct. 20.4 Procedures. In the event that one party receives notice of a claim, lawsuit, or liability for which it is entitled to indemnification by the other party, the party receiving notice shall give prompt notification to the indemnifying party. The party being indemnified shall cooperate fully with the indemnifying party throughout the pendency of the claim, lawsuit or liability, and the indemnifying party shall have complete control over the conduct and disposition of the claim, lawsuit, or liability including the retention of legal counsel engaged to handle such matter. The indemnifying party hereunder will be liable for any costs associated with the settlement of any claim or action brought against it or the other party unless it has received prior notice of the settlement negotiations and has agreed to the settlement. XXI. LIMITATION OF LIABILITY In no event shall CEPHALON or CATALYTICA be liable to the other for incidental, special, consequential or punitive damages, including, but not limited to, any claim for damages based upon lost profits. Except as set forth in Section 20.1, in no event shall CATALYTICA's aggregate liability pursuant to this Agreement exceed the amount of consideration received by CATALYTICA from CEPHALON under this Agreement. XXII. FURTHER ENGAGEMENTS/DEVELOPMENTS 22.1 If CEPHALON develops a revised formulation of the Product, or otherwise desires to engage CATALYTICA to formulate or package pharmaceutical products other than the Product, then the parties will negotiate in good faith to reach agreement on mutually acceptable terms and conditions under which this Agreement shall be expanded to cover such additional engagement(s). -23- 22.2 It is the Parties' intent to negotiate in good faith to reach agreement on future activities related to Product, including, but not limited to, larger-scale manufacturing operations (i.e., larger batch sizes and lower prices per unit as set forth in Schedule E) for current and/or new formulations of Product, evaluation of alternate drying method(s) (e.g., fluid bed and/or microwave), and transfer and validation of new Product formulations, as well as the preparation and submission of scale-up and post-approval changes filings related to such future products or developments. Such future activities may be negotiated and based on, among other things, the full-time equivalent employee/contractor hours and materials involved in conducting such activities, and any corresponding Agreement will include an estimate of CATALYTICA's costs, and CATALYTICA will agree not to incur costs in excess of this estimate without CEPHALON's approval. XXIII. TERMINATION 23.1 Without Cause. Either party may terminate this Agreement, effective on the fifth anniversary of the date hereof or on subsequent anniversary date(s), if applicable, by giving one-hundred-eighty (180) days written notice to the other party. 23.2 Breach. If either party hereto commits a material breach of any of its obligations hereunder, the non-breaching party may, at its option, terminate this Agreement by giving the other party at least ninety (90) days prior written notice (twenty (20) days with respect to a payment default) of its intent to terminate this Agreement, which notice shall specify the breach and the termination date, unless the breaching party cures said breach prior to the specified termination date (or prior to the expiration of a longer period as may be reasonably necessary to cure a non-payment breach, provided that the breaching party is making diligent efforts to cure such breach, and provided further that such longer period shall not in any event exceed one hundred twenty (120) days from the date of notice). 23.3 Insolvency. Either party may terminate this Agreement immediately in its entirety if the other Party files a petition of bankruptcy, is adjudged bankrupt, takes advantage of any insolvency act, or executes a bill of sale, deed of trust, or assignment for the benefit of creditors. 23.4 Survival. The rights and obligations contained in sections covering representations and warranties, indemnification and confidentiality will survive termination of this Agreement, as will any rights to payment or other rights or obligations that have accrued under this Agreement prior to termination. Termination will not affect the liability of either party by reason of any act, default, or occurrence prior to said termination. 23.5 Transfer. If either party terminates this Agreement, CATALYTICA will upon request and at CEPHALON's expense provide reasonable assistance in -24- transferring production of Product to a facility owned by CEPHALON or a third party selected by CEPHALON. 23.6 Return of Product and Components. Upon termination under this Article, CATALYTICA shall, at CEPHALON's expense, return promptly to CEPHALON all Product, Active Drug Substance, in process materials and packaging components in its possession on the effective date of termination. CEPHALON shall promptly pay for all such Product, in-process materials and packaging components. XXIV. ALTERNATE DISPUTE RESOLUTION Any dispute concerning or arising out of this Agreement or concerning the existence or validity hereof, shall be determined by the following procedure. 24.1 Both parties understand and appreciate that their long term mutual interest will be best served by effecting a rapid and fair resolution of any claims or disputes which may arise out of services performed under this contract or from any dispute concerning contract terms. Therefore, both parties agree to use their best efforts to resolve all such disputes as rapidly as possible on a fair and equitable basis. Toward this end both parties agree to develop and follow a process for presenting, rapidly assessing, and settling claims on a fair and equitable basis. 24.2 If any dispute or claim arising under this contract cannot be readily resolved by the parties pursuant to the process described in Section 24.1, the parties agree to refer the matter to a panel consisting of one (1) senior executive employed by each party who is not directly involved in the claim or dispute for review and resolution. A copy of the contract terms, agreed upon facts (and areas of disagreement), and concise summary of the basis for each side's contentions will be provided to both such senior executives who shall review the same, confer, and attempt to reach a mutual resolution of the issue. 24.3 If the matter has not been resolved utilizing the process set forth in this Article XXV, and the parties are unwilling to accept the non-binding decision of the panel, either or both parties may elect to pursue resolution through litigation, or other legal remedies available to the parties. XXV. MISCELLANEOUS 25.1 Headings. The headings and captions used herein are for the convenience of the parties only and are not to be construed to define, limit or affect the construction or interpretation hereof. -25- 25.2 Severability. In the event that any provision of this Agreement is found to be invalid or unenforceable, then the offending provision shall not render any other provision of this Agreement invalid or unenforceable, and all other provisions shall remain in full force and effect and shall be enforceable, unless the provisions which have been found to be invalid or unenforceable shall substantially affect the remaining rights or obligations granted or undertaken by either party. 25.3 Entire Agreement. This Agreement, including all those Schedules appended hereto, contains the entire agreement of the Parties regarding the subject matter hereof and supersedes all prior agreements, understandings or conditions (whether oral or written) regarding the same. Further, this Agreement may not be changed, modified, amended or supplemented except by a written instrument signed by both parties. 25.4 Assignability. This Agreement and the rights hereunder may not be assigned or transferred by either party without the prior written consent of the other party (other than for rights to payment), provided however, that either party may assign this Agreement to an Affiliate, and provided further that in the event of a merger, acquisition or sale of substantially all of the assets of either party, the rights and obligations of such party under this Agreement may be assigned to the survivor or purchaser in that transaction. In the event that this Agreement is assigned, it shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. 25.5 Subcontractors. With CEPHALON'S prior approval which shall not be unreasonably withheld or delayed, CATALYTICA may use qualified subcontractors to perform parts of the work under this Agreement so long as such subcontractors are bound by a confidentiality agreement with CATALYTICA and meet such other quality standards as are imposed on CATALYTICA under this agreement; e.g., cGMP compliant. For example, with CEPHALON'S prior approval (which shall not be unreasonably withheld or delayed), CATALYTICA may have cleaning verification/methods validation performed by a cGMP compliant laboratory. CEPHALON's prior approval shall not be required with respect to subcontractors performing services on CATALYTICA's premises relating to CATALYTICA's business generally and not specifically related to the Product. 25.6 Further Assurances. Each party hereto agrees to execute, acknowledge and deliver such further instruments, and to take such other actions, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 25.7 Waiver. The waiver by either party of a breach of any provisions contained herein shall be effective only if made in writing and shall in no way be -26- construed as a waiver of any succeeding breach of such provision or the waiver of the provision itself. 25.8 Force Majeure. A party shall not be liable for nonperformance or delay in performance (other than of obligations regarding any payments or of confidentiality) caused by any event reasonably beyond the control of such party including, without limitation, wars, hostilities, revolutions, riots, civil disturbances, national emergencies, strikes, lockouts, unavailability of supplies, epidemics, fires, floods, earthquakes, other forces of nature, explosions, embargoes, or any other Acts of God, or any laws, proclamations, regulations, ordinances, or other acts or orders of any court, government or governmental agency. Any occurrence of Force Majeure shall be reported promptly to the other party. A party whose performance has been excused will perform such obligation as soon as is reasonably practicable after the termination or cessation of such event or circumstance. 25.9 Remedies. Each party agrees and acknowledges that its disclosure of Confidential Information in breach of this Agreement may cause irreparable harm to other party, and therefore that any such breach or threatened breach will entitle such party to injunctive relief, in addition to any other legal remedies available in a court of competent jurisdiction. 25.10 Governing Law. This Agreement shall in all respects be construed and enforced in accordance with the law of the State of North Carolina. 25.11 Independent Contractors. The parties are independent contractors under this Agreement. Nothing contained in this Agreement is to be construed so as to constitute CEPHALON and CATALYTICA as partners, agents or employees of the other, including with respect to this Agreement. 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 unless expressly so authorized in writing by the other party. 25.12 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be considered and shall have the force and effect of an original. 25.13 Notices. Except as set forth in Section 14.1 above, or as otherwise stated herein, all notices, consents or approvals required by this Agreement shall be in writing and sent by certified or registered air mail, postage prepaid or by facsimile or cable (confirmed by such certified or registered mail) to the parties at the following addresses or such other addresses as may be designated in writing by the respective parties. Notices shall be deemed effective on the date of mailing. -27- Sr. Director, Technical Operations CEPHALON, Inc. 145 Brandywine Parkway West Chester, PA 19380-4245 Facsimile: (610) 344-7563 Dr. Gabriel R. Cipau CATALYTICA Pharmaceuticals, Inc. P.O. Box 1887 Greenville, NC 27835-1887 Facsimile: (252) 707-2450 All invoices and/or charges in billing should be directed to the Accounting Department at: CEPHALON, Inc. 145 Brandywine Parkway West Chester, PA 19380-4245 Attention: Accounts Payable IN WITNESS WHEREOF, the undersigned parties have caused this Agreement to be executed as of the date first above written. CEPHALON, INC. By: \s\ J. Kevin Buchi ------------------------------------- CATALYTICA PHARMACEUTICALS, INC. By: \s\ Gabriel R. Cipau ------------------------------------- -28- Schedule A ---------- Active Drug Substance and Starting Material Specifications ---------------------------------------------------------- The parties have agreed upon all those applicable specifications for the Active Drug Substance and Starting Material as set forth in the following documents. The parties shall agree upon any modifications to any such specifications. [**] -29- The following packaging components apply to this Agreement: [**] TRADEMARKS - ---------- [GRAPHIC OMITTED] Provigil(R) Cephalon(R) -30- Schedule B ---------- Product Specifications ---------------------- The parties have agreed upon all those applicable specifications for the Product as set forth in the following documents. The parties shall agree upon any modifications to any such specifications. [**] -31- Schedule C ---------- Quality Agreement ----------------- INTERCOMPANY QUALITY AGREEMENT CEPHALON, Inc. 145 Brandywine Parkway West Chester, PA 19380 (hereafter called "CLIENT") Approved by: \s\ J. Kevin Buchi Date: 7/21/99 Representative, CLIENT AND Catalytica Pharmaceuticals, Inc. Greenville, North Carolina (hereafter called "C*P") Approved by: \s\ Joyce Aydlett Date: 8/24/99 Vice President, Quality Operations, C*P The Products Listed in Appendix I (hereafter called "the PRODUCTS") are subject to the following conditions: -32- Section TABLE OF CONTENTS Page ------- ----------------- ---- 1 QUALITY AGREEMENT...................................... 4 ----------------- 1.1 Purpose................................................ 4 1.2 Relationship to Definitive Agreement 4 2 PRODUCTS.............................................. 4 -------- 3 ADMINISTRATIVE INFORMATION............................ 4 -------------------------- 4 DURATION OF AGREEMENT................................. 5 --------------------- 5 MANUFACTURING GMP COMPLIANCE.......................... 5 ---------------------------- 5.1 General............................................... 5 5.2 Premises.............................................. 5 5.3 GMP Guidelines........................................ 5 5.4 Materials............................................. 5 5.5 Master Production Records ............................ 6 5.6 Standard Operating Procedures......................... 6 5.7 Batch Numbers......................................... 6 5.8 Dates of Manufacture and Expiration................... 7 5.9 Manufacturing and Equipment Data...................... 7 5.10 Storage and Shipment.................................. 7 6 QUALITY CONTROL....................................... 8 --------------- 6.1 General............................................... 8 6.2 Materials Supplied by C*P............................. 8 6.3 In-Process and Product Testing........................ 8 6.4 Retain Samples........................................ 8 6.5 Routine Stability Program............................. 9 6.6 Out-of-Specification (OOS) Investigations............. 9 7 QUALITY ASSURANCE..................................... 9 ----------------- 7.1 Deviations and Investigations......................... 9 7.2 Batch Disposition..................................... 10 7.3 Product Release....................................... 10 7.4 Product Complaints and Recall......................... 10 7.5 Records Retention..................................... 11 7.6 QA Presence in the Manufacturing Facility............. 11 8 REGULATORY COMPLIANCE................................. 11 --------------------- 8.1 Regulatory Inspections................................ 11 8.2 Regulatory Audit ..................................... 12 8.3 Audit Closeout........................................ 12 Section TABLE OF CONTENTS (Cont'd) Page ------- -------------------------- ---- -33- 9 DISPUTE RESOLUTION.................................... 12 ------------------ 9.1 Non-Conformity Dispute................................ 12 9.2 Test Result Dispute................................... 12 10 CHANGE MANAGEMENT..................................... 13 ----------------- 10.1 Controlled Documentation.............................. 13 10.2 Change Control........................................ 13 11 PRODUCT AND PROCESS VALIDATION........................ 13 ------------------------------ 11.1 Process............................................... 13 11.2 Cleaning Validation................................... 13 11.3 Equipment, Computer, Facility and Utilities Qualification......................................... 13 11.4 Laboratory Qualification.............................. 13 12 ANNUAL PRODUCT REVIEW, ANNUAL REPORT AND DRUG --------------------------------------------- LISTING............................................... 14 ------- 12.1 Annual Product Review................................. 14 12.2 Annual Manufacturing Process Change Report............ 14 12.3 Drug Listing.......................................... 14 APPENDIX I - The PRODUCTS........................... 15 APPENDIX II - List of Quality Contracts.............. 16 APPENDIX III - Release Documentation.................. 17 -34- 1. QUALITY AGREEMENT ----------------- 1.1 Purpose 1.1.1 This agreement defines the roles and responsibilities for the C*P Quality Operations in carrying out the services for the PRODUCTS. 1.1.2 This agreement also defines how the C*P Quality Operations and the CLIENT Quality Department will interact with each other. 1.2 Relationship to Definitive Agreement 1.2.1 This agreement shall be incorporated within and constitute a part of the Definitive Agreement between the two companies. 1.2.2 In the event of a conflict between any of the provisions of the Quality Agreement and the Definitive Agreement, the provisions of the Definitive Agreement shall govern. 2. PRODUCTS -------- 2.1 The PRODUCTS prepared for CLIENT by C*P are described in Appendix I. 3. ADMINISTRATIVE INFORMATION -------------------------- 3.1 CLIENT contact names: See Appendix II 3.2 C*P contact names: See Appendix II 3.3 Emergency contact names and numbers, during and outside working hours: Robert J. Urban Sr. Director, Technical Operations Work: (610) 738-6119 Home: (610) 644-3760 Beeper: (888) 346-2141 Joyce Aydlett Vice President, Quality Operations Work: (252) 707-7104 Home: (252) 756-1759 Beeper: (252) 757-7504 -35- 4. DURATION OF AGREEMENT --------------------- The agreement will expire with termination of the Definitive Agreement. The agreement can be modified as needed with the written approval of both parties. 5. MANUFACTURING GMP COMPLIANCE ---------------------------- 5.1 General 5.1.1 The manufacturing operations for the PRODUCTS to be performed by C*P are defined in the Definitive Agreement. 5.2 Premises 5.2.1 C*P will manufacture the PRODUCTS at the Greenville site. 5.2.2 The premises and equipment used to manufacture the PRODUCTS will be according to current regulatory requirements and in accordance with the controlled documentation approved by CLIENT. 5.2.3 The production of the PRODUCTS will be conducted in a suitably controlled environment and such facilities will be regularly monitored for parameters critical to the process to demonstrate compliance with cGMP guidelines and any conditions registered in the manufacturing authorization. 5.2.4 C*P will maintain controlled access to the premise. All visitors must sign-in and are escorted during any visit to the areas of the premise used to manufacture, test, and store the PRODUCTS. 5.3 GMP Guidelines 5.3.1 The principles detailed in the US Current Good Manufacturing Practices (21 CFR 200, 211, and 600) and the "Rules Governing Medicinal Product in The European Community - Volume IV Good Manufacturing Practice for Medicinal Products" and/or World Health Organization's cGMP Guidelines will cover the standards of manufacture of the PRODUCTS, as well as, the product specifications and any applicable product license or pharmacopoeia or formulatory requirements. 5.4 Materials 5.4.1 C*P will use only chemical materials, packaging, and labeling components approved by CLIENT and tested in accordance with the documentation reviewed and approved by CLIENT. -36- 5.4.2 Materials procured by C*P 5.4.2.1 C*P is responsible for ensuring that all material and components procured by C*P for use in the product is in full compliance with the specifications. Raw Materials are given a repass date upon the satisfactory completion of all initial testing. Repass testing will be performed at defined time intervals to ensure the chemical and physical stability of the raw materials unless client provides an official expiration date. 5.4.2.2 C*P is responsible for ensuring that all materials are used correctly, are appropriately tested upon receipt, and by holding the relevant Certificate of Analysis for the materials. 5.4.3 Materials Provided by CLIENT for C*P 5.4.3.1 Client is responsible for ensuring that all materials and components provided by CLIENT for use in the product is in full compliance with the specifications registered. CLIENT will provide C*P a Certificate of Conformance statement for the vendors that CLIENT is responsible for qualifying. C*P will perform ID tests on any materials provided by CLIENT. 5.5 Master Production Records 5.5.1 C*P may transcribe the manufacturing information (i.e., formulation, filing work order, packaging work order) into its own format and must obtain written approval from CLIENT for each document version before manufacturing. However, agreed upon changes to documentation will be handled as outlined by Change Management (see section 10) 5.6 Standard Operating Procedures 5.6.1 C*P is responsible for maintaining any SOPs required to manufacture, test, and store the PRODUCTS at C*P and to support GMPs. 5.7 Batch Numbers 5.7.1 The convention for the C*P "Batch Identification Number" (BIN) is as follows: o The first digit of the BIN is the last number of the year that the working formula was issued or the labwork was requested. -37- o The second digit of the BIN is the letter that corresponds to the month that the working formula was issued or the labwork was requested. The letter assignment is as listed for the following years: From 1997 through 2006 ---------------------------------------------- A = January G = July ---------------------------------------------- B = February H = August ---------------------------------------------- C = March I = September ---------------------------------------------- D = April J = October ---------------------------------------------- E = May K = November ---------------------------------------------- F = June L= December ---------------------------------------------- From 2007 through 2016 ---------------------------------------------- M = January T = July ---------------------------------------------- N = February U = August ---------------------------------------------- O = March W = September ---------------------------------------------- P = April X = October ---------------------------------------------- R = May Y= November ---------------------------------------------- S = June Z= December ---------------------------------------------- o The third through the sixth digits are four sequential numbers that are assigned from the reserved number series (1200 to 2599) designated for routine pharmaceutical production. 5.8 Dates of Manufacture and Expiration 5.8.1 Date of Manufacture - C*P will allocate the Date of Manufacture based on the first day of compounding the PRODUCT. 5.8.2 Expiration Date - C*P will calculate the expiry date from the Date of Manufacture using the currently approved expiry period. The expiration date will be the last day of the month computed above. The current approved expiration date periods can be found in Appendix I. 5.9 Manufacturing and Equipment Data 5.9.1 C*P is responsible for keeping records of equipment usage (previous PRODUCT produced is non-dedicated equipment), cleaning, and any maintenance/calibration performed. -38- 5.10 Storage and Shipment 5.10.1 Storage - C*P will store the PRODUCTS (Schedule IV controlled substances) under conditions in compliance with applicable DEA regulations and approved by CLIENT. C*P will ensure that during storage before shipping of the PRODUCTS that there is no possibility of deterioration, interference, theft, product contamination, or admixture with any other materials. CLIENT will provide details of any labeling requirements and container sealing and integrity. 5.10.2 Packaging and Labeling for Transit - The PRODUCTS will be suitably packaged for transit, each pallet or outer container being labeled with: o PRODUCT'S Approved Name o C*P Batch Number o Quantity o CLIENT Name and Address 5.10.3 Mixing of PRODUCTS - C*P will maintain proper segregation of the PRODUCTS according to systems reviewed and approved by CLIENT. Different lots of a single PRODUCT or different types of PRODUCTS will not be mixed on a pallet. 5.10.4 Shipment of Product to CLIENT - Only approved, finished (unless required by CLIENT), labeled PRODUCTS will be shipped by C*P to CLIENT or CLIENT'S agents. Any shipment of product from C*P which is Unapproved or under Quarantine requires prior written consent by the CLIENT's Quality Unit. This authorization will be on a lot basis. 6. QUALITY CONTROL --------------- 6.1 General 6.1.1 The testing activities for the PRODUCTS are to be performed by C*P are defined in the Definitive Agreement. In general, C*P is responsible for GMP compliance assays and for product release. 6.2 Materials supplied by C*P 6.2.1 Quality control of materials supplied by C*P will be undertaken by C*P. 6.3 In-Process and Product Testing 6.3.1 C*P will perform all in-process and finished product testing using the specifications and methods of analysis listed in Appendix IV and other applicable licenses. -39- 6.3.2 A C*P Qualified Person/QA Representative will sign a Certificate of Conformity/Analysis confirming that the product has been manufactured, packaged, tested, and meets the requirements of the Master Batch Record. The current release documentation information can be found in Appendix III. 6.3.3 CLIENT may perform testing to confirm the C*P data. CLIENT may perform confirmatory testing during the initial term of the agreement to validate the C*P data. Periodically thereafter, CLIENT may test material to confirm the C*P data. Dispute resolutions in conflicting test data will be handled per Section 9. 6.4 Retain Samples 6.4.1 Retain Samples 6.4.1.1 Active Ingredients - C*P will retain samples of the active ingredients for at least one year beyond the expiry period of the PRODUCTS in which used. The amount of sample retained will be twice the quantity required to carry out all of the tests required to determine if the material meets its specifications, with the exception of sterility and pyrogen testing. (CFR 21 1.1 70a) 6.4.1.2 Products - C*P will retain samples of the PRODUCTS for at least one year beyond the expiry period. The amount of sample retained will be twice the quantity required to carry out all of the tests required to determine if the material meets its specifications, with the exception of sterility and pyrogen testing. (CFR 211.170b) 6.5 Routine Stability Program 6.5.1 C*P is responsible for maintaining a routine stability testing program for the PRODUCTS and will provide a stability report to CLIENT annually or on request. The stability program will be in compliance with any license commitments as notified by CLIENT. At a minimum one lot of each product, of each strength and in each package type (largest and smallest) will be placed on stability each year. The stability program will generally follow ICH guidelines. The stability protocol or any changes must be approved by CLIENT. 6.5.2 Stability Failures - Any confirmed problems that arise as a result of the stability program will be immediately communicated by C*P to CLIENT. -40- 6.6 Out-of-Specification (OOS) Investigations 6.6.1 C*P is responsible for investigating any testing performed by C*P that fails to meet specification. C*P will immediately notify CLIENT in the event of a specification failure. Each investigation will be reviewed by C*P's designated Quality person, and will follow the procedures recommended by regulatory agencies. 7 QUALITY ASSURANCE ----------------- 7.1 Deviations and Investigations 7.1.1 Deviations - Any deviation from the process during manufacture must be carefully explained and documented in the batch records, justified, and approved by C*P Quality Assurance and Production Managers and included in the document package. Batch records that contain significant process deviations will be highlighted to CLIENT. 7.1.2 Failure Investigations - C*P is responsible for investigating any test result or in-process test which fails to meet specification. Each investigation will be reviewed and approved by C*P's designated Quality person and by CLIENT. The investigation must document that any failure has not jeopardized the safety, efficacy, or quality of the PRODUCT. 7.1.3 C*P will notify the CLIENT of any batch of PRODUCTS rejected by C*P. 7.1.4 C*P will notify the CLIENT if any problems are discovered that may impact PRODUCTS batch(s) previously shipped to CLIENT. 7.1.5 Some deviations/failures may require that additional testing, stability, or validation be conducted. This work will be performed by C*P as agreed by both parties. 7.2 Batch Disposition 7.2.1 For each batch, C*P will provide the documentation required in Appendix III. 7.2.2 Certificate of Compliance 7.2.2.1 C*P is responsible for ensuring and certifying that the PRODUCTS have been manufactured according to the specifications/procedures documented in the Master Production Records. -41- 7.2.2.2 C*P Qualified Person/QA Representative will sign a Certificate of Compliance confirming that the PRODUCTS have been manufactured, tested and stored according to the requirements of the Master Production Record. 7.3 Product Release 7.3.1 Release of the PRODUCTS is the absolute responsibility of CLIENT Quality and will be undertaken by CLIENT based on CLIENT's internal procedures, the full document package provided by C*P, and completion of any release testing required by CLIENT Quality Control. 7.3.2 Any problem discovered by CLIENT likely to cause rejection of the PRODUCTS will be communicated to C*P within 30 days from receipt of the full release documentation package (see Appendix III). 7.4 Product Complaints and Recalls 7.4.1 Product Complaints - CLIENT is responsible for receiving and initially investigating any PRODUCTS complaints. CLIENT will notify C*P of any problems thought to be due to manufacture, which are found during the distribution of the product. When requested by CLIENT, C*P will promptly perform investigations for these problems. Investigation reports will be forwarded to CLIENT within 30 days. 7.4.2 Product Recall - CLIENT is responsible for instituting a PRODUCTS recall due to any defect considered sufficiently serious. CLIENT will notify C*P of any recall which may be due to the manufacturing of PRODUCTS. C*P will provide a rapid initial response and a full report within ten working days. 7.5 Records Retention 7.5.1 C*P will retain, at a minimum, batch production records for the PRODUCTS and materials for the expiry date of the PRODUCTS plus one year. 7.6 QA Presence in the Manufacturing Facility 7.6.1 C*P will maintain adequate QA presence in the manufacturing facility during the manufacture of the PRODUCTS to ensure compliance with GMPs. 7.6.2 C*P will permit CLIENT presence in the manufacturing facility during the manufacture of the PRODUCTS, if requested by CLIENT. -42- 8 REGULATORY COMPLIANCE --------------------- 8.1 Regulatory Inspections 8.1.1 C*P will immediately inform CLIENT of any regulatory inspections that may involve the PRODUCTS and permit a representative from CLIENT Quality to be present, if required by CLIENT. 8.1.2 C*P will secure CLIENT's agreement prior to making any commitment to a regulatory agency regarding CLIENT's PRODUCTS. 8.1.3 Additionally, C*P will immediately forward any regulatory correspondence on the PRODUCTS to CLIENT. 8.1.4 CLIENT will inform C*P in writing of any regulatory issue that impacts C*P's ability to manufacture the PRODUCTS. 8.2 Regulatory Actions 8.2.1 CLIENT will notify C*P of any regulatory actions on the PRODUCTS that may impact C*P. 8.2.2 C*P is responsible for supporting all batch record investigations associated with regulatory actions. 8.2.3 C*P agrees to supply CLIENT with any manufacturing, testing, or storage data within 48 hours, if requested, as the result of a regulatory inspection, or a potential regulatory exposure such as a recall or significant product complaint. 8.3 Right to Audit 8.3.1 C*P will allow representatives from CLIENT Quality to have access to their manufacturing, warehousing, laboratory premises, and records for audit purposes listed below in 8.3.2 through 8.3.4. CLIENT representatives will be escorted at all times by C*P personnel. 8.3.2 C*P will permit CLIENT Quality to conduct preparatory audits either for initiation of GMP manufacture of the PRODUCTS or for preapproval inspections (PAI). 8.3.3 C*P will permit CLIENT Quality to conduct audits to address significant product quality or safety problems. 8.3.4 C*P will permit CLIENT Quality to perform one standard GMP compliance audit per year. -43- 8.4 Audit Closeout 8.4.1 An exit meeting will be held with representatives from C*P and CLIENT to discuss significant audit observations. 8.4.2 CLIENT will provide a written report of all observations within 30 days to C*P. Within 30 days of the audit report receipt, C*P will provide a written response to all findings that details corrective action to be implemented. C*P will follow up to ensure that all corrective actions are implemented. 9 DISPUTE RESOLUTION ------------------ 9.1 Non-Conformity Dispute 9.1.1 In the event that a dispute arises between C*P and CLIENT in the nonconformity of a batch of the PRODUCTS, the heads of Quality from both companies shall in good faith promptly attempt to reach an agreement. Whatever the outcome, CLIENT Quality retains the absolute right to determine product release status. Financial liability is determined in the Definitive Agreement. 9.2 Test Result Dispute 9.2.1 In the event that a dispute arises between C*P and CLIENT in the testing performed by C*P for the PRODUCTS, the resolution will proceed in stages. The first stage requires direct communication between analysts from both parties to determine that the methods of analysis are the same and are being executed in the same manner at both sites. Second, carefully controlled and split samples should be sent from one site to another in an attempt to reach agreement. Should there be a failure to achieve resolution, analysts from both parties will be required to meet to work through the analysis of a mutually agreeable sample. If these actions fail to achieve resolution, and only after these avenues have been exhausted, a qualified referee laboratory will be used to achieve resolution. This laboratory must be agreeable to both parties prior to use. The results from this referee laboratory will be used as final authority to determine responsibilities, but whatever the outcome, CLIENT retains the right to determine product release status. Financial liability is determined in the Definitive Agreement. -44- 10. CHANGE MANAGEMENT ----------------- 10.1 Controlled Documentation 10.1.1 All manufacturing, testing, and storage operations performed by C*P for the PRODUCTS will have CLIENT Quality review and written approval. 10.1.2 Any significant changes as described in CLIENT's Change Control Procedure/Form for Contracted Suppliers or to this agreement will be mutually agreed upon prior to implementation. All required regulatory approvals will be obtained prior to implementation. 10.2 Change Control 10.2.1 Changes to the controlled documents or to validated equipment and systems specific to the PRODUCTS must have CLIENT Quality written approval, prior to implementation. 10.2.2 Administrative changes to the controlled documents (e.g., typo corrections, formatting) do not require CLIENT Quality written approval prior to implementation, but these changes must be submitted to CLIENT Quality in a timely way for review and approval. 11. PRODUCT AND PROCESS VALIDATION ------------------------------ 11.1 Process - C*P is responsible for ensuring that the manufacturing process is validated. The validation should ensure that the process is capable of consistently achieving the PRODUCTS acceptance specification. 11.2 Cleaning Validation - C*P is responsible for ensuring that adequate cleaning is carried out between batches of different products to prevent contamination. CLIENT will provide information (i.e. LD50, toxicity, solubility, batch size, fill volume, product min dose/70Kg patient) to establish cleaning limits. The cleaning procedure and analytical methodology will be reviewed before the first product batches are made. 11.3 Equipment, Computer, Facility, and Utilities Qualification - C*P is responsible for all equipment, computer, facility, and utility qualification activities associated with the PRODUCTS. 11.4 Laboratory Qualification - C*P is responsible for ensuring that all laboratories are compliance with cGMP's and are qualified in all of the methodology associated with the PRODUCTS. If analytical work is performed at C*P then the client will also provide any existing analytical documentation to assist in methods transfer or methods validation. In addition, if analytical work is not performed at the Greenville site, C*P may elect to perform an audit on vendors to be used for analytical testing. -45- 12. ANNUAL PRODUCT REVIEW, ANNUAL REPORT AND DRUG LISTING ----------------------------------------------------- 12.1 Annual Product Review 12.1.1 C*P will perform an Annual Product Review for the PRODUCTS and will issue a report to CLIENT. This report will cover all manufacturing, testing, and storage activities performed by C*P. It will be a review of stability data, investigations, and any changes at C*P in the manufacturing, testing, storage or validation of the PRODUCTS in the previous calendar year and a summary of lots made, released, and rejected. Also, control charting or trend analysis of key product parameters will be performed. Any abnormalities will be explained in the annual review. 12.1.2 Client is responsible for preparing any Annual Report as required by applicable regulations, including 21 CFR 314.7(g)(3), 314.81(b)(2), and/or 601.12(d), (f)(3). At least 90 calendar days before the Annual Report due date, CLIENT shall request in writing from C*P the chemistry, manufacturing, and controls data required for submission of the Annual Report. C*P will provide the requested information to CLIENT within 30 days. 12.2 Annual Manufacturing Process Change Report 12.2.1 CLIENT is responsible for preparing the Annual Manufacturing Process Change Report as required by 21 CFR 601.12(d). At least 90 calendar days before the Annual Report due date, CLIENT shall request in writing from C*P the chemistry, manufacturing, and controls data required for submission of the Annual Report. C*P will provide the requested information to CLIENT within 30 days. 12.3 Drug Listing 12.3.1 C*P is responsible for drug listing as the manufacturer of the PRODUCTS, while CLIENT is responsible for drug listing as the distributor of the PRODUCTS. CLIENT will provide C*P with all required information needed by them for their listing. CLIENT will notify C*P of the scheduled product launch. -46- APPENDIX I The PRODUCTS Provigil 100 mg, bulk tablets Provigil 100 mg, 30 count blister Provigil 100 mg, 100 count bottle Provigil 200 mg, bulk tablets Provigil 200 mg, 6 count bottle Carton x 2 bottles Provigil 200 mg x 100 count -47-
APPENDIX II List of Quality Contacts (name, phone, fax, e-mail) - ------------------------------------------------------------------------------------- ISSUE CLIENT C*P - ------------------------------------------------------------------------------------- Product Release Timothy Sheehan Jason Williams Ph: (610) 738-6574 Ph: (252) 707-2182 Fax: (610) 738-6642 Fax: (252) 707-7306 tsheehan@cephalon.com jwilliams@catalytica-pharm.com --------------------- - ------------------------------------------------------------------------------------- QC Testing Matthew Hulbert Ph: (610) 738-6513 Fax: (610) 738-6315 mhulbert@cephalon.com --------------------- - ------------------------------------------------------------------------------------- Investigations Timothy Sheehan Kathleen Bussell Ph: (610) 738-6574 Ph: (252) 707-2128 Fax: (610) 738-6642 Fax: (252) 707-2207 tsheehan@cephalon.com kbussell@catalytica-pharm.com --------------------- - ------------------------------------------------------------------------------------- Stability Joseph Johnson Kirit Amin Ph: (610) 738-6462 Ph: (252) 707-2372 Fax: (610) 738-6640 Fax: (252) 707-7027 jjohnson@cephalon.com kamin@catalytica-pharm.com --------------------- - ------------------------------------------------------------------------------------- Validation Robert Urban Ph: (610) 738-6119 Fax: (610) 738-6315 rurban@cephalon.com ------------------- - ------------------------------------------------------------------------------------- Compliance Audits Timothy Sheehan Kathleen Bussell Ph: (610) 738-6574 Ph: (252) 707-2128 Fax: (610) 738-6642 Fax: (252) 707-2207 tsheehan@cephalon.com kbussell@catalytica-pharm.com --------------------- - ------------------------------------------------------------------------------------- Product Complaints Timothy Sheehan Kathleen Bussell Ph: (610) 738-6574 Ph: (252) 707-2128 Fax: (610) 738-6642 Fax: (252) 707-2207 tsheehan@cephalon.com kbussell@catalytica-pharm.com --------------------- - ------------------------------------------------------------------------------------- Change Management Robert Urban Maduhkar Mehta Ph: (610) 738-6119 Ph: (252) 707-2004 Fax: (610) 738-6315 Fax: (252) 707-2134 rurban@cephalon.com mmehta@catalytica-pharm.com ------------------- - -------------------------------------------------------------------------------------
-48- APPENDIX III Release Documentation The Batch/Lot Release Document Package will include a Certificate of Analysis and a Certificate of Compliance. A Certificate of Analysis (CofA) - ------------------------- This document will include the name of the PRODUCT, the batch number and the date of manufacture. The COA will list the In-Process QC tests performed by C*P and actual test results. The COA will also list the product release QC tests performed by C*P and actual test results. A Certificate of Compliance (CofC) - --------------------------- This document will attest to the fact that the batch of PRODUCTS was made in accordance with all applicable regulations, product licenses, and company policies. This annulment will include the batch quantity approved, the batch yield, and the expiration date. It will also include a listing of all manufacturing variances and/or incidents for the batch that have been adjudicated -49- Schedule D ---------- Product Validation and Stability Testing Procedures --------------------------------------------------- The parties have agreed upon all those applicable specifications for Product validation and stability testing as set forth in the following documents. The parties shall agree upon any modifications to any such specifications. [**] -50- Schedule E ---------- Tolling Fees ------------ CEPHALON shall pay CATALYTICA the following amounts in consideration of the formulation and packaging services rendered hereunder: [**] Beginning on the first anniversary of the effective date of this Agreement and on each anniversary thereafter, the above tolling fees shall be increased by the percentage change from the immediately preceding anniversary date in the Producer Price Index (PPI), Pharmaceutical Preparations, Ethical (Prescription), series code PCU-2834 #1, as published by the Bureau of Labor Statistics of the U.S. Department of Labor for the region in which the production facility is located, or comparable successor index. The tolling fees shall be renegotiated and agreed upon by the parties prior to any renewal term. -51- Schedule F ---------- Minimum Quantities ------------------ The minimum annual quantities to be purchased by CEPHALON and capacity to be reserved by CATALYTICA, are as follows for the initial term of this agreement: [**] Pursuant to Section 3.1, if the actual annual quantity exceeds the minimum annual quantity in any year by twenty-five percent (25%) or less, this excess will reduce the minimum annual quantity in the following year. -52- Schedule G ---------- Equipment --------- [**] -53- EX-10.16B 4 dex1016b.txt AMEND. #1 TO TOLL MFG. AND PACKAGING AGREEMENT Exhibit 10.16(b) July 2, 2001 Ms. Trudy Briley DSM Catalytica Pharmaceuticals P.O. Box 1887 Greenville, NC 27835-1887 Re: Amendment No. 1 to Toll Manufacturing and Packaging Agreement ------------------------------------------------------------- Dear Ms. Briley: This letter is to confirm our understanding concerning an amendment to be made with respect to the Toll Manufacturing and Packaging Agreement dated as of August 24, 1999 (the "Agreement"), between Cephalon, Inc. ("Cephalon") and DSM Catalytica Pharmaceuticals, Inc. ("Catalytica"). All terms not otherwise defined herein are used as defined in the Agreement. The purpose of this Amendment is to increase the minimum annual quantities of Product to be purchased by Cephalon and to increase the manufacturing capacity reserved by Catalytica for the remainder of the Initial Term of the Agreement. The Agreement is hereby amended as follows: 1. Existing Schedule F of the Agreement relating to Minimum Quantities shall be deleted in its entirety and replaced with the attached revised Schedule F. 2. Except as amended hereby, the Agreement remains in full force and effect. If the foregoing accurately reflects your understanding as to these matters, please indicate your agreement in the space provided below, and return one fully-executed original to me. Very truly yours, \s\ Robert Urban Vice President, Technical Operations Acknowledged and agreed to by: DSM CATALYTICA PHARMACEUTICALS, INC. By: \s\ Michael H. Thomas -------------------------------- Name: Michael H. Thomas Title: President & CEO **Certain portions of this document have been omitted based upon a request for confidential treatment that has been filed with the Commission. The omitted portions have been filed separately with the Commission.0 Schedule F ---------- Minimum Quantities ------------------ The minimum annual quantities to be purchased by CEPHALON and capacity to be reserved by CATALYTICA, are as follows for the remainder of the Initial Term of this Agreement: [**] Pursuant to Section 3.1, if the actual annual quantity exceeds the minimum annual quantity in any year by twenty-five percent (25%) or less, this excess will reduce the minimum annual quantity in the following year A-1 EX-10.16(C) 5 dex1016c.txt AMEND. #2 TO TOLL MFG. AND PACKAGING AGREEMENT Exhibit 10.16(c) Confidential Amendment No. 2 to Toll Manufacturing and Packaging Agreement THIS Amendment No. 2 to Toll Manufacturing and Packaging Agreement is made as of this 9th day of October, 2001, by and between Cephalon, Inc. ("Cephalon") and Catalytica Pharmaceuticals, Inc. ("Catalytica"). WHEREAS, Cephalon and Catalytica have previously executed a Toll Manufacturing and Packaging Agreement dated as of August 24, 1999, as amended by Amendment No. 1 thereto dated July 3, 2001 (collectively, the "Agreement"); and WHEREAS, the parties desire to establish special procedures to apply to the formulation and packaging of [**] commercial lots of Product (the "Launch Lots"), which provisions differ from provisions in the Agreement. NOW THEREFORE, for and in consideration of the covenants exchanged between the parties, including those provisions intended as inducements for Catalytica to produce the Launch Lots, the parties hereto agree as follows: 1. The parties recognize that the Agreement contains the general provisions for the supply of Product; however, the parties hereto expressly recognize and agree that this Amendment No. 2 expressly supercedes any provisions of the Agreement which directly or indirectly conflict with the provisions of this Amendment No. 2, including by way of example and not limitation Section 6.2, Section 8.1, Section 8.3, Section 9.1, Section 9.3, Section 11.1, Section 11.2, Section 11.3, Section 14.3, and Section 20.1. 2. With regard to the production of the Launch Lots, the following shall apply: a. Cephalon shall provide free of charge and deliver to Catalytica at Catalytica's Greenville facility and shall retain title to the Active Drug Substance and Compressil at all times before, during and after the production of the Launch Lots. b. Cephalon specifically recognizes and confirms that it is seeking production the Launch Lots, and is agreeing to pay for such Launch Lots, notwithstanding any regulatory delay or non-approval (including by way of example, actions or lack of action by the FDA) associated with Product as or to be manufactured at Catalytica's Greenville, North Carolina facility. No Product shall be shipped from the facility until all applicable regulatory approvals have been obtained. 3. On or before October 10, 2001 Cephalon agrees to pay a fifty percent (50%) down payment of estimated costs [**] for the Production of the Launch Lots (i.e. [**] batches at an aggregate estimated down payment of [**]. The remainder of the payment for the Launch Lots shall be due within thirty (30) days of Catalytica's delivery of the applicable invoice and the certificate of analysis with variances/incidents, if any, for such Launch Lots. 4. Catalytica shall provide Cephalon with a certificate of analysis with variances/ incidents, if any, as provided in Section 9.1 of the Agreement, and Cephalon shall have the right to inspect the Product (at Catalytica's facility and at **Certain portions of this document have been omitted based upon a request for confidential treatment that has been filed with the Commission. The omitted portions have been filed separately with the Commission. Confidential Cephalon's cost and expense) as outlined in Section 9.2 of the Agreement. If Cephalon properly rejects the Product within thirty (30) days of Catalytica's delivery of certificate of analysis with variances/incidents, if any, for the Launch Lots, subject to agreement as to the rightfulness of such rejection (or in the absence thereof the opinion of a mutually acceptable, third party laboratory) Catalytica shall refund to Cephalon all payments made hereunder as to such rejected Product and shall reimburse Cephalon for the acquisition cost of the applicable portion of the lost Active Ingredients. 5. The parties further recognize that Product may need to be stored in a special area or in special containers following production. The parties shall separately and in good faith negotiate the charge or charges for such storage as well as any time or space limitations that may apply thereto. IN WITNESS WHEREOF, the undersigned parties have caused this Amendment No. 2 to be executed as of the date first above written and further confirm by their execution the power of the officials so shown to bind each such party. Cephalon, Inc. Catalytica Pharmaceuticals, Inc. \s\ Robert Urban \s\ Michel Deinum - ------------------------- ------------------------- Robert Urban Michel Deinum Senior Director, Technical Operations Vice President and Business Manager, PPO Date: October 9, 2001 Date: October 12, 2001 EX-10.17(A) 6 dex1017a.txt RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT Exhibit 10.17(a) RESEARCH, DEVELOPMENT AND LICENSE AGREEMENT This Research, Development and License Agreement (the "Agreement") is made on October 31, 2001 by and between Cephalon, Inc., a Delaware corporation with its principal place of business located at 145 Brandywine Parkway, West Chester, Pennsylvania 19380-4245, U.S.A. ("Cephalon") and Sanofi-Synthelabo Inc., a Delaware corporation with its principal place of business located at 90 Park Avenue, New York, New York 10016 U.S.A. ("Sanofi-Synthelabo"). WITNESSETH: WHEREAS, Cephalon has developed a chemical platform of fused pyrrolocarbazole compounds ("FP" or "FPs") and pyrazolone compounds which display activity as inhibitors of certain protein kinases and that are believed to have potential efficacy in treating human diseases, including cancer; WHEREAS, Cephalon has identified and developed a compound from its library of FPs, which shall hereinafter be known as CEP-7055, as a lead development candidate; WHEREAS, Sanofi-Synthelabo has established expertise in the discovery, development, manufacturing and commercialization of human therapeutic agents for the treatment of human diseases; WHEREAS, Cephalon and Sanofi-Synthelabo desire to enter into a research and development collaboration to identify, develop and commercialize CEP-7055 and one or more of its Backup Compounds in the Field; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby affirmed, the parties hereby agree as follows. Article 1. Definitions. Terms that are capitalized as defined terms in this Agreement shall have the meanings set forth below, and defined terms may be used in their singular and plural sense: 1.1 "Affiliate" shall mean any individual or entity directly or indirectly controlling, controlled by or under common control with, a Party to this Agreement; provided, however, that with respect to Sanofi-Synthelabo, the definition of Affiliate shall exclude L'Oreal and TotalFinaElf and any person not controlled by Sanofi-Synthelabo that would be an Affiliate of Sanofi-Synthelabo solely by reason of it being controlled by L'Oreal or TotalFinaElf. The term control shall mean (a) the direct or indirect ownership of fifty percent (50%) or more of the outstanding voting securities of an entity; (b) the right to control the policy decisions of a person or entity; or (c) the right to manage or veto any material decision relating to the management or policies of an entity through ownership of voting securities, by contract, or otherwise. 1.2 Approval" shall mean the receipt of all necessary approvals, including approvals as to labeling, by the FDA, EMEA or applicable regulatory authorities in any Major Market to immediately promote, market and sell a human pharmaceutical together with governmental **Certain portions of this document have been omitted based upon a request for confidential treatment that has been filed with the Commission. The omitted portions have been filed separately with the Commission. pricing or reimbursement approval, when applicable. 1.3 "At Cost" shall mean all direct expenses incurred by a Party to this Agreement who engages a toll manufacturer or otherwise incurs costs due to the payment of an invoice submitted by a third party in connection with services rendered in connection with this Agreement; "At Cost" with respect to such services shall mean the amount(s) set forth on said invoice(s) and paid by the applicable Party, provided that the third party has been engaged on competitive terms. 1.4 " Audited Cost of Goods" shall mean the independently audited actual cost of producing, processing and packaging a Development or Licensed Product, including related quality assurance and quality control activities required by applicable law, which actual cost is comprised of cost of goods as determined in accordance with US GAAP, and shall include direct labor, direct material and the allocable portion of the manufacturing overhead directly attributable to such Cephalon Compound or Licensed Product. 1.5 "Backup Compounds" shall mean each Compound that fulfills the same criteria set forth by the Joint Research Committee that enable a Compound to qualify as a Development Compound whether-or-not such Backup Compounds are actually selected by the JRC for development in the Field. The precise number of Backup Compounds, as well as, their respective selection criteria, shall be determined by the JRC. It is the intention of the Parties that such Backup Compounds initially shall be held in reserve and subsequently may be designated and developed as Development Compounds. 1.6 "Biological Materials" shall mean without limitation, biological tissues, fluids, cells lines, antibodies, enzymes, and peptide sequences corresponding to a receptor. 1.7 "CEP-7055" shall mean that certain Compound having the chemical formula set forth on Exhibit A and designated herein as the first Development Compound. 1.8 "Cephalon Compounds" shall mean collectively (i) CEP-7055 and (ii) any future Development Compound(s) and Backup Compounds other than Joint Compounds in each instance. 1.9 "Cephalon Know-How" shall mean Know-How that is proprietary, controlled by or licensed (with the right to sublicense) to Cephalon other than Joint Know-How. 1.10 "Cephalon Licensed Products" shall mean pharmaceutical products that contain Cephalon Compounds, or any salt, ester, metabolite or pro-drug thereof for use in the Field. 1.11 "Cephalon Patent Rights" shall mean the patents listed on Exhibit B hereto together with any provisionals, divisionals, continuations, continuations-in-part, reissues, reexaminations, or extensions derived therefrom, as well as all foreign patent applications, granted patents and all counterparts thereof including, but not limited to, substitutions, confirmations, registrations, revalidations, supplemental protection certificates, administrative protection certificates (or other governmental actions) which provide exclusive rights to the patent holders in the patented subject matter. Exhibit B may be updated every six (6) months 2 during the Research Program and the Development Program upon Sanofi-Synthelabo's written request. 1.12 "Cephalon Technology" shall mean Technology that is proprietary to, controlled by or licensed (with the right to sublicense) to Cephalon other than Joint Technology. For the avoidance of doubt, with respect to Cephalon Compounds, Cephalon Technology includes any Cephalon Patent Rights and Cephalon Know-How including but not limited to the synthesis, compositions, intermediates and uses of CEP-7055 and Backup Compounds, and any active metabolites thereof, in the Field. 1.13 "Committee" shall mean and may include, as the context requires, one or more of the following groups: (a) "Joint Development Committee" or "JDC" shall mean that group of senior development representatives collectively designated to serve in such capacity by each of Cephalon and Sanofi-Synthelabo; and (b) "Joint Research Committee" or "JRC" shall mean that group of senior research representatives collectively designated to serve in such capacity by each of Cephalon and Sanofi-Synthelabo. 1.14 "Compound" shall mean (a) (i) FPs and pyrazolone compounds that inhibit the biological activity of the Targets with a potency criteria (an IC50 against isolated enzyme) established by the JRC; (ii) chemical entities other than FPs and pyrazolone compounds that are selected by mutual agreement of the Parties and that inhibit the biological activity of the Target(s) with a potency criteria (an IC50 against isolated enzyme) established by the JRC. For purposes of this subsection, a FP, pyrazolone or other chemical entity shall be deemed to be a Compound only insofar as it has been conceived prior to the end of the Research Program. Any such FPs, pyrazolones or other chemical entities that inhibit the biological activity of a Target and fulfill potency criteria established by the JRC, but fail to meet the selectivity requirements established by the JRC or would otherwise be excluded as "Compounds" under the terms of Subsection 1.14(b) below, nevertheless may be designated by the JRC to be "Backup Compounds" so long as such chemical entities are not covered by the terms of any then-existing third party obligations of either Party; and (b) notwithstanding the foregoing, "Compounds" shall not include any chemical entities (whether or not FPs or pyrazolones) which (i) are subject to any outstanding third party obligations of Cephalon, as set forth on Exhibit C hereto; or (ii) inhibit the biological activity, with an IC50 ** 50 nM, of the enzymes and receptors listed in the table of restricted enzymes and receptors in Exhibit H, which Exhibit may be updated by Cephalon prior to any renewals or extensions of the Initial Research Term. Any such chemical entities that are deemed to fall outside the definition of Compounds as a result of the application of this Section 1.14(b) shall remain the sole and exclusive property of Cephalon, and will not be subject to the terms and conditions hereof. ** = Less than 3 1.15 "Competing Product" shall mean any product that comprises the same active pharmaceutical ingredient or chemical entities as a Cephalon Licensed Product, but which is not sold under a trademark selected for the Cephalon Licensed Product pursuant to this Agreement. 1.16 "Development Compounds" shall mean CEP-7055 and any Backup Compounds that meet the criteria established by the JRC, and are selected by the JRC, to be developed for use in the Field, unless and until such Backup Compounds are otherwise excluded from further development by the JDC in accordance with the terms of Section 3.3 below. 1.17 "Development Program" shall mean a program including, but not limited to, preclinical, clinical, manufacturing (including pilot batch and scale-up manufacturing) and commercial development of a Development Compound in the Field conducted by the Parties pursuant to this Agreement primarily with the intent, and for the purpose, of generating data for submission to the FDA and the EMEA in support of an application for governmental approval necessary to permit the commercialization of a Licensed Product. The initial Development Program for CEP-7055 is more particularly described on Exhibit D hereto. 1.18 "Effective Date" shall mean October 1, 2001. 1.19 "EMEA" shall mean the European Medicines Evaluation Agency, or any successor thereto. 1.20 "Exclusive Territory" shall mean the world, excluding North America (USA, Canada and Mexico and their respective territories and possessions) and Japan (and its respective territories and possessions). 1.21 "Field" shall mean, except for the limitations below, all therapeutic, diagnostic and prophylactic uses of Compounds that inhibit angiogenesis; the definition of Field includes, without limitation, all pharmaceutical uses of antiangiogenic Compounds but specifically excludes uses of Compounds in nervous system and ophthalmic disorders other than for malignancies. For the avoidance of doubt, uses of Compounds in cardiovascular and thrombotic strokes are in the Field. 1.22 "FDA" shall mean the United States Food and Drug Administration, or any successor thereto. 1.23 "FTE" shall mean a full time technical person employed by either Party dedicated to the Research Program or the Development Program, or in the case of less than a full-time dedicated technical person, a full time, equivalent scientific person year, based upon a total of one thousand eight hundred twenty (1,820) hours per year of scientific work on or directly related to the Research Program or the Development Program. Scientific work on or directly related to the Research Program or the Development Program can include, but is not limited to, experimental laboratory work, recording and writing up results, reviewing literature and references, holding scientific discussions, attending selected and appropriate seminars and symposia, managing and leading scientific staff, and carrying out management duties related to the Research Program and the Development Program. Each FTE initially shall be 4 chargeable at a rate per annum of [**]; such FTE rate shall be increased or decreased on December 31 of each year during the Initial Research Term (or any extensions thereof) by the percentage increase in the U.S. Consumer Price Index for all Urban Consumers (U.S. City Average) for those payments made by either Party to the other during the following calendar year. 1.24 "Initial Research Term" shall mean the initial two (2) year period of the Research Program, commencing upon the Effective Date of this Agreement, and one extension thereof at Sanofi-Synthelabo's option pursuant to Section 2.1 (b). 1.24 "Joint Biological Materials" shall mean Biological Materials which are developed by both of the Parties jointly during the Research Program or the Development Program. 1.25 "Joint Know-How" shall mean all Know-How that is developed by both Parties jointly during the implementation of (i) the Research Program; (ii) Development Program and (iii) commercialization of a Licensed Product in the Joint Territory. 1.26 "Joint Compounds" shall mean Compounds that have been conceived by both Parties jointly during the conduct of the Research Program. 1.27 "Joint Patent Rights" shall mean all Patent Rights to inventions related to the Development Compounds and/or Licensed Products that are conceived by both Parties jointly during the implementation of (i) Research Program; (ii) Development Program and (iii) commercialization of a Licensed Product in the Joint Territory. 1.28 "Joint Licensed Products" shall mean all pharmaceutical products that contain Joint Compounds for uses in the Field. 1.29 "Joint Technology" shall mean Technology that is proprietary to, controlled by or licensed (with the right to sublicense) to both Parties jointly including Joint Biological Materials, Joint Compounds, Joint Know-How, Joint Patent Rights or New Inventions that are deemed to be Joint Technology and owned by both Parties jointly in accordance with Section 14.2. 1.30 "Joint Management Team" or "JMT" shall mean the group of senior executives nominated pursuant to Section 3.4. 1.31 "Joint Territory" shall mean North America (USA, Canada and Mexico, and their respective territories and possessions). 1.32 "Joint Venture" or "JV" shall mean one or more sales and marketing collaboration or entities to be created by the Parties, or their Affiliates, to jointly market, promote, distribute and sell Licensed Products in the Joint Territory as more particularly described in Section 3.6. 1.33 "Know-How" shall mean all present and future know-how, trade secrets, inventions, discoveries, technical information (including preclinical data, databases and clinical results), 5 formulae, processes, expert opinions, data, and other confidential and proprietary information, either not patentable or which may be patentable but is not patented, now or hereinafter conceived, owned, controlled or licensed (with the right to assign or sublicense) by either Party, related to the Biological Materials, Cephalon Compounds, Joint Compounds, New Inventions or Licensed Products. 1.34 "Licensed Products" shall mean either or both of any Cephalon Licensed Product and Joint Licensed Product. 1.35 "L'Oreal" shall mean L'Oreal S.A., a societe anonyme organized and existing under the laws of the French Republic. 1.36 "Loss of Exclusivity" means the loss of exclusivity in any country in either the Exclusive Territory or Joint Territory for any Cephalon Licensed Product upon the occurrence of both of the two following conditions: (i) a Cephalon Licensed Product shall have lost its marketing exclusivity (whether by virtue of compulsory licenses under, or expiration, invalidity or unenforceability of, the patents covering such Cephalon Licensed Product, loss or expiration of any exclusivity conferred de facto or de jure by any statutory marketing or data exclusivity or any other cause), and (ii) one or more Competing Products shall have been legally marketed in such country by one or more third party. 1.37 "Market Penetration" means, with respect to one or more Competing Products in any given country in either the Exclusive or Joint Territory, the number of units of such Competing Products sold in such country, expressed as a percentage of the sum of (i) the number of units of the Cephalon Licensed Product with respect to which such products constitute Competing Products sold in such country and (ii) the number of units of such Competing Products sold in such country, in each case over a period of six (6) consecutive months, as reported by the International Marketing Survey. 1.38 "Major Markets" shall mean each of [**]. 1.39 "Marketing Authorization Application" or "MAA" shall mean an application seeking the approval of the competent regulatory authority in any country in the Exclusive Territory (including, without limitation, the EMEA) to enable Sanofi-Synthelabo (or an Affiliate, sublicensee or assignee thereof) to market and sell a Licensed Product. 1.40 "New Inventions" shall mean any and all inventions, discoveries and improvements that may be conceived or made by either Party while engaged in the performance of the Research Program, Development Program, Sole Development and, in the Joint Territory, the commercialization of a Licensed Product, whether patentable or not, as such inventions, discoveries and improvements are related only to Cephalon Compounds, Joint Compounds, Targets and to compositions, formulations, uses, methods of formulating, processes, or methods of administration of such Cephalon Compounds, Joint Compounds and/or Licensed Products containing such Compounds. 1.41 "Net Sales" shall mean (a) the gross amount invoiced in arms-length transactions for the 6 sale of Licensed Products in the Exclusive Territory by Sanofi-Synthelabo (or by its Affiliates, sublicensees or assignees), to independent third parties in the Territory, or (b) the gross amount invoiced in arms-length transactions from the sale of Licensed Products in the Joint Territory by each JV, less the sum of the following items: (i) Import, export, excise and sales taxes and custom duties paid or allowed by the selling party and any other governmental charges imposed upon the production, importation, use or sale of Licensed Products by Sanofi-Synthelabo and/or its Affiliates, or a JV to the extent included in the gross invoiced price; (ii) Credit for returns, refunds, rebates and allowances, or trades to customers for returned or recalled Licensed Product; (iii) Trade, quantity and cash discounts actually allowed; (iv) Transportation, freight and insurance allowances, if separately indentified in such invoice; and (v) Rebates actually granted to wholesalers, administrative fees to managed care, group purchasing and other similar institutions, chargebacks and retroactive price adjustments and any other similar allowances which effectively reduce the net selling price. Gross and Net Sales shall be calculated according to US GAAP. Where (i) Licensed Products are sold as one of a number of items without a separate price; or (ii) the consideration for the Licensed Products shall include any non-cash element; or (iii) the Licensed Products shall be transferred in any manner other than an invoiced sale, except for Licensed Products transferred as samples or any other similar transfer for promotional purposes usually made in the relevant part of the Joint Territory or the Exclusive Territory, the gross sales applicable to any such transaction shall be calculated using the selling party's average gross sales price for the applicable quantity of Licensed Products in the applicable country during the calendar quarter and in the country in which the transaction occurred. If there are no independent gross sales of Products in the country at that time, than Sanofi-Synthelabo and Cephalon shall mutually agree on a surrogate measure to be used in lieu thereof. 1.42 "New Drug Application" or "NDA" shall mean an application for the approval of a competent regulatory authority in any country in the Joint Territory (including without limitation, the FDA) to enable each JV (or an Affiliate or assignee thereof, if applicable) to market and sell a Licensed Products in the Joint Territory. 1.43 "Party" or "Parties" shall mean Cephalon and/or Sanofi-Synthelabo, as the case may be. 1.44 "Patent Rights" shall mean all present and future patent applications and issued patents, owned, controlled or licensed (with the right to assign or sublicense) by a Party or Parties to this Agreement (or an Affiliate thereof) covering the assays, Targets and corresponding 7 sequences and any use thereof, processes, composition, manufacture, sale or use of any Compound, including but not limited to any provisionals, divisionals, continuations, continuations-in-part, reissues, reexaminations, or extensions derived therefrom, as well as all foreign patent applications, granted patents and all counterparts thereof including, but not limited to, substitutions, confirmations, registrations, revalidations, supplemental protection certificates, administrative protection certificates (or other governmental actions) which provide exclusive rights to the patent holders in the patented subject matter. 1.45 "Phase 1 Clinical Trial" shall mean the first introduction into humans of a Development Compound including small scale clinical studies conducted in normal volunteers or patients to obtain information on safety, tolerability, pharmacological activity or pharmacokinetics as more fully defined in 21 C.F.R. 312.21(a). 1.46 "Phase 2 Clinical Trial" shall mean a well-controlled clinical trial of a Development Compound, including clinical studies conducted in patients and designed to indicate clinical efficacy for one or more indications and its safety, as well as to obtain an indication of the dosage regimen required, as more fully defined in 21 C.F.R. 312.21(b). 1.47 "Phase 3 Clinical Trial" shall mean large-scale clinical studies conducted in a sufficient number of patients to establish the efficacy of a Development Compound for one or more indications and its safety, as more fully defined in 21 C.F.R. 312.21(c). 1.48 "Research Program" shall mean the program of discovery research that will focus on the selection and validation of Targets and on the discovery and evaluation of Compounds in the Field, aimed at identifying and selecting "Backup Compounds", all to be conducted by the Parties under the terms of this Agreement as more fully described in Exhibit E and which must be reviewed, revised as needed and approved in writing semi-annually by JRC. Such Exhibit E shall allocate the work thereunder between the Parties. 1.49 "Sanofi-Synthelabo Technology" shall mean Technology that is proprietary to, controlled by or licensed (with the right to sublicense) to Sanofi-Synthelabo other than Joint Technology. 1.50 "Target" or "Targets" shall mean one or more known, or to be discovered during the term of the Research Program members of; (i) the protein tyrosine kinase receptor families which recognize proteins of the vascular endothelial growth factor (VEGF) family as a preferred ligand and (ii) the tyrosine kinases with immunoglobulin and epidermal growth factor homology domains (Tie-1 and Tie-2) or another member of this family of receptors which may be discovered during the term of the Research Program. Targets will be defined in terms of their respective protein or genetic sequence(s), molecular structure(s), biochemical activity, binding of ligand(s) or interaction with other components of the cell and appended to Exhibit E as part of the Research Program. 1.51 "Technology" shall mean, collectively, Patent Rights and Know-How. For purposes of clarification, the term Technology expressly excludes any Patent Rights and Know-How that either Party may license from a third party after the Effective Date of this Agreement, unless (i) such Party is permitted to grant a sublicense or other rights thereunder to the other Party; 8 and (ii) the sublicensing Party shall have executed and delivered a sublicense or other agreement in a form reasonably required in connection therewith. 1.52 "TotalFinaElf" shall mean TotalFinaElf S.A., a societe anonyme organized and existing under the laws of the French Republic. 1.53 "US GAAP" shall mean generally accepted accounting principles in the United States. 1.54 "Valid Claim" shall mean a claim of an issued patent that has not lapsed or become abandoned or been declared invalid or unenforceable by a court or agency of competent jurisdiction from which no appeal can be or is taken. 1.55 The following additional defined terms shall have the meanings set forth in the Sections of this Agreement listed below: Defined Term Section Where Defined ------------- --------------------- Abandoning Party 15.3 Agreement Preamble Breach-related Product 17.5(a) Bulk Licensed Product 6.4 Buy-in Rights 11.3(a) CEO 21.10(b) Cephalon Preamble Cephalon Indemnitees 20.2 Closing 21.11(b) Commercially Reasonable Efforts 9.1 Confidential Information 18.1 Controlling Party Exhibit F Deadlock Closing 17.10(b) Deadlock 3.5(b) Development Royalty 6.5(a)(ii) Discovery Royalty 6.2(a) FP or FPs Preamble Japan Rights 4.6 Marketing Royalty 11.4(a) Party #1 5.4(b) Party #2 5.4(b) Publication 21.5(a) Purchase Price 17.10(a) Providing Party 18.1 Receiving Party 18.1 Retaining Party 15.3 Right 17.10(a) Sanofi-Synthelabo Preamble 9 Sanofi-Synthelabo Indemnitees 20.1 SSBO Territory Rights 21.11(a) SSBO Purchase Price 21.11(b) Sole Development 11.1(a) Terminating Party 17.9 Transfer Price 6.4 Article 2. Research and Development Programs 2.1 (a) Research Activities. The Parties agree to conduct a joint Research Program during the Initial Research Term as described in Exhibit E to discover and synthesize Compounds that inhibit the Target(s) and may have efficacy in the Field. Under the Research Program the Parties shall evaluate Compounds as potential modulators of Targets in the Field. The Research Program also may include studies of other Compounds in treating diseases in the Field, concentrating on, but without being limited to, studies relating to the potential efficacy of Backup Compounds in oncology. (b) Extension of the Research Program. At the option of Sanofi-Synthelabo, the Research Program shall be extended for an additional term of twelve (12) months beyond the date of expiry of the Initial Research Term which option must be exercised by written notice to Cephalon at least six (6) months before the expiry of the Initial Research Term. The level of financial support to be provided by the Parties during the extension shall be mutually agreed upon by the Parties, provided, however, (i) Cephalon shall be committed to provide no less than [**] at the rate specified under Section 1.23, (ii) the Parties shall share the cost of such extension equally; and (iii) the costs of such extension shall include the employment by Cephalon of not less than [**] in direct support of the Research Program. 2.2 (a) Development Activities. The Parties agree jointly to conduct a Development Program for the use of CEP-7055 to treat diseases in the Field as described in Exhibit D, and of other Development Compounds as may be selected by the JDC. The Development Program will have the objective of utilizing the preclinical and clinical trial data developed by or on behalf of Cephalon and Sanofi-Synthelabo for use in regulatory filings and approvals in the Joint Territory and the Exclusive Territory. The Development Program shall be designed to be sufficient to achieve approval from the FDA and the EMEA. The Development Program also may include studies relating to the potential efficacy of CEP-7055, in various non-clinical studies relating to the potential activity in various oncology models. The JDC, with the advice of the JMT, will coordinate the design, primary or secondary end points, treatment regimens, dosing paradigms, and indications in proof-of principle and Phase 3 Clinical Trials to maximize the efficiencies of such studies. (b) Term of the Development Program. The Development Program shall continue for so long as the Parties agree, through the JMT, to pursue marketing approval for not less than one Development Compound in either the Joint Territory or the Exclusive Territory pursuant to the terms of this Agreement. 10 2.3 Cooperation. The Parties agree to cooperate with each other in good faith to ensure the success of the Research Program and Development Program. The Parties agree to use commercially reasonable diligence to perform their obligations pursuant to this Agreement. Nothing in this Agreement shall give either Party the authority to control or direct the activities of any employees or agents of the other Party. 2.4 Use of Research and Development Materials. The Parties agree that all compositions, Biological Materials, animals and humans used in the Research Program and the Development Program shall be used in compliance with all applicable laws and regulations. 2.5 Transfer of Material. Prior to the transfer of any compositions, animals and Biological Materials between the Parties, the Parties agree to negotiate and execute a material transfer agreement within thirty (30) business days after execution of this Agreement and shall incorporate by reference and append as Exhibit I hereto. Such materials transfer agreement shall supercede that certain Sample Supply Agreement, dated May 3, 2001, between Cephalon and Sanofi-Synthelabo's parent company, as amended by Letter, dated August 23/24, 2001 or the Parties shall amend (or cause their Affiliates to amend) to conform to the provisions of Exhibit I hereto. Article 3. Committees/Joint Management Team 3.1 Committees. Each Committee will comprise an even number of company representatives, half of whom shall be appointed by Cephalon and half of whom shall be appointed by Sanofi-Synthelabo. Each Party may change its representatives to a Committee in its sole discretion. Each Committee shall meet face-to-face at least once per calendar quarter unless mutually agreed otherwise, and shall otherwise communicate regularly. The first such meeting of each Committee shall be held within ninety (90) days after the Effective Date. The location of the meetings shall alternate between the corporate headquarters of the Parties unless otherwise agreed to by the Parties. The Party hosting the meeting of a Committee will be responsible for establishing the agenda of the meeting and recording and providing minutes and resolutions of the Committee signed on behalf of each Party not later than thirty (30) days after any such meeting. The minutes of each meeting of a Committee shall describe the status of any projects. 3.2 Decision Making by the Committees. Regardless of the number of individual members of a Committee that may attend any given meeting or proceeding, each Party shall be entitled to cast one (1) vote on all matters to be determined by such Committee, and each such matter shall be governed by unanimous consent of the Parties. The Parties shall cooperate in implementing all decisions taken by the Committees. 3.3 Responsibilities of the Committees. The responsibilities of each of the Committees shall include the following: 11 (a) Joint Research Committee. (i) The JRC shall be responsible for the management of the Research Program including the selection of Back-up Compounds and Development Compounds. The JRC shall establish and may amend in writing the scientific objectives of the Research Program from time to time and shall review the progress of the Research Program. The JRC also shall guide the research activities of the Parties with respect to the Research Program. The JRC shall establish a global Research Program which will be updated every six (6) months. For example, the JRC shall determine the assay systems against which Compounds will be screened for use in the Field. The budget for the Initial Research Term will be based on an FTE basis, as described in Section 1.23 and will describe additional external studies agreed by the JRC. The JRC shall review the budget of the Research Program on an annual basis and may revise the budget in accordance with the objectives of the Research Program. Any changes to the budget changes shall be signed by authorized representatives of both Parties and incorporated by reference as amendments to Exhibit E. (ii) The JRC shall consider the advice of the JDC and shall be responsible for developing a set of criteria by which a Compound shall be deemed to be a Development Compound or a Back-up Compound. Such criteria may be revised at the sole discretion of the JRC from time to time, but shall at least include references to biological activity levels associated with the Target(s), as well as customary pharmaceutical criteria (e.g., solubility, bioavailability and safety). Once a Compound has fulfilled the criteria set forth at a given time, such Compound shall be classified as either a Development Compound or a Backup Compound, as the case may be, for purposes of this Agreement. In addition, Compounds that fail to meet such criteria for selection as a Development Compound or Backup Compound at any given time within the Initial Research Term may be reevaluated by the Parties against the Target(s) hereunder and thereafter may become a Development Compound or a Backup Compound on the basis of having met revised selection criteria for such Target(s); provided however, that the Parties may not reevaluate any such Compound that, having failed to meet the criteria set by the JRC following the initial evaluation thereof, has been selected by Cephalon for development outside the scope of this Agreement or is subject to then existing third party obligations of Cephalon. (iii) The JRC shall maintain a complete list of criteria for Development Compounds for each Target. For all Compounds evaluated under the Research Program, the JRC shall keep a record of the status of all such Compounds as Joint Compounds, Development Compounds, Backup Compounds, and as Compounds that failed to meet the criteria set by the JRC to become Development Compounds or Backup Compounds for a Target. Compounds that fail to meet the criteria set by the JRC to become Development Compounds or Backup Compounds for a Target shall no longer be subject to the terms and conditions of this Agreement except according to those provisions specified in Section 3.3 (a) (ii) hereinabove, Sections 19.2, 19.3 and Article 18. (b) Joint Development Committee. (i) The Joint Development Committee shall establish, periodically review, and 12 modify as may be necessary and advisable, the preclinical, clinical and commercial objectives of a Development Program for each Development Compound from time to time. The three year budget for the Development Program for CEP-7055 is set forth in Exhibit D. The JDC shall review the budget of the Development Program on an annual basis and, not later than June 30th of each year, may revise the rolling three year budget forecast in accordance with the objectives of the Development Program. Any changes to the budget shall be signed by an authorized representative of the Parties and incorporated by reference as amendments to Exhibit D. (ii) The JDC also will manage and coordinate all development activities of the Parties with respect to the Development Program, including scheduling preclinical studies and clinical trials for Development Compounds; establishing milestones for the completion of Development Program objectives, including without limitation those relating to anticipated filing dates of an investigational new drug application (or its equivalent) filing and an NDA or MAA filing; evaluating the progress of the Parties with respect to the Development Program; determining to end the development of a Development Compound; and generally ensuring completion in a timely manner the Development Program with respect to any Development Compound. (iii) Not later than the commencement of Phase 3 Clinical Trials for the any Development Compound, the JDC shall decide upon an alternative manufacturing source for Development Compound (and the associated Licensed Product) in addition to Cephalon. (iv) If the JDC does not agree that any particular pre-clinical or clinical study is necessary for a Development Compound, either Party may conduct such a study outside the Development Program at its own risk and expense pursuant to Article 11. (c) Dispute Resolution for JDC and JRC. In the event JDC or JRC is unable to agree upon a material matter under the program that it supervises, the relevant Committee shall prepare a report setting forth the dispute in question and the probable consequences to the collaboration if such dispute remains unresolved. Such report shall be prepared within thirty (30) days after the meeting of the Committee in which the dispute was identified and shall be submitted to the JMT which shall consider such report and attempt to resolve the dispute. 3.4 Joint Management Team. The JMT shall comprise an even number of company representatives, half of whom will be appointed by Cephalon and half of whom will be appointed by Sanofi-Synthelabo. Each Party may change its representatives on the JMT in its sole discretion. The JMT shall meet on an as needed basis and face-to-face at least twice per year unless mutually agreed otherwise. The location of the meetings shall alternate between the corporate headquarters of the Parties unless otherwise agreed by the Parties. The Party hosting the meeting of the JMT will be responsible for establishing the agenda of the meeting and recording and providing minutes and resolutions of the JMT signed on behalf of each part, not later than thirty (30) days after any such meetings. 3.5 Responsibilities of the JMT. The responsibilities of the JMT shall include: 13 (a) The JMT shall be charged with the strategic oversight for the implementation of this Agreement and oversight of the Research Program and Development Program. (b) The JMT shall be responsible for the resolution of disputes arising in the Committees and the management bodies of the JVs. The failure of JMT to resolve any disagreement arising within any Committee or JV body, as evidenced, in each case by the JMT's failure to agree unanimously following two (2) consecutive attempts at consensus, with the second attempt following the first by not less than ten (10) business days shall be deemed a deadlock ("Deadlock"). Within thirty (30) days following a Deadlock either Party may submit the issue to dispute resolution according to Section 21.10(b) and 21.10(c). If such dispute is not resolved in accordance with Sections 21.10(b) and 21.10(c), either Party may terminate its participation in the further development or commercialization of the disputed Licensed Product pursuant to Sections 17.10(a) and 17.10(b). Notwithstanding the foregoing, a Deadlock shall not be deemed to have occurred (i) if either Party exercises its Sole Development right pursuant to Article 11 or (ii) as a result of the failure of the JMT to agree (x) on a modification of a decision previously adopted by a Committee unless the action is required because such prior decision is no longer permitted as a result of a binding change in applicable law and such change is final and unappealable or (y) any other matter not previously considered if it would not be viable to further develop or commercialize the Licensed Product in question in accordance with this Agreement unless a decision is made with respect to such matter. In the event of the failure by the JMT to reach agreement on any modification of a previous decision which is still permitted or any new matter which is not required to further develop or continue commercialization, the prior decision shall not be modified or a decision shall not be made with respect to such matter, as the case may be, and the further development or commercialization of such Licensed Product shall proceed in accordance with the framework established by the prior decision until otherwise agreed. (c) During the pendency of any dispute resolution under Sections 3.3 (c), 3.5(b) or 21.10 the development and/or commercialization will continue in accordance with previous decision and last agreed budgets. 3.6 Formation of a Joint Venture. In order to commercialize any Development Compound or Licensed Product in the Joint Territory, the JMT shall establish a separate JV for such commercialization of each Development Compound or Licensed Product (different dosages, routes of administration and indications of the same Compound shall be deemed a single Development Compound or Licensed Product). The Parties hereby agree that the JVs shall be established to the principles set forth in Exhibit F not later than the commencement of Phase 3 Clinical Trial for the each Development Compound. Sanofi-Synthelabo shall be the Controlling Party (as defined in Exhibit F) of the first (to be established) JV, and Cephalon shall be the Controlling Party of the second JV. Thereafter, the Controlling Party shall alternate between Sanofi-Synthelabo and Cephalon. Article 4. Grant of Rights 14 4.1 Exclusive Territory. Cephalon hereby grants to Sanofi-Synthelabo for the Exclusive Territory, under the Cephalon Technology and the Joint Technology: (i) a co-exclusive license, co-exclusive with Cephalon to import and use, but not make, have made, offer for sale or sell, Compounds and Joint Compounds solely for use in the Research Program; (ii) a co-exclusive license, co-exclusive with Cephalon to import, make, have made and use, but not sell or offer for sale, Cephalon Compounds and Joint Compounds solely for use in the Development Program; and (iii) an exclusive license, exclusive even as to Cephalon, to use, import, sell and offer for sale Licensed Products. 4.2 Joint Territory (a) Cephalon Rights. Cephalon hereby grants to Sanofi-Synthelabo in the Joint Territory, a co-exclusive license, co-exclusive with Cephalon, under the Cephalon Technology and Joint Technology to: (i) to import and use, but not make, have made, sell or offer for sale, Cephalon Compounds and Joint Compounds solely for use in the Research Program; (ii) to import, make, have made and use, but not sell or offer for sale, Cephalon Compounds and Joint Compounds solely for use in the Development Program; and (iii) to use, import, sell, and offer for sale Licensed Products; provided, however, that any rights to sell or offer for sale Licensed Product in the Joint Territory shall be exercised solely by the JV(s) in accordance with Section 4.2 (c). (b) Sanofi-Synthelabo Rights. Sanofi-Synthelabo hereby grants to Cephalon in the Joint Territory, a co-exclusive license, co-exclusive with Sanofi-Synthelabo, under the Sanofi-Synthelabo Technology and Joint Technology to: (i) make, have made, use, import, sell and offer for sale Cephalon Compounds and Joint Compounds solely for use in the conduct of the Research Program and Development Program and; (ii) to make, have made, use, import, sell and offer for sale Licensed Products; provided, however, that any rights to sell or offer for sale Licensed Products in the Joint Territory shall be exercised solely by the JV(s) in accordance with Section 4.2 (c). (c) Upon the formation of the JVs, the Parties hereby agree to grant their rights to import, use, sell and offer for sale Licensed Products in the Joint Territory exclusively to each of the JVs. 4.3 Manufacture. Cephalon hereby grants to Sanofi-Synthelabo a co-exclusive license, co-exclusive with Cephalon, under the Cephalon Technology and Joint Technology, in the Exclusive Territory and the Joint Territory to make, have made, use, import, sell and offer for sale, Cephalon Compounds solely for use in the Research Program, Development Program and for manufacturing Licensed Products; provided, however that Sanofi-Synthelabo shall not exercise the license granted under this Section 4.3 unless Cephalon fails to meet its obligations to supply Cephalon Compounds and Licensed Products under this Agreement. Before Sanofi-Synthelabo exercises its rights under this Section, Sanofi-Synthelabo shall give Cephalon notice of such failure and thirty (30) days within which to cure such failure. If Cephalon cures such failure to supply within the thirty (30) day period, then Sanofi-Synthelabo shall have no right to exercise the license rights granted under this Section 4.3. If 15 Sanofi-Synthelabo exercises its right under this Section 4.3, Sanofi-Synthelabo hereby agrees to provide all of Cephalon's or JV's pre-clinical, clinical and commercial supplies of Cephalon Compounds, Joint Compounds or Licensed Products At Cost. 4.4 Use of Existing Compounds for Screening by Sanofi-Synthelabo for Certain Non-Field Applications. In consideration for entering into this Agreement Cephalon hereby grants to Sanofi-Synthelabo the right to use Compounds, to be provided by Cephalon, for the sole purpose of screening the Compounds prior to December 31, 2002 in order to determine if Sanofi-Synthelabo or one of its Affiliates wishes to enter into a separate agreement with Cephalon as outlined in Exhibit G. 4.5 Right of First Negotiation to Other Compounds in the Field. In consideration for entering into this Agreement, Cephalon hereby grants to Sanofi-Synthelabo, and Sanofi-Synthelabo hereby accepts from Cephalon, a first right of negotiation to obtain from Cephalon any rights to Compounds in the Field that Cephalon has or may have under any other kinase inhibitor program (the "Other Rights"). If Cephalon has or obtains such Other Rights, then Cephalon shall notify Sanofi-Synthelabo in writing promptly that Cephalon has such Other Rights. If Sanofi-Synthelabo notifies Cephalon within sixty (60) days after receiving Cephalon's notice that Sanofi-Synthelabo desires to negotiate with Cephalon for such Other Rights, then Cephalon and Sanofi-Synthelabo shall in good faith proceed within ninety (90) days thereafter to negotiate the terms under which such Other Rights could be licensed to Sanofi-Synthelabo. If Cephalon and Sanofi-Synthelabo are not able to agree on the terms of a license after good faith negotiations within ninety (90) days after Sanofi-Synthelabo's notice to Cephalon, or if Sanofi-Synthelabo does not provide notice to Cephalon of its interest in the Other Rights within the sixty (60) day period described above, then such right of first negotiation shall expire and shall be of no further force and effect, provided, however, Cephalon shall not enter into any agreement with a third party on terms and conditions more favorable to such third party than those offered to Sanofi-Synthelabo in accordance with the procedures set forth herein without first offering such more favorable terms to Sanofi-Synthelabo in accordance with the procedures set forth herein. 4.6 Right of First Negotiation for Japan. In consideration for entering into this Agreement, Sanofi-Synthelabo hereby grants to Cephalon, and Cephalon hereby accepts from Sanofi-Synthelabo, a first right of negotiation to obtain from Sanofi-Synthelabo exclusive rights to Sanofi-Synthelabo Technology and any of Sanofi-Synthelabo's rights to Joint Technology to make, have made, use, import, sell or offer for sale Licensed Products in Japan (the "Japan Rights"). In no case later than the commencement of the first Phase 3 Clinical Trial, Cephalon shall notify Sanofi-Synthelabo in writing of Cephalon's interest in the Japan Rights. Cephalon and Sanofi-Synthelabo shall in good faith proceed within ninety (90) days after Cephalon's notice to negotiate the terms under which the Japan Rights could be licensed to Cephalon. If Cephalon and Sanofi-Synthelabo are not able to agree on the terms of a license after good faith negotiations within ninety (90) days after commencement of the first Phase 3 Clinical Trial, or if Cephalon does not provide notice to Sanofi-Synthelabo of its interest in the Japan Rights within the ninety (90) day period described above, then such right of first negotiation shall expire and shall be of no further force and effect, provided, however, Sanofi-Synthelabo shall not enter into any agreement with a third party on terms and 16 conditions more favorable to such third party than those offered to Cephalon without first offering such more favorable terms to Cephalon in accordance with the procedures set forth herein. 4.7 New Inventions. Sanofi-Synthelabo hereby agrees to grant to Cephalon a perpetual, worldwide, royalty-free, exclusive license (exclusive even as to Sanofi-Synthelabo) (with the right to sublicense) to New Inventions and Joint Technology to make, have made, use, import, sell and offer for sale for use in nervous system disorders and ophthalmic disorders other than for malignancies. For the avoidance of doubt, New Inventions for use in cardiovascular and thrombotic strokes shall not be subject to this grant. Article 5. Research and Development Funding 5.1 General. Except as otherwise provided herein, all payments required under the terms of this Agreement shall be due and payable within forty five (45) days from the date that either Party receives an invoice from the other Party, unless the invoicing Party consents in writing to other payment terms. All payments by either Party in connection with this Agreement shall be made by wire transfer and in U.S. dollars unless otherwise agreed to by the Parties in writing. 5.2 Funding for Research Program and Development Program (a) The Parties agree to share equally the costs of the Research Program and the Development Program except in cases of Sole Development. Such costs shall include on an annual basis the employment by Cephalon of not less than [**] in direct support of the Research Program for so long as it is on-going. The costs of the Research Program and Development Program shall be consistent with those levels of investment outlined in Exhibits D and E. Other than those aggregate expenses outlined in Exhibits D and E, the JMT must approve in advance any increases in internal or external activities relating to the conduct of the Research Program and Development Program. Any external expenses incurred (whether by Cephalon or by Sanofi-Synthelabo) during the Initial Research Term and the Development Program that relate to the conduct of the Research Program and the Development Program shall be determined At Cost and, be shared equally by the Parties. Neither Party may use the services of any third party to conduct activities contemplated by the Research Program or Development Program without the prior consent of the other Party, the JRC or the JMT. (b) Sanofi-Synthelabo shall be responsible for the first [**] of expenses whether incurred by Cephalon, by Sanofi-Synthelabo or by the Parties jointly for the expenses under the Research Program and the Development Program as set forth in Exhibits E and D, respectively. 5.3 Records and Audits Relating to the Research and Development Program. The Parties shall maintain complete and accurate records of their respective employee hours 17 devoted, and expenses incurred, in connection with the Research and Development Programs for a period of not less than three (3) years from the date of incurrence. Each Party shall have the right, at its own expense and through a certified public accountant or like person reasonably acceptable to the other Party, to examine such records during regular business hours during the term of this Agreement; provided, however, that such examination shall not take place more often than once a year and shall not cover such records for more than the preceding three (3) years and provided further that such certified public accountant shall report to the other Party only as to the accuracy of said records. 5.4 Cost Balancing for Research Program and Development Program. (a) Except as provided under Section 5.2(b), within thirty (30) days following the end of each calendar quarter each Party shall provide to the other Party a preliminary invoice. Such preliminary invoice shall represent fifty percent (50%) of the costs incurred by the Party. The preliminary invoice shall set forth: (i) any third party fees, costs and expenses incurred At Cost in providing services under the Research Program and the Development Program during the preceding calendar quarter; (ii) the actual time spent in providing services in accordance with the Research Program and the Development Program (including a breakdown by function and the percentage of FTE time consistent with the level of detail provided in the budgets of Exhibits D and E) expended during the preceding calendar quarter; and (iii) the receiving Party of the preliminary invoice shall have up to thirty (30) days after receipt of such invoice to dispute any items on the preliminary invoice. Any disputed items not resolved between the Parties by the end of such thirty (30) day period shall be referred to the appropriate Committees for reconciliation. If the appropriate Committee is unable to reconcile such disputed items in the preliminary invoice, the matter shall be referred to dispute resolution in accordance with Section 20.10. Any items in the preliminary invoice not disputed within the thirty (30) day period shall be considered approved. Upon such approval or notification by the receiving Party that the preliminary invoice is approved, the reconciliations shall proceed as follows:. (b) To the extent a Party's (Party #1) preliminary invoice exceeds the other Party's (Party #2) invoice, the Party #2 shall pay to Party #1 an amount equal to the amount by which Party #1's preliminary invoice exceeds the Party #2's preliminary invoice. Such payment shall be made within fifteen (15) days of the approval of preliminary invoices. 18 Article 6. License Fees, Royalties, Transfer Price and Milestone Payments 6.1 License Fees. Within ninety (90) days after the Effective Date of this Agreement, Sanofi-Synthelabo shall pay Cephalon by wire transfer (or as otherwise agreed upon by the Parties), an amount equal to [**] for the rights granted herein to Cephalon Technology and Joint Technology under the Research Program and the Development Program. 6.2 Royalty Payments. (a) Subject to the provisions of Section 6.3 below, Cephalon shall receive a discovery royalty on sales of Cephalon Licensed Products (the "Discovery Royalty") as follows: (i) with respect to each country in the Exclusive Territory, Sanofi-Synthelabo shall pay to Cephalon a Discovery Royalty in the amount of [**] of the annual Net Sales of Cephalon Licensed Products in such country and (ii) with respect to each country in the Joint Territory, the Parties shall cause the JVs to pay to Cephalon a Discovery Royalty in the amount of [**] of the annual Net Sales of Cephalon Licensed Products in such country. (b) The Discovery Royalty shall be payable on all Net Sales of Cephalon Licensed Products in each country of the Exclusive Territory and Joint Territory completed prior to the last to occur of (i) the expiration date of Valid Claims of any applicable Cephalon Patent Rights in such country (if no Valid Claim of any applicable Cephalon Patent has issued in such country, than for purposes of this section all Cephalon Patent Rights for such Cephalon Licensed Product in such country shall be deemed to have expired); (ii) the last day of any period of market exclusivity or data protection under an MAA or NDA for Cephalon Licensed Products (or under the terms of applicable laws and regulations) in such country from the date of first sale of each Cephalon Licensed Product; or (iii) the date which is ten (10) years from the date of first sale of such Cephalon Licensed Product. 6.3 Adjustment. From and after the Loss of Exclusivity of a Cephalon Licensed Product in any given country in either the Exclusive or Joint Territory, Cephalon shall receive a royalty of [**] of Net Sales of such Cephalon Licensed Product in such country, and, until the remainder of the term set forth in Section 6.2(b) above, any balance in the rate of the Discovery Royalty attributable so such country remaining after subtraction of such three percent 3% (if applicable) shall be reduced gradually, on the basis of the level of Market Penetration of Competing Products in such country, as follows: Competitor(s)'s Reduction in Balance of Discovery Royalty Market Penetration attributable to such country --------------------------------------------------------------------------- [**] [**] [**] [**] [**] [**] [**] [**] For clarity and by way of example, if there is a Loss of Exclusivity in respect of a Cephalon Licensed Product for which a Discovery Royalty had been due at the rate of 15% of Net Sales, and the Competitor's Market Penetration was 35% in a country of the Exclusive Territory, then 19 the Royalty owed to Cephalon on Net Sales in that country would be 9% (3% + 50% of 12% Discovery Royalty); should the Market Penetration reach 50% in such country, the Royalty owed to Cephalon on Net Sales in that country would be 3% (3% + 0% of 12% Discovery Royalty). The Loss of Exclusivity shall be measured by the JMT based on data reported by International Marketing Survey. 6.4 Transfer Price. Subject to the provisions of Section 6.5 below, the transfer price shall be the Audited Cost of Goods ("Transfer Price") sold to either Sanofi-Synthelabo or its Affiliates in the Exclusive Territory or to the JVs in the Joint Territory, respectively. Transfer Price shall apply, in the Joint Territory, to Licensed Products in finished, packaged form and, in the Exclusive Territory, to finished dosage form in primary packaging to the specifications provided by Sanofi-Synthelabo to meet the then current requirements of the EMEA (the "Bulk Licensed Product"); for purposes of clarification, finished dosage form in primary packaging may be exemplified by finished dose tablets in drums or finished liquid injectate in vials on pallets. 6.5 Transfer Price Adjustment. The Transfer Price with respect to Cephalon Licensed Products shall be adjusted as follows: (a) Exclusive Territory. (i) The Transfer Price is estimated to be [**] of the annual Net Sales of Licensed Products in the Exclusive Territory for the supply by Cephalon of Bulk Licensed Product to Sanofi-Synthelabo for the Exclusive Territory. If the Transfer Price exceeds [**], but is less than or equal to [**] of said Net Sales, then Sanofi-Synthelabo shall bear the amount of the Transfer Price that exceeds [**] of said Net Sales, but is less than [**] of said Net Sales. If the Transfer Price sold by Cephalon to Sanofi-Synthelabo in the Exclusive Territory exceeds [**] but is less or equal to than [**] of said Net Sales, then the Discovery Royalty payable pursuant to Section 6.2(a) shall be lowered to such an extent that the total Discovery Royalty and Transfer Price payable by Sanofi-Synthelabo together total [**] of Net Sales of such Licensed Product. (ii) If the Transfer Price exceeds [**] of Net Sales, Sanofi-Synthelabo shall have the option of (x) paying a reduced Discovery Royalty of [**] of Net Sales in addition to the Transfer Price, or (y) returning its rights under this Agreement to the Licensed Product in the Exclusive Territory to Cephalon. In the event the rights in Licensed Product are returned to Cephalon, and Cephalon markets the Licensed Product in the Exclusive Territory, or grants a license to a third party to market the Licensed Product in the Exclusive Territory, Sanofi-Synthelabo shall be entitled to a development royalty on Net Sales of such Licensed Product (a "Development Royalty") of [**] unless the Licensed Product is the subject of Sole Development by Sanofi-Synthelabo pursuant to Section 11.4, in which case the development royalty payable to Sanofi-Synthelabo shall be [**] of Net Sales. Cephalon shall not offer such Licensed Product to a third party at a combined royalty and Transfer Price less than that offered to Sanofi-Synthelabo without the express written consent of Sanofi-Synthelabo. (b) Joint Territory. (i) The Transfer Price is estimated to be [**] of the annual Net Sales of Licensed Products in the Joint Territory for the supply by Cephalon of finished and 20 packaged Licensed Product to the JVs for the Joint Territory. If the Transfer Price exceeds [**], but is less than or equal to [**] of said Net Sales, then the JVs shall bear that amount of Transfer Price that exceeds [**] of said Net Sales, but is less than or equal to [**] of said Net Sales. If the Transfer Price of finished and packaged Licensed Product by Cephalon to the JVs in the Joint Territory exceeds [**] but is less than or equal to [**] of said Net Sales, then the Discovery Royalty payable pursuant to Section 6.2(a) shall be lowered to such an extent that the total Discovery Royalty and Transfer Price payable by the JV together total [**] of Net Sales of such Licensed Product. (ii) If the Transfer Price exceeds [**], Sanofi-Synthelabo shall have the option of permitting the JVs to (i) pay a reduced Discovery Royalty of [**] of Net Sales, or (ii) returning its rights under this Agreement to the Licensed Product to Cephalon. In the event the rights in Licensed Product are returned to Cephalon, and Cephalon markets the Licensed Product in the Joint Territory, or grants a license to a third party to market the Licensed Product in the Joint Territory, Sanofi-Synthelabo shall be entitled to a development royalty on Net Sales of such Licensed Product of [**] of Net Sales unless the Licensed Product is the subject of Sole Development by Sanofi-Synthelabo pursuant to Section 11.4, in which case the development royalty payable to Sanofi-Synthelabo shall be [**] of Net Sales. Cephalon shall not offer such Licensed Product to a third party at a combined royalty and Transfer Price less than that offered to the JV without the express written consent of Sanofi-Synthelabo. (iii) In the event the Licensed Products are supplied by a source other than Cephalon as contemplated by Sections 3.3(b)(iii) and 4.3, the Discovery royalty payable to Cephalon shall nevertheless be adjusted pursuant to Section 6.5 depending upon the Transfer Price. 6.6 Accounting/Books and Records. (a) Sanofi-Synthelabo shall maintain (and shall require its Affiliates, sublicensees and third party marketers to maintain, if applicable) complete and accurate records of all sales of Licensed Products pursuant to the licenses granted hereunder, for a period of not less than three (3) years from the date of the applicable Net Sales. Cephalon shall have the right, at its own expense and through a certified public accountant or like person reasonably acceptable to Sanofi-Synthelabo, to examine its records for Licensed Products in the Exclusive Territory during regular business hours during the life of this Agreement and for thirty-six (36) months after its termination provided, however, that such examination shall not take place more often than once a year and shall not cover such records for more than the preceding three (3) years and provided further that such certified public accountant shall report to Cephalon only as to the accuracy of said royalty statements and payments. (b) Within fifteen (15) days after the end of each calendar quarter during the pendency of this Agreement, Sanofi-Synthelabo shall deliver to Cephalon a true accounting of all Licensed Products sold in the Exclusive Territory by Sanofi-Synthelabo (and by its Affiliates, sublicensees and third party marketers, if applicable) during such calendar quarter and shall, within thirty (30) days after delivering to Cephalon such true accounting, pay all royalties due Cephalon on the basis of the Net Sales attributable Cephalon Licensed Product. Such accounting shall show sales on a country-by-country and Licensed Product-by-Licensed 21 Product basis, and such accounting shall state the Net Sales subject to royalty under this Article 6, the calculation of royalties with respect thereto, and shall separately show the calculation of all adjustments thereto. (c) All royalties and Transfer Prices due under this agreement shall be payable in U.S. dollars. If governmental regulations prevent remittances from a country of the Exclusive Territory to any other country with respect to sales made in the country, the obligation of Sanofi-Synthelabo to pay royalties on sales in that country shall be suspended until such remittances are possible, and once they are possible, Sanofi-Synthelabo shall pay Cephalon any back royalties which may be owed. Alternatively, Cephalon shall have the right, upon giving written notice to Sanofi-Synthelabo, to receive payment in that country in local currency. Monetary conversions from the currency of a foreign country, in which Cephalon Licensed Products are sold into United States currency shall be made at the official exchange rate in force in that country for financial transactions at the close of the last business day of the calendar quarter for which the royalties are being paid. If there is no such official exchange rate, the conversion shall be made at the rate prevailing on the last day of each of the applicable calendar quarters as published in The Wall Street Journal under the heading "Foreign Exchange," unless otherwise agreed upon in writing by the Parties. (d) The Parties agree to impose on the JVs similar obligations as these contained in Section 6.6(a) through (c) hereof. 6.7 Milestone Payments. (a) Sanofi-Synthelabo shall pay Cephalon those amounts set forth below not later than sixty (60) days following the completion of the milestones set forth below for each Development Compound (for purposes of determining Milestone Payments, different dosages of a Cephalon Compound shall be deemed to be a single such Development Compound): (i) [**] (ii) [**] (iii) [**] (iv) [**] (v) [**] (vi) [**] (vii) [**] (b) In the event there is a combination Phase 2/3 Clinical Trial for a Development Compound, the payments required by Section 6.6(a) (ii) shall be made upon first patient enrollment and the payment required by Section 6.6 (a) (iii) shall be made upon completion of the study and issuance of the final report thereof. 22 (c) For the avoidance of doubt, the Parties confirm and agree that no milestones shall be payable in Sole Development situations unless and until a Party exercises its Buy-in Rights pursuant to Section 11.3 hereof. 6.8 Credits Against Milestone Payments. Milestone payments made by Sanofi-Synthelabo under the terms of Section 6.6 hereof in connection with a Development Compound that fails in development, or for which Sanofi-Synthelabo or a JV otherwise fails to obtain Approval of the applicable MAA, shall be credited against milestone payments for such Backup Compound as shall be designated by the JDC as a Development Compound for the same Target. Notwithstanding the foregoing, if prior to the failure or withdrawal of the Development Compound, the Parties introduce another Development Compound into joint development for the same Target, the milestones shall be payable only once for such Target unless both Development Compounds continued to be pursued for the same Target. 6.9 Taxes. If Sanofi-Synthelabo is required by law to withhold any taxes or other governmental obligations from the milestone or royalty obligations to be paid to Cephalon under the terms of this Article 6, then Sanofi-Synthelabo shall provide notice to Cephalon of any such requirement. In such event, Sanofi-Synthelabo as appropriate may withhold and pay such taxes or obligations on behalf of Cephalon, provided that Sanofi-Synthelabo sends to Cephalon reasonable proofs of payment. Article 7. Regulatory Matters/Quality Assurance 7.1 Regulatory Approvals (a) Sanofi-Synthelabo shall be responsible for obtaining all necessary regulatory and MAAs for the use and sale of Licensed Products in those countries of the Exclusive Territory in which Sanofi-Synthelabo markets, sells and distributes Licensed Products. Sanofi-Synthelabo shall be responsible for translating, preparing, and filing all regulatory submissions with the countries in the Exclusive Territory, as appropriate, for any Cephalon Compounds or Joint Compounds as described in and in accordance with a schedule set forth in the Development Program by the JDC; provided, however, that in the case of Sole Development by Sanofi-Synthelabo, Sanofi-Synthelabo, rather than the JDC, will be responsible for determining the schedule for such responsibilities. Sanofi-Synthelabo shall bear the cost and expense of all such regulatory submissions and MAAs subject to the Parties' obligations set forth in Article 5. Sanofi-Synthelabo shall be responsible at its own cost and expense for any clinical studies in the Exclusive Territory not required for EMEA approval. Sanofi-Synthelabo shall own all regulatory and marketing approvals in the Exclusive Territory. (b) Sanofi-Synthelabo agrees to file a MAA with the EMEA (or with the regulatory authorities in [**] Major Markets) within [**] following successful completion of the Development Program (including all related activities) for any Licensed Products. Sanofi-Synthelabo further agrees that within [**] of the Approval of the MAA in at least [**] Major 23 Markets, it will launch such Licensed Products in such [**] Major Markets, provided there is a reliable source of supply. (c) The Parties or their designee(s) shall be responsible for obtaining all necessary Approvals for the use and sale of Licensed Products in the Joint Territory. The Parties or their designee(s) shall be responsible for translating, preparing, and filing all regulatory submissions with the countries in the Joint Territory, as appropriate, for any Cephalon Compounds or Joint Compounds as described in and in accordance with a schedule set forth in the Development Program by the JDC. Approvals in the Joint Territory shall be held by the JVs, if possible. 7.3 Cooperation. Parties hereby agree to: (i) cooperate with each other and render assistance in connection with the filing of an NDA or MAA (or other application for regulatory approval) with any governmental authority or agency which may be required to obtain approval to market Licensed Products or to obtain pricing and reimbursement approval; and (ii) execute documents, and provide a letter of authorization or other documentation to the appropriate regulatory authorities or to any other governmental authority or agency, as necessary or advisable, to enable either Party to file, refer to or incorporate by reference all technical information including data on file with any such agency or authority concerning Licensed Products that may be contained in a drug master file or otherwise. In the event that either party wishes to supplement or modify such drug master file, each Party agrees to discuss promptly such supplements or modifications with the other Party in advance. 7.4 Adverse Drug Events. The Parties hereby agree that, not later than three (3) months after the Effective Date, they will establish procedures for the handling and reporting of adverse drug events, and that such procedures may be coordinated by the JDC and shall require that the Parties inform each other in an appropriate and efficient manner of any such adverse drug events with respect to Development Compounds and the Licensed Products, taking into account those procedures used regularly by the Parties and those requirements of the EMEA, the FDA and other relevant regulatory authorities. 7.5 Notice of Governmental Action. During the term of this Agreement, each Party further agrees to immediately notify the other Party about any information such Party received regarding any threatened or pending action by a governmental agency which may involve the safety and efficacy claims of Development Compounds or Licensed Products or the continued clinical testing, manufacturing or marketing thereof. Upon receipt of any such information, the Parties shall consult with each other in an effort to arrive at a mutually acceptable procedure for taking appropriate action; provided, however, that nothing contained herein shall be construed as restricting the right of either Party to make a timely report of such matter to any government agency or take other action that it deems to be appropriate or required by applicable law or regulation. 7.6 Product Recalls. If (i) any governmental or regulatory authority issues a request, directive, or order that any Licensed Product be recalled or withdrawn from the market, (ii) a court of competent jurisdiction in a final, nonappealable judgment orders a recall or 24 withdrawal of any Licensed Product, or (iii) following discussion between the Parties, and giving due consideration to the views of the other Party, the Party holding the MAA (or analogous marketing application outside the Exclusive Territory) for the applicable Licensed Product determines in its sole discretion that said Licensed Product should be recalled or withdrawn from one or more countries, then the Parties together shall take all appropriate corrective actions to effect the recall or withdrawal. The costs and expenses of notification and destruction or return of the recalled or withdrawn Licensed Product in the Exclusive Territory shall be borne by Sanofi-Synthelabo, and in the Joint Territory shall be borne by JVs; provided, however, if the cause of the recall is Cephalon's failure to meet the specifications for Licensed Products, in which case the cost of the recall shall be borne by Cephalon. 7.7 Quality Assurance. The Parties agree that all pre-clinical and human use manufacturing activities required to meet Good Laboratory Practices (as defined in 21 C.F.R. 58), Good Clinical Practices (as defined in 21 C.F.R. 50 & 312) and Good Manufacturing Practices (as defined in 21 C.F.R. 210 & 211) standards will be available to the Parties' respective quality assurance and quality control functions for evaluation. Without limiting the foregoing, the Parties shall have reasonable rights to audit quality systems, documentation, data, reports and other documents, and to inspect facilities, laboratories, services, utilities and computer systems. Article 8. Manufacture and Supply of Compounds and Licensed Products 8.1 Research and Development Supplies. (a) Joint Development. Until the definitive supply agreement described in Section 8.3 has been executed by the Parties, the Parties agree that Cephalon shall be the exclusive supplier of Cephalon Compounds and the Development Compounds for the Research Program and the Development Program. Cephalon may engage third party manufacturers to produce such Compounds with the prior written consent of Sanofi-Synthelabo, which consent shall not be unreasonably withheld. Cephalon shall provide all clinical and pre-clinical supply At Cost. All such supplies shall be in dosage form and packaging according to Research Program and Development Program needs. (b) Sole Development. Until the definitive supply agreement described in Section 8.3 has been executed by the Parties, Cephalon agrees to supply Sanofi-Synthelabo and Sanofi-Synthelabo agrees to purchase exclusively from Cephalon, Sanofi-Synthelabo's requirements of Cephalon Compounds and Development Compounds for any studies for which Sanofi-Synthelabo has undertaken Sole Development pursuant to Article 11. Cephalon may engage third party manufacturers to produce the Cephalon Compounds and Development Compound with the prior written consent of Sanofi-Synthelabo, which consent shall not be unreasonably withheld. Cephalon shall provide all clinical and pre-clinical supply At Cost. All such supplies shall be in dosage form and packaging as specified by Sanofi-Synthelabo. 8.2 Commercial Supplies. 25 (a) Joint Territory. Until the definitive supply agreement described in Section 8.3 has been executed by the Parties, the Parties agree that Cephalon shall be the exclusive supplier of all requirements for commercial supplies of GMP finished and packaged Licensed Products At Cost for use and resale in the Joint Territory. Cephalon may engage third party manufacturers to produce the Licensed Products with the prior written consent of Sanofi-Synthelabo, which consent shall not be unreasonably withheld. (b) Exclusive Territory. Until the definitive supply agreement described in Section 8.3 has been executed by the Parties, Cephalon agrees to supply and Sanofi-Synthelabo agrees to purchase from Cephalon its requirements for commercial supplies of BulkLicensed Products for final packaging and sale of Licensed Products in the Exclusive Territory. Cephalon may engage third party manufacturers to produce the active pharmaceutical ingredient of Bulk Licensed Product or Bulk Licensed Product itself with the prior written consent of Sanofi-Synthelabo, which consent shall not be unreasonably withheld. Bulk Licensed Products shall be provided to Sanofi-Synthelabo At Cost to specifications provided by Sanofi-Synthelabo to meet the then current European regulatory requirements specified by the EMEA. (c) Upon the shipment of Bulk Licensed Product to Sanofi-Synthelabo in the Exclusive Teritory or the shipment of finished and packaged Licensed Product in the Joint Territory, Cephalon shall invoice the appropriate party for such shipment. Cephalon shall deliver Bulk Licensed Product or finished and packaged Licensed Products F.O.B. Cephalon's production facility. Sanofi-Synthelabo shall be responsible for all licenses and authorizations necessary for the importation of Bulk Licensed Products into the Exclusive Territory. 8.3 Definitive Supply Agreement. The Parties agree to negotiate in good faith the terms of a definitive supply agreement with regard to the manufacture and supply by Cephalon (and the JMT's designee pursuant to Section 3.3(b)(iii)) of (i) Development Compounds (and their associated Licensed Products) or Cephalon Compounds (and their associated Licensed Products) under joint or Sole development in both the Joint Territory and the Exclusive Territory, (ii) Bulk Licensed Product in the Exclusive Territory, and (iii) finished and packaged Licensed Products in the Joint Territory. Such supply agreement shall contain terms and conditions customary in the industry, including without limitation those relating to quality control, warranties, records, storage and inspection. Sanofi-Synthelabo shall be responsible for final packaging and labeling of Licensed Product to be marketed and sold in the Exclusive Territory. Article 9. Marketing, Promotion and Sale of Product 9.1 Marketing in the Joint Territory. The Parties agree to use their commercially reasonable efforts to co-promote the sale of Licensed Products in the Joint Territory through the JVs and to maximize the Net Sales thereof. For purposes of this Section 9.1, "commercially reasonable efforts" shall mean that during any given calendar year following commercial launch of Licensed Products in the Joint Territory, the JVs shall expend selling 26 promotional expenses, at a level comparable to that incurred by others marketing and selling pharmaceutical products with the same commercial potential, as those of the Licensed Product(s). 9.2 Marketing in the Exclusive Territory. Sanofi-Synthelabo agrees to use its commercially reasonable efforts to promote the sale of Licensed Products in the Exclusive Territory and to maximize the Net Sales thereof. In connection with these efforts, Sanofi-Synthelabo shall annually prepare a status report on its a commercialization efforts for Cephalon's review. For purposes of this Section 9.2, "commercially reasonable efforts" shall mean that during any given calendar year following commercial launch of Licensed Products in the Exclusive Territory, Sanofi-Synthelabo shall expend selling promotional expenses at a level comparable to that those incurred by others marketing and selling pharmaceutical products with the same commercial potential, as those of the Licensed Product(s). If Sanofi-Synthelabo determines in its reasonable business judgment that it would not be in Sanofi-Synthelabo's commercial interests for it to commence (or to continue, as the case may be) marketing and selling Licensed Products in any given country in the Exclusive Territory for which it has received marketing approval, then it will promptly notify Cephalon of such determination. Such determination shall not be deemed a breach of this Agreement so long as Sanofi-Synthelabo pursues the marketing, selling and/or distribution of Licensed Products in no less than [**] countries of the Major Markets. 9.3 Marketing and Distribution Rights to Licensed Products in Japan. Cephalon intends market and distribute Licensed Products in Japan through the channels normally used for the Cephalon product portfolio including, but not limited to, Affiliates, agents, distributors, joint venture partners and co-promotion and co-marketing partners (even if any such commercial contract between Cephalon and the applicable third party is formally described or structured as a license). Before Cephalon grants rights to third parties to market, promote, sell and distribute Licensed Products in Japan where Cephalon does not do so itself or through its then-existing ordinary channels, Cephalon hereby agrees to negotiate in good faith for a period not to exceed sixty (60) days to grant such rights to Sanofi-Synthelabo under terms and conditions to be mutually agreed upon. If Sanofi-Synthelabo and Cephalon fail to so reach agreement within such period, then Cephalon may discuss terms and conditions with third parties but it shall not enter into any such agreement with a third party on terms and conditions more favorable to such third party than those offered to Sanofi-Synthelabo without first offering such more favorable terms to Sanofi-Synthelabo in accordance with the procedures set forth herein. If Cephalon thereafter enters into such an agreement with a third party, then such agreement shall contain terms and conditions customary in the pharmaceutical industry with respect to such commercial arrangements, including without limitation those relating to the prompt disclosure of adverse drug experiences and any adverse regulatory or other governmental actions relating to the Licensed Products. 9.4 Sublicensing. Without Cephalon's prior consent, Sanofi-Synthelabo may market, sell and distribute Licensed Products in the Exclusive Territory through the channels normally used for the Sanofi-Synthelabo product portfolio including, but not limited to, Affiliates, agents, distributors, joint venture partners and co-promotion and co-marketing partners (even if any such commercial contract between Sanofi-Synthelabo and the applicable third party is 27 formally described or structured as a license). With respect to countries in the Exclusive Territory other than the Major Markets, Sanofi-Synthelabo agrees to use commercial reasonable efforts to market, sell and distribute Licensed Products in such countries; provided, however, that Sanofi-Synthelabo shall not be required to register market, sell and distribute Licensed Products in such countries if, in the reasonable business judgment of Sanofi-Synthelabo, it would not be in the commercial interests of Sanofi-Synthelabo to commence (or to continue, as the case may be) marketing, selling and distributing a Licensed Product in any given country in the Territory (other than [**] Major Markets). Subject to the written consent of Cephalon, with such consent not to be unreasonably withheld, taking into account the reasonable commercial interests of Sanofi-Synthelabo, Sanofi-Synthelabo may grant rights to third parties to register market, promote, sell and distribute Licensed Products in any country in the Exclusive Territory where Sanofi-Synthelabo desires to market Licensed Products, but where Sanofi-Synthelabo does not desire to market Licensed Products itself or through its then-existing ordinary channels. However, if Cephalon has established, or notifies Sanofi-Synthelabo of plans to develop, a commercial operation in any such country in the Exclusive Territory, then prior to offering to a third party such marketing and sales rights, Sanofi-Synthelabo hereby agrees to negotiate in good faith for a period not to exceed sixty (60) days to grant such rights to Cephalon under terms and conditions to be mutually agreed upon. If Sanofi-Synthelabo and Cephalon fail to so reach agreement within such period, then Sanofi-Synthelabo may discuss terms and conditions with third parties but it shall not enter into any such agreement with a third party on terms and conditions more favorable to such third party than those offered to Cephalon without first offering such more favorable terms to Cephalon in accordance with the procedures set forth herein. If Sanofi-Synthelabo thereafter enters into such an agreement with a third party with the consent of Cephalon, then such agreement shall contain terms and conditions customary in the pharmaceutical industry with respect to such commercial arrangements, including without limitation those relating to the prompt disclosure of adverse drug experiences and any adverse regulatory or other governmental actions relating to the Licensed Products. 9.5 Compliance. (a) Joint Territory. The Parties shall ensure that all required permits, licences and Approvals necessary or advisable to market, promote, sell and distribute Licensed Products in the Joint Territory will be maintained in good standing. The Parties' designee shall comply with all local laws, rules, regulations, and reporting requirements in force in each country of the Joint Territory covering, among other things, the marketing, promotion, sale and payment for Licensed Products. (b) Exclusive Territory. Sanofi-Synthelabo (or its designee) shall have obtained and shall maintain in good standing all required permits, licenses and regulatory approvals necessary or advisable to market, promote, sell and distribute Licensed Products in the Exclusive Territory where Sanofi-Synthelabo is marketing, selling and distributing Licensed Products either itself or through its then-existing ordinary channels, and in any event, in no less than [**] Major Markets. Sanofi-Synthelabo shall comply with all local laws, rules, regulations, and reporting requirements in force in the Exclusive Territory covering, among other things, the marketing, promotion and sale, and the payment for Licensed Products. 28 Article 10. Rights to Data 10.1 Sharing of Data. Subject to the grants set forth in Article 4,the Parties have reciprocal rights to use all Cephalon Technology, Sanofi-Synthelabo Technology and Joint Technology under the Research Program and the Development Program. The Parties shall agree on a format to be used to enable the Parties to have prompt, direct electronic access to all data generated (whether generated jointly or by either Party separately). Article 11. Sole Development 11.1 Compounds Subject to Sole Development. (a) During the term of this Agreement, either Party may undertake the sole development of any Cephalon Compound ("Sole Development"), provided that (i) the JRC has been requested in writing by such Party to designate such Cephalon Compound a Development Compound, and provided further that following a meeting of the JRC, the JRC has declined to do so or (ii) the JDC has decided not to pursue, or to continue, the joint development of a Development Compound or a Back-up Compound. (b) In the event that a Party has requested the JRC to designate a Cephalon Compound as a Development Compound and the JRC has declined to do so, such refusal shall not be the basis for a dispute subject to resolution under this Agreement; the sole remedy of the requesting Party being to undertake Sole Development pursuant to this Article 11. (c) If both Parties wish to undertake Sole Development of the same Cephalon Compound, then the JRC shall designate such Compound as a Development Compound. (d) A Party may veto the Sole Development of a Cephalon Compound by the other Party if, in the good faith judgment of the vetoing Party, such Sole Development violates reasonable and established medical safety standards. (e) Notwithstanding the other provisions of this Article 11, with respect to the Sole Development of a Joint Compound only, such Sole Development (i) shall not be subject to a Discovery Royalty and (ii) if the Party that has not undertaken Sole Development does not exercise its Buy-In Rights under Section 11.3, Sole Development of such Joint Compound shall be deemed not subject to the terms and conditions of this Agreement except as provided under Sections 4.7, 8.1(b) and Article 18. 11.2 Responsibility and Funding for Sole Development. Any Party undertaking Sole Development of a Cephalon Compound shall do so at its sole discretion and risk, and, subject to Section 11.3, shall be responsible for all costs and 29 expenses incurred in connection with such Sole Development. Unless a Party exercises its Buy-in Rights pursuant to Section 11.3 below, the results of all Sole Development shall be owned by the developing Party. 11.3 Buy-In by Other Party. The Party that has not undertaken Sole Development as to a Cephalon Compound may share in the commercialization of such Cephalon Compound, but only as follows: (a) Once Sole Development as to any Cephalon Compound has successfully completed Phase 2 Clinical Trials, the Party undertaking the Sole Development shall promptly notify the other Party. Such notice shall include copies of: (i) the IND or its equivalent, plus annual updates if any, (ii) investigator drug brochure or its equivalent, (iii) clinical study reports and supporting data tables, (iv) correspondence with regulatory authorities and (v) annual expenses incurred for such Sole Development. Within ninety (90) days of receipt of such notice, the receiving Party shall, if it wishes to exercise its buy-in rights under this Agreement ("Buy-in Rights") so notify the other Party. The exercise of Buy-in Rights of any Party shall require (i) that the Buy-in Party shall reimburse the Party that has undertaken Sole Development for [**] of the total costs and expenses (calculated in the same manner as total costs are calculated under Section 5.4 hereof) of such Sole Development to date, plus [**] of such total costs in consideration of the risk undertaken by the sole developer (for clarity, the Sole Developer shall be reimbursed for [**] of its development costs). (ii) Upon the payment pursuant to 11.3(a)(iii) below the Cephalon Compound shall be deemed a Development Compound and, where applicable, a Cephalon Licensed Product. The subsequent development costs shall be shared equally by the Parties. (iii) Once the cost of a Buy-in Rights in has been determined, the buy-in Party shall have thirty (30) days in which to reimburse the sole developing Party for [**] of its costs and expenses, and upon the expiration of such thirty (30) days the Buy-in Rights shall lapse as to the Cephalon Compound in question. 11.4 No Buy-in. In the event a Party does not exercise its Buy-in Rights, the Party that undertook Sole Development may continue Sole Development at its discretion and expense, subject to the following: (a) Joint Territory - The commercialization of the Licensed Product in the Joint 30 Territory shall be undertaken by the JVs, which shall be responsible for applying for and obtaining necessary governmental approvals. The JV shall pay the Sole Developer a development royalty of [**]. If the developing Party solely pays marketing costs of the Licensed Product in the Joint Territory, the sole developer shall receive an additional marketing royalty of up to [**] which shall be deducted after Discovery Royalty, Development Royalty, Transfer Price and other expenses of the JV (the " Marketing Royalty"). For clarity and by way of example, [**]. (b) Exclusive Territory -The commercialization of the Licensed Products shall be undertaken by Sanofi-Synthelabo in accordance with the provisions of Section 9.2 hereof. If Sanofi-Synthelabo is the sole developer of a Cephalon Compound, then Net Sales of such Cephalon Compound in the Exclusive Territory shall be subject to a Discovery Royalty to Cephalon such that sum of the Transfer Price of the Cephalon Compound plus the Discovery Royalty equals [**] of Net Sales as provided under Section 6.5(a). If Cephalon is the sole developer of the Cephalon Compound, then Sanofi-Synthelabo shall have the first right to commercialize such Cephalon Compound in the Exclusive Territory by paying a development royalty of from [**] depending upon the Transfer Price of the Cephalon Compound, the sum of the Transfer Price, the Discovery Royalty and the Development Royalty being capped at [**]. For clarity, and by way of example, [**]. (ii) In the event of Sole Development of a Joint Compound, the Parties agree to establish the applicable royalty rates and transfer prices prior to the commencement of Phase 3 Clinical Trials. Unless otherwise agreed by the Parties, the royalties above shall be payable for the period set forth in Section 6.2(b) hereof. Article 12. Limited Liability OTHER THAN THOSE WARRANTIES SET FORTH IN SECTION 19 BELOW, AND THOSE TO BE INCLUDED IN THE DEFINITIVE SUPPLY AGREEMENT, THERE IS NO WARRANTY (EXPRESS OR IMPLIED) AS TO THE COMPOUNDS, CEPHALON COMPOUNDS, JOINT COMPOUNDS, THE LICENSED PRODUCTS, MERCHANTABILITY OR A FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS SET FORTH IN THE DEFINITIVE SUPPLY AGREEMENT OR INDEMNIFICATION CLAIMS UNDER ARTICLE 20 BELOW, IF THE COMPOUNDS, CEPHALON COMPOUNDS, JOINT COMPOUNDS, OR LICENSED PRODUCTS FAIL TO MEET SPECIFICATIONS, THE SOLE AND EXCLUSIVE REMEDY OF EITHER PARTY IS LIMITED TO THE REPLACEMENT OF COMPOUND, CEPHALON COMPOUND, JOINT COMPOUND OR LICENSED PRODUCT (AS THE CASE MAY BE) OR THE REFUND OF THE SUPPLY PRICE THERFOR AND NEITHER PARTY SHALL IN ANY CASE BE LIABLE FOR SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING LOST PROFITS AS A RESULT OF SUCH 31 NONCOMFORMITY. Article 13. Trademark for Licensed Products. The Parties acknowledge that it may be in their mutual best interests to attempt to develop a single trademark for use within the Joint Territory and the Exclusive Territory for a given Licensed Product, and agree to discuss this matter at an appropriate time prior to commercial launch. A failure by the Parties to agree on a trademark shall not be deemed a deadlock with respect to the Exclusive Territory and Sanofi-Synthelabo shall be free to select a trademark in the Exclusive Territory. Any trademark selected and developed for use in the Exclusive Territory shall be owned by Sanofi-Synthelabo. Any trademark selected and developed for use in the Joint Territory shall be owned by and registered in the name of the JV(s). The Parties hereby acknowledge and agree that rights to any such trademark in Japan shall be owned by or exclusively licensed to Cephalon. Article 14. Inventions 14.1 Disclosure of Inventions. During the pendency of this Agreement, the Parties agree to disclose to each other any and all New Inventions. 14.2 Inventorship and Ownership. Inventorship with respect to all New Inventions shall be determined in accordance with applicable patent law. The Parties hereby agree that all such New Inventions shall be owned by the Parties jointly except in cases of New Inventions made under Sole Development pursuant to Section 11.4, in which case the Party undertaking Sole Development shall own such New Inventions. Article 15. Patents 15.1 Cephalon Patent Rights. Cephalon, at its own expense, shall prepare, file, prosecute and maintain the Cephalon Patent Rights in the Exclusive Territory and Joint Territory. Cephalon shall inform Sanofi-Synthelabo of the countries within the Exclusive Territory and Joint Territory in which Cephalon intends to seek patent protection and shall file, prosecute and maintain patent applications and patents in such countries at Cephalon's expense. Each Party shall cooperate reasonably with the other upon request in promptly executing any and all instruments deemed necessary or useful by either or both Parties in connection with the preparation, filing, prosecution, maintenance or obtaining extensions of Patent Rights in the Exclusive Territory and the Joint Territory. 15.2 Joint Patent Rights. Cephalon shall have an outside law firm mutually acceptable to both Parties prepare, file, prosecute and maintain patent application and patents claiming the Joint Patent Rights and patentable New Inventions in the Exclusive Territory, Joint Territory and Japan. Cephalon shall keep Sanofi-Synthelabo fully advised (by providing copies of all draft applications, applications, office actions, draft responses and responses thereto, legal proceedings and the like) of the status of all such Joint Patent Rights. In addition, Cephalon shall send Sanofi-Synthelabo advance drafts of any documents to be filed relating to such 32 Joint Patent Rights and patentable New Inventions and shall consider the suggestions of Sanofi-Synthelabo and its patent counsel with respect to the prosecution and maintenance of such Joint Patent Rights or patentable New Inventions. If Cephalon fails to have a mutually acceptable outside law firm prepare, file, prosecute or maintain such Joint Patent Rights or patentable New Inventions, then Sanofi-Synthelabo shall have the right to assume responsibility for the preparation, filing, prosecution, and maintenance of any such Joint Patent Rights or patentable New Inventions. Each Party shall cooperate reasonably with the other upon request in promptly executing any and all patent applications, or other instruments deemed necessary or useful by either or both Parties in connection with the application, prosecution or maintenance of the Joint Patent Rights or patentable New Inventions or the implementation of Section 15.3. 15.3 Patent Costs for Joint Patent Rights. The external expenses of preparing, filing, prosecuting and maintaining Joint Patent Rights and patentable New Inventions shall be shared equally by the Parties, unless both Parties decide not to prosecute or one Party wishes to abandon its rights in and to such patent rights (the "Abandoning Party"). If both Parties decide not to prosecute in any country, Cephalon shall abandon the Patent or application. The Abandoning Party shall provide the other Party (the "Retaining Party") with timely notice of such intent. The Retaining Party shall have the right to assume ownership and responsibility for preparing, filing, prosecuting and maintaining such Joint Patent Rights or patentable New Inventions at its sole expense and shall, for the term of this Agreement, grant the Abandoning Party a nonexclusive, irrevocable fully paid up license to such Joint Patent Rights or patentable New Inventions for internal research purposes only. On a quarterly basis, the Parties shall exchange audit worthy documentation establishing the aggregate amount of external expense incurred in the preparation, filing, prosecution and maintenance of Joint Patent Rights or patentable New Inventions (excluding costs expended as a Retaining Party). The Parties further agree to make appropriate payments to each other at the end of each calendar quarter to equalize their respective external expenses incurred relating to said Joint Patent Rights and patentable New Inventions. Article 16. Infringement 16.1 Notice Regarding and Authority to Take Action Against Infringers. (a) Each Party shall promptly notify the other Party of any known infringement by third parties of the proprietary rights of either Party with regard to Cephalon Compounds, Joint Compounds, Development Compounds, Backup Compounds, Licensed Products, Patent Rights, Joint Patent Rights, Cephalon Patent Rights, Sanofi-Synthelabo Technology, patentable New Inventions and other Technology, including Cephalon Technology and Joint Technology. If any of the Cephalon Patent Rights or Joint Patent Rights are infringed in the Exclusive Territory, Joint Territory or Japan, Cephalon shall have the right but not the obligation to commence appropriate legal action to enjoin such infringement with respect to all items other than Sanofi-Synthelabo Technology at its sole expense; in such case Sanofi-Synthelabo shall provide its complete cooperation to Cephalon at its expense. If Cephalon fails to initiate such action within ninety (90) days after being notified of the infringement, 33 then Sanofi-Synthelabo shall have the right, but not the obligation, to undertake such action at its own expense in the name of Cephalon, if necessary, and Cephalon shall provide its complete cooperation to Sanofi-Synthelabo at its expense. Any damages or awards resulting from the prosecution of such claim shall be apportioned as follows: (b) If the action is brought by Cephalon at its expense, then any damages or awards shall be applied first to reimburse Cephalon for its out-of-pocket costs and expenses, with the balance, if any, to be shared by the Parties with an amount equal to [**] being retained by Cephalon, and [**] being paid to Sanofi-Synthelabo. (c) If the action is brought by Sanofi-Synthelabo at its expense, then any damages or awards shall be applied first to reimburse Sanofi-Synthelabo for its out-of-pocket costs and expenses, with the balance, if any, to be shared by the Parties with an amount equal to [**] being paid to Cephalon, and [**] being retained by Sanofi-Synthelabo. If no such damages or awards result from said prosecution or if such damages or awards are insufficient to fully reimburse the costs and expenses of Sanofi-Synthelabo associated with said prosecution, then Cephalon shall reimburse Sanofi-Synthelabo in an amount equal to [**] of such unreimbursed costs and expenses; provided however, that such reimbursement shall be effected by reducing, during that twelve (12) month period immediately following the issuance of the final order in any such action, the royalties otherwise payable by Sanofi-Synthelabo to Cephalon hereunder, but in no case shall such reduction exceed the aggregate amount due and payable by Sanofi-Synthelabo to Cephalon during said twelve (12) month period. 16.2 Notice of Infringement of Third Party Patents. Each Party shall promptly notify the other Party of any claim asserting infringement of the proprietary rights of the third Party by Cephalon Compounds, Joint Compounds, Development Compounds, Backup Compounds, Licensed Products or by the practice of Patent Rights, Joint Patent Rights, Cephalon Patent Rights, Sanofi-Synthelabo Technology, patentable New Inventions and other Technology, including Cephalon Technology and Joint Technology. 16.3 Infringement of Third Party Patents. (a) In the event either Party determines that it or a JV should obtain a license from a third party in order to import, manufacture, use or sell Licensed Products in the Exclusive Territory or the Joint Territory such party shall use reasonable commercial efforts to obtain a license from the third party for the right to continue to import, make, use and sell the Licensed Product. In the event Sanofi-Synthelabo is obligated to make any royalty payments to such third party, the applicable Royalty payable to Cephalon hereunder shall be reduced by no more than [**] of the royalty payment otherwise owed to Cephalon. If the sum of royalty payments to such third party and to Cephalon and Transfer Price exceed [**], Sanofi-Synthelabo shall have the option to return its rights under this Agreement to the Cephalon Licensed Product to Cephalon without any penalty and Sanofi-Synthelabo shall be relieved of all milestone, royalty and cost sharing obligations related to such Licensed Product. In the event the rights in Licensed Product are returned to Cephalon, and Cephalon markets the Licensed Product in the Exclusive Territory, or grants a license to a third party to market the Licensed Product in the Exclusive Territory, Sanofi-Synthelabo shall be entitled to 34 a development royalty on Net Sales of such Licensed Product (a "Development Royalty") of [**] unless the Licensed Product is the subject of Sole Development by Sanofi-Synthelabo pursuant to Section 11.4, in which case the development royalty payable to Sanofi-Synthelabo shall be [**]. In the event a JV is obligated to make any royalty payments to such third party, such payment shall be deducted from the expenses of the entity before distribution of applicable profits or losses. (b) Joint Territory If a claim alleging infringement of third party patents in the Joint Territory by a Licensed Product is made against Cephalon, Sanofi-Synthelabo or a JV, then Cephalon may elect to defend against such a claim on behalf of the defendant at the cost and expense (including, without limitation, attorneys fees), of Cephalon, but Sanofi-Synthelabo may be represented in such event by legal counsel in an advisory capacity at its own expense. However, if Cephalon does not elect to defend against such a claim within one hundred twenty (120) days after receiving notice (whether from Sanofi-Synthelabo or otherwise) of such claim, Sanofi-Synthelabo has the right, but not the obligation, to defend against such claim at its own expense. The Party assuming said defense shall keep the other Party informed of the status of the case and shall be entitled to any damages awarded based on such claim. (c) Exclusive Territory If a claim alleging infringement of third party patents in the Exclusive Territory by a Licensed Product is made against Sanofi-Synthelabo, then Sanofi-Synthelabo may elect to defend against such a claim on behalf of Cephalon at the cost and expense (including, without limitation, attorneys fees), of Sanofi-Synthelabo, but Cephalon may be represented in such event by legal counsel in an advisory capacity at its own expense. Cephalon shall provide reasonable assistance to Sanofi-Synthelabo to enable it to defend such claim. However, if Sanofi-Synthelabo does not elect to defend against such a claim within one hundred twenty (120) days after receiving notice (whether from Cephalon or otherwise) of such claim, Cephalon has the right, but not the obligation, to defend against such claim at its own expense. The Party assuming said defense shall keep the other Party informed of the status of the case and shall be entitled to any damages awarded based on such claim. (d) Regardless of which Party assumes the defense of any such claim, if damages are awarded based upon said claim, then the Parties shall allocate the responsibility for paying said damages in proportion to their respective economic interests in the country or countries within the Exclusive Territory or Joint Territory as to which such damage award is based. Article 17. Term and Termination 17.1 Term of the Agreement. (a) General. This Agreement shall commence as of the Effective Date, and shall continue until the last to occur of (i) the expiration of the Initial Research Term, (ii) the termination of all development hereunder, or (iii) the date through which royalties are no longer 35 payable to Cephalon or Sanofi-Synthelabo on any Licensed Product pursuant to Sections 6.2(b), 6.3 and 11.4 hereof. Upon expiration pursuant to Section 17.1(a)(iii) hereinabove, Sanofi-Synthelabo shall have a irrevocable license to make, have made, use, sell and offer for sale Cephalon Licensed Products in the Exclusive Territory for so long at it pays Cephalon a royalty of [**] on Net Sales which obligation shall survive any termination of this Agreement except under Section 17.6(c) hereof. Upon expiration pursuant to 17.1 (a) (iii) hereinabove JVs shall have a fully paid up license to make, have made, use, sell and offer for sale Licensed Products for so long as the JVs exist as jointly owned entities. As soon as one Party (or its Affiliates) wishes to exit a JV, the remaining Party has the right to purchase the exiting Parties (or its Affiliates) interest at fair market value. If such Party does not exercise such right or there is no agreement on fair market value, the JV shall be liquidated in accordance with the applicable agreement. Upon the expiration or termination of the Research Program and the Development Program (provided that no Cephalon Compound is under Sole Development by either Party) and no Licensed Product has been commercialized, the licenses granted under Article 4, except for the license granted under Section 4.7, shall terminate and all rights granted hereunder shall expire, the Parties shall have no further obligations to one another except as provided under Section 17.11 and the Parties are shall be entitled to the full benefit and use of any Joint Technology subject to Section 4.7 hereof. (b) Early Termination. Either Party shall be entitled to terminate this Agreement in its entirety without cause upon written notice to the other Party for a period of seventy-five (75) days after the Effective Date without any liability of any nature to the other Party whatsoever except for the terms and conditions of Sections 4.7, 7.4 and 21.6 and Articles 12, 18 and 20. For the avoidance of doubt, the Parties confirm any and all payment obligations hereunder shall be voided by termination pursuant to this Section 17.1(b). 17.2 Effects of Termination of Research Program. Upon the expiration of the Research Program, the licenses granted under Article 4 hereof automatically shall be curtailed so as to limit going forward the rights granted to Sanofi-Synthelabo thereunder as follows: (i) Sanofi-Synthelabo shall have rights only as to the Development Compounds (and to Backup Compounds thereto) and only for so long as at least one such Development Compound is being diligently developed or commercialized by the Parties; and (ii) Sanofi-Synthelabo shall have the right to use Cephalon Technology (regardless of whether it has been developed under the Research Program) only in connection with the further development of Development Compounds (and of Backup Compounds thereto). For purposes of clarification, the Parties hereby confirm that all worldwide rights in any Compounds and Cephalon's rights in any Joint Compounds granted by Cephalon to Sanofi-Synthelabo hereunder shall automatically revert to Cephalon unless they are designated as Development Compounds or Backup Compounds. Upon expiration of the Research Program, the cooperation between the Parties under this Agreement shall continue for all Compounds which have met the criteria for being either Backup Compounds or Development Compounds. 17.3 Termination for Breach By Either Party. Upon breach of any material provision of this Agreement, the breaching Party will be given written notice and ninety (90) days within which to remedy such breach. Failure to remedy any such breach within this time period will constitute sufficient grounds for termination by the other Party without any further notice. 36 17.4 Termination Upon Insolvency. This Agreement may be terminated by a Party if, at any time, the other Party shall file in any court or agency pursuant to any statute or regulation of any state or country, a petition in bankruptcy or insolvency or for reorganization or for an arrangement or for the appointment of a receiver or trustee of the Party or of its assets, or if the other Party proposes a written agreement of composition or extension of its debts, or if the other Party shall be served with an involuntary petition against it filed in any insolvency proceeding, and such petition shall not be dismissed within ninety (90) days after the filing thereof, or if the other Party shall propose or be a party to any dissolution or liquidation, or if the other Party shall make an assignment for the benefit of creditors. 17.5 Effects of Termination by Cephalon For Breach by Sanofi-Synthelabo or Insolvency of Sanofi-Synthelabo. Upon termination of this Agreement due to unremedied breach by Sanofi-Synthelabo as described in Section 17.3, or the insolvency of Sanofi-Synthelabo as described in Section 17.4, the following provisions shall apply: (a) The effects of termination by Cephalon for breach by Sanofi-Synthelabo shall be limited, where possible, to rights in and obligations with respect to the specific Development Compound, Backup Compound, Licensed Product or territory which is the subject of the breach ("Breach-related Product"); for clarity, the rights in and obligations with respect to Development Compounds, Backup Compounds, Licensed Products and territory which are not subject to the breach shall remain in full force and effect, subject only to the terms and conditions of this Agreement. (b) Breach relating to the Joint Territory. (i) All rights granted to Sanofi-Synthelabo under this Agreement in the Breach-related Products in the Joint Territory shall immediately revert to Cephalon and Sanofi-Synthelabo shall immediately cease its use of all such rights in the Joint Territory; (ii) Any outstanding unpaid Cephalon invoices relating to the Breach-related Product in the Joint Territory shall become due and payable immediately in lieu of any payment terms previously agreed upon by the Parties; (iii) Sanofi-Synthelabo shall cease, and shall cause its Affiliates to cease, use of all Breach-related Products in the Joint Territory, and shall cease all marketing, sales and distribution thereof in the Joint Territory; (iv) Sanofi-Synthelabo will provide Cephalon with all copies of any NDA (or its equivalent ) for the Breach-related Product and any accompanying documentation (including without limitation all regulatory agency correspondence) in its possession or, if such registration application has not yet been filed in the Joint Territory prior to the date of termination, with all pre-clinical and clinical data relating to the Breach-related Product in its possession on such date; (v) Sanofi-Synthelabo immediately will grant to Cephalon a perpetual, exclusive 37 (exclusive even as to Sanofi-Synthelabo), fully-paid, royalty-free license under the Joint Technology and any Sanofi-Synthelabo Technology necessary to enable Cephalon to make, have made, use, sell and offer for sale Breach-related Products in the Joint Territory; and (vi) If the JV(s) have been formed prior to the date of termination, Sanofi-Synthelabo shall immediately transfer to Cephalon its entire right, title and interest in the JV(s) with respect to the Breach-related Product without any compensation or payment of any kind. (vii) If applicable Sanofi-Synthelabo shall immediately transfer its entire right, title and interest to Cephalon in any trademark selected and developed for the Breach-related Products for the Joint Territory. (c) Breach relating to the Exclusive Territory. (i) All rights granted to Sanofi-Synthelabo under this Agreement in the Exclusive Territory in the Breach-related Product shall immediately revert to Cephalon, and Sanofi-Synthelabo shall immediately cease its use of such rights in the Exclusive Territory; (ii) Any outstanding unpaid Cephalon invoices relating to the Breach-related Product in the Exclusive Territory shall become due and payable immediately in lieu of any payment terms previously agreed upon by the Parties; (iii) Sanofi-Synthelabo shall cease use of all Breach-related Product(s) in the Exclusive Territory, and shall cease all marketing, sales and distribution thereof in the Exclusive Territory; provided, however, that Sanofi-Synthelabo shall have the right to sell in accordance with the terms of this Agreement all unsold inventories of such Breach-related Products in its possession unless Cephalon, in its sole discretion, shall exercise the option, by written notice to Sanofi-Synthelabo on or before the effective date of such termination, to repurchase all remaining inventory then held by Sanofi-Synthelabo at Sanofi-Synthelabo's cost for such inventory; (iv) Sanofi-Synthelabo will provide Cephalon with all copies of any MAA (or its equivalent) for the Breach-related Product and any accompanying documentation (including without limitation all regulatory agency correspondence in its possession or, if such registration application has not yet been filed in the Exclusive Territory prior to the date of termination, with all pre-clinical and clinical data relating to the Breach-related Product in its possession on such date. At the request of Cephalon, Sanofi-Synthelabo shall take all steps as may be required by applicable law to transfer any such Breach-related Product registration to Cephalon, or otherwise to enable Cephalon to market and sell the Breach-related Product in the Exclusive Territory, and also shall provide full support to Cephalon to facilitate the prompt execution of such legal transfer. In no event shall Cephalon be obligated to pay any fee or to make any other payment to Sanofi-Synthelabo, to the local government in the Exclusive Territory, or to any third party, to effect such legal transfer; (v) Sanofi-Synthelabo immediately will grant to Cephalon a perpetual, 38 exclusive (exclusive even as to Sanofi-Synthelabo), fully paid, royalty-free license under the Joint Technology and any Sanofi-Synthelabo Technology held by necessary to enable Cephalon to make, have made, use, sell and offer for sale Breach-related Products in the Exclusive Territory; and (vi) Sanofi-Synthelabo shall immediately transfer its entire right, title and interest to Cephalon in any trademark selected and developed for the Breach-related Products in the Exclusive Territory. 17.6 Effects of Termination by Sanofi-Synthelabo For Breach by Cephalon or Insolvency of Cephalon. Upon termination of this Agreement due to unremedied breach by Cephalon as described in Section 17.3, or the insolvency of Cephalon as described in Section 17.4, the following provisions shall apply: (a) The effects of termination by Sanofi-Synthelabo for breach by Cephalon shall be limited, where possible, to rights in and obligations with respect to the specific Development Compound, Backup Compound, Licensed Product or territory which is the subject of the Breach-related Product; for clarity, the rights in and obligations with respect to Development Compounds, Backup Compound, Licensed Products and territory which are not subject to the breach shall remain in full force and effect, subject only to the terms and conditions of this Agreement. (b) Breach relating to the Joint Territory. (i) Any outstanding unpaid Sanofi-Synthelabo invoices relating to the Breach-related Product in the Joint Territory shall become due and payable immediately in lieu of any payment terms previously agreed upon by the Parties; (ii) Cephalon shall cease use of all Breach-related Products in the Joint Territory, and shall cease all marketing, sales and distribution thereof in the Joint Territory; (iii) Cephalon will provide Sanofi-Synthelabo with all copies of any NDA (or its equivalent) for the Breach-related Product and any accompanying documentation (including without limitation all regulatory agency correspondence) in its possession or, if such registration application has not yet been filed in the Joint Territory prior to the date of termination, with all pre-clinical and clinical data relating to the Breach-related Product in its possession on such date; (iv) Cephalon immediately will grant to Sanofi-Synthelabo a perpetual, exclusive (exclusive even as to Cephalon), fully-paid, royalty-free license under the Joint Technology and Cephalon Technology necessary to enable Sanofi-Synthelabo to make, have made, use, sell and offer for sale Breach-related Products in the Joint Territory; and (v) If the JV(s) have been formed prior to the date of termination, upon request, Cephalon shall immediately transfer to Sanofi-Synthelabo its entire right, title and interest in the JV(s) with respect to the Breach-related Product without any compensation or payment of any 39 kind. (vi) If applicable and upon Sanofi-Synthelabo request, Cephalon shall immediately transfer its entire right, title and interest to Sanofi-Synthelabo in any trademark selected and developed for the Breach-related Products in the Joint Territory. (c) Breach relating to the Exclusive Territory. (i) Any outstanding unpaid Sanofi-Synthelabo invoices relating to the Breach-related Product in the Exclusive Territory shall become due and payable immediately in lieu of any payment terms previously agreed upon by the Parties; (ii) Cephalon will provide Sanofi-Synthelabo with all copies of any MAA for Breach-related Product and any accompanying documentation (including without limitation all regulatory agency correspondence) in its possession or, if such registration application has not yet been filed in the Exclusive Territory prior to the date of termination, with all pre-clinical and clinical data relating to all the Breach-related Products in its possession on such date; (iii) Cephalon immediately will grant to Sanofi-Synthelabo a perpetual, exclusive (exclusive even as to Cephalon), fully-paid, royalty-free license under the Joint Technology and any Cephalon Technology held by Cephalon necessary to enable Sanofi-Synthelabo to make, have made, use, sell and offer for sale Breach-related Products in the Exclusive Territory; and (iv) If applicable, Cephalon shall immediately transfer its entire right, title and interest to Sanofi-Synthelabo in any trademark selected and developed for the Breach-related Products in the Exclusive Territory. 17.7 Termination for Safety Reasons Either Party may terminate the Agreement at any time with respect to any Cephalon Compound, Development Compound or Licensed Product if, in that Party's sole judgment, such Cephalon Compound, Development Compound or Licensed Product is unsafe. In the event of such a termination, the terminating Party shall not be responsible for any costs or expenses otherwise payable by such Party except for costs or expenses already incurred or for which binding commitments have been made. The terminating Party shall also forfeit all rights granted under this Agreement with respect to such Cephalon Compound, Development Compound or Licensed Product. To the extent the non-terminating Party or a JV continues to develop or commercialize such Cephalon Compound, Development Compound or License Product, the non-terminating Party shall hold the terminating Party harmless from any and all liability, loss, damages, costs or expenses (including reasonable attorneys' fees) stemming from third party claims or actions based upon such continued development or commercialization. 17.8 Termination at end of Phase 2 Clinical Trial. Either Party may terminate this Agreement for any reason with respect to any Development Compound following the 40 completion of Phase 2 Clinical Trial. In the event of such a termination, the terminating Party shall not be responsible for any costs, expenses, milestones or royalties otherwise payable by such Party except for costs or expenses already incurred or for which binding commitments have been made. The terminating Party shall also forfeit all rights granted under this Agreement with respect to such Development Compound except for the Discovery Royalty owed to Cephalon in the event such Development Compound is commercialized. To the extent the non-terminating Party or a JV continues to develop or commercialize such Development Compound, the non-terminating Party shall hold the terminating Party harmless from any and all liability, loss, damages, costs or expenses (including reasonable attorneys' fees) stemming from third party claims or actions based upon such continued development or commercialization. 17.9 Termination at end of Phase 3 Clinical Trial. Either Party may terminate this Agreement for any reason with respect to any Development Compound while the Development Compound is in Phase 3 Clinical Trial (the "Terminating Party"). If the non-terminating Party desires to continue with the development or commercialization of the Development Compound, it may only do so by purchasing the rights of the terminating Party in the Development Compound in accordance with Sections 17.10(a) and 17.10(c). Following the notice of termination, the non-terminating party shall not be responsible for any costs, expenses, milestones or royalties otherwise payable by such Party except for costs or expenses already incurred or for which binding commitments have been made prior to the notice of termination. The terminating Party shall also forfeit all rights granted under this Agreement with respect to such Development Compound. To the extent the non-terminating Party or a JV continues to develop or commercialize such Development Compound, the non-terminating Party shall hold the terminating Party harmless from any and all liability, loss, damages, costs or expenses (including reasonable attorneys' fees) stemming from third party claims or actions based upon such continued development or commercialization. Notwithstanding anything to the contrary herein, any on-going studies under the Development Program shall be completed by the Parties and, if applicable, during acquisition of rights to the Development Compound by the non-Terminating Party, the Parties shall take any and all steps necessary to preserve the safety of the patients and conclusion of such Phase 3 Clinical Trials. 17.10 Consequences of Deadlock Termination or Termination Under Section 17.9. (a) Within a thirty (30) day period after completion of mediation as provided under Section 21.10(c) or after the notice of termination according to Section 17.9, the Parties shall appoint a panel of independent, internationally recognized, investment bankers with experience in the appraisal of pharmaceutical companies to determine the fair market value in the Joint Territory, the Exclusive Territory or both of the Development Compound or Licensed Product which is subject to Deadlock set forth in Section 3.5(b) or subject to termination set forth in Section 17.9 hereunder (hereinafter, the "Right"); provided, however, that solely with respect to Deadlock under Section 3.5(b), if Phase 3 Clinical Trials have commenced for such Licensed Product, only the rights to the Joint Territory may be purchased and sold under this Section 17.10. Fair market value shall mean the price at which such Right would be sold if neither the purchaser nor the seller were under a compulsion to 41 buy or to sell. The panel of investment bankers shall consist of a representative appointed by Cephalon, a representative appointed by Sanofi- Synthelabo, and a third representative chosen by the above two investment bankers. Within sixty (60) days after the appointment of the panel of investment bankers, such panel shall determine the fair market value of the Right that is the subject of the dispute and report the determination to the Parties. The Parties agree that they shall share equally the cost of the appraisal, including the cost of the panel of investment bankers. The fair market value of the Right as determined by the panel shall be the purchase price of the Right (the "Purchase Price"). (b) In the case of purchase of the Right under Section 3.5(b), the non-Controlling Party shall purchase the Right from the Controlling Party and the Controlling Party shall sell the Right to the non-Controlling Party for the Purchase Price at a closing (the "Deadlock Closing") to be held at the offices of the Controlling Party at a date and time specified by the Controlling Party, which Deadlock Closing date shall be not less than five (5) nor more than ten (10) business days after the panel of investment bankers has determined and reported the Purchase Price of the Right to each of the Parties. At the Closing, the Controlling Party shall transfer the Right to the non-Controlling Party free and clear of all security interests, liens, claims and other encumbrances. The Purchase Price shall be paid by wire transfer of immediately available funds to an account designated by the non-Controlling Party. At the option of the non-Controlling Party the Purchase Price may be made in a lump sum, or in the form of periodic payments (including royalties) or a combination thereof. In the event the non-Controlling Party elects to make periodic payments, the panel of investment bankers shall also determine the amount and time of such payments, factoring in the cost and risk to the non-Controlling Party. Notwithstanding anything to the contrary herein, any on-going studies under the Development Program shall be completed by the Parties and during the pendency of the Deadlock the Parties shall take any and all steps necessary to preserve the safety of the patients and conclusion of the studies. (c) In the case of purchase of the Right under Section 17.9, the non-Terminating Party elects to continue with the Development or Commercialization of a Development Compound, such Party may do so only by purchasing the Rights of the Terminating Party as follows. The non-Terminating Party shall purchase the Right from the Terminating Party and the Terminating Party shall sell the Right to the non-Terminating Party for the Purchase Price at a closing to be held at the offices of the Terminating Party at a date and time specified by the Terminating Party, which closing date shall be not less than five (5) nor more than ten (10) business days after the panel of investment bankers has determined and reported the Purchase Price of the Right to each of the Parties. At the closing, the Terminating Party shall transfer the Right to the non-Terminating Party free and clear of all security interests, liens, claims and other encumbrances. The Purchase Price shall be paid by wire transfer of immediately available funds to an account designated by the non-Terminating Party. At the option of the non-Terminating Party, the Purchase Price may be made in a lump sum, or in the form of periodic payments (including royalties) or a combination thereof. In the event the non-Terminating Party elects to make periodic payments, the panel of investment bankers shall also determine the amount and time of such payments, factoring in the cost and risk to non-Terminating Party. 42 17.11 Survival of Obligations. The terms and conditions of Sections 4.7, 5.3, 5.4, 6.3, 6.6(a), 7.4, 17.10 and 17.12, Article 12, Article 18, and Article 20 of this Agreement shall survive the expiration or termination hereof. 17.12 Surviving Licenses. The Parties hereby agree to grant to the non-Terminating or non-Controlling Party any licenses required to effect their rights hereunder Sections 17.8, 17.9 and 17.10. 17.13 Remedies. Expiration or early termination, in part or in whole, of this Agreement pursuant to this Article 17 shall be without prejudice to any rights which shall have accrued to the benefit of any Party prior to such expiration or termination, provided, however, in the event of termination due to unremedied breach, the breaching Party's pro rata interest in the fair market value of the Breach-related Products acquired, if any, by the non-breaching Party shall be netted against the amount of any successful claim for damages, provided, further, in no event shall the non-breaching Party owe any amount to the breaching Party if the value of its pro rata interest is greater than the amount of damages. Article 18. Confidentiality. 18.1 Confidential Information. During the term of this Agreement, and for five (5) years after its termination or expiration, each Party and its Affiliates shall maintain in confidence any information concerning the subject matter hereof provided by the other Party (the "Providing Party"), and that is considered to be confidential by the Providing Party, regardless of whether provided prior to or after the Effective Date. Such information, collectively the "Confidential Information" includes but is not limited to Technology, documentation, business plans, cost and operational information, whether or not related to Cephalon Compounds or Licensed Products. Confidential Information shall not be used or disclosed to others except for carrying out the purpose of this Agreement. The foregoing obligation of confidentiality shall not apply to any portion of the Confidential Information that a Party ("Receiving Party") can demonstrate: (a) was already known to the Receiving Party; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure; (c) became generally available to the public or otherwise part of the public domain after its disclosure to the Receiving Party, other than through any act or omission of the Receiving Party in breach of this Agreement; (d) was subsequently lawfully disclosed to the Receiving Party by a third party; (e) was independently developed by the Receiving Party without use of the Confidential Information as evidenced by written documentation; or 43 (f) the Receiving Party was compelled to disclose by governmental administrative agency or judicial requirements; provided however, that any disclosure under this Subsection 18.1(f) shall neither relieve the Receiving Party from attempting to impose confidentiality obligations on the governmental administrative agency or judicial body, to the extent feasible, nor shall it relieve the Receiving Party from maintaining the confidentiality of the Confidential Information with respect to third parties other than the agency or body as to which such compelled disclosure has been made. To the extent possible, the Receiving Party shall notify the other Party of any governmental administrative agency or judicial requirement for the disclosure of Confidential Information in sufficient time to enable such other Party to apply for a protective order preventing or limiting such disclosure. 18.2 Protection of Confidential Information. The Parties shall take all reasonable steps to eliminate the risk of disclosure of Confidential Information, including, without limitation, ensuring that only employees, agents, and representatives with a need to know the Confidential Information have access thereto. The Parties acknowledge by the signing of this Agreement that such employees, agents, and representatives are to be bound by substantially similar obligations of confidentiality as are established under this Article 18. 18.3 Presumptive Confidentiality of Information Exchanged. All information exchanged by the Parties under the terms and conditions of this Agreement shall be considered Confidential Information and treated as such unless otherwise specified and agreed upon by the Parties. 18.4 Use Following Termination For Breach. In the event that this Agreement is terminated for breach under the terms of Article 18, nothing herein shall be construed so as to preclude the non-breaching Party from disclosing to a competent regulatory authority or to a third party any preclinical or clinical data, or other Confidential Information, that it may deem necessary or advisable in order to support the further development or commercialization of Development Compounds or Licensed Products. Article 19. Representations, Warranties and Covenants 19.1 General Representations. Each Party hereby represents, warrants and covenants to the other as follows: (a) Duly Organized. It is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, is qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which the conduct of its business or the ownership of its properties requires such qualification and has all requisite power and authority, corporate or otherwise, to conduct its business as now being conducted, to own, lease and operate its properties and to execute, deliver and perform this Agreement; 44 (b) Due Execution. The execution, delivery and performance by it of this Agreement have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of its stockholders, (ii) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to it or any provision of its charter or by-laws, or (iii) result in a breach of or constitute a default under any agreement, mortgage, lease, license, permit, patent or other instrument or obligation to which it is a Party or by which it or its assets may be bound or affected; (c) No Third Party Approval. No authorization, consent, approval, license, exemption of, or filing or registration with, any court or governmental authority or regulatory body is required for the due execution, delivery or performance by it of this Agreement; (d) Binding Agreement. This Agreement is a legal, valid and binding obligation of such Party, enforceable against it in accordance with its terms and conditions, except as may be limited by bankruptcy laws or other laws affecting the rights of creditors generally, and rules of law governing equitable remedies. Each is not under any obligation to any person, contractual or otherwise, that is conflicting or inconsistent in any respect with the terms of this Agreement or that would impede the diligent and complete fulfillment of its obligations hereunder; (e) Inventions. It will take all steps reasonably necessary to ensure that its employees convey to it all rights in and to any and all inventions that may be conceived or reduced to practice by said employees; (f) Debarment. It is not debarred or suspended from receiving contracts from the United States government or other governmental authority or agency; (g) Good Practices. All preclinical and clinical studies involving Compounds will be conducted in accordance with current good laboratory practices (GLP) as specified by the applicable laws and regulations in the relevant country at the time of such laboratory research; good clinical practices (GCP) as specified by the applicable laws and regulations in the relevant country at the time of such studies, and that the Development Compounds will be manufactured in accordance with current good manufacturing practices (GMP) as specified by the applicable laws and regulations of the relevant countries at the time of manufacture; and (h) Full Disclosure. It has disclosed in good faith any and all material information related to the subject matter hereof and to the performance of its obligations hereunder. 19.2 Cephalon Representations, Warranties and Covenants. Cephalon hereby represents, warrants and covenants to Sanofi-Synthelabo that, as of the Effective Date: (a) Cephalon is the owner of the right, title and interest in and to the Cephalon Patent Rights and Cephalon Technology, all Cephalon Patent Rights are valid and there is no lien or other encumbrances effecting Cephalon Patent Rights or Cephalon Technology. (b) It has the right to grant to Sanofi-Synthelabo the licenses provided for in this 45 Agreement and that patents listed in Exhibit B are a complete list of Patent Rights as of the Effective Date related to the Compounds; (c) Except as otherwise provided herein, during the term of this Agreement it will not grant rights in the Field to any third party with respect to the research, development, use, manufacture, marketing, sale or distribution of CEP-7055, Backup Compounds and Development Compounds in the Exclusive Territory and Joint Territory; (d) There is no litigation, investigation, proceeding, or claim pending or threatened against the Cephalon Technology and the best of knowledge its knowledge no known claim that Cephalon Technology infringes the rights of a third party. (e) For so long as Sanofi-Synthelabo or one of its Affiliates is, directly or indirectly, engaged in the diligent development or registration of a Development Compound or a Licensed Product containing such Development Compound, [**] [**] [**] For the avoidance of doubt, nothing contained in this Section 19.2(e) shall prevent Sole Development by Cephalon as provided in Article 11. Sanofi-Synthelabo's decision in Section 19.2(e)(i) and Section 19.2(e)(ii) must be provided in writing no later than sixty (60) days after Cephalon's notice. With respect to [**] under Section 19.2(e)(ii), Cephalon and Sanofi-Synthelabo agree to negotiate in good faith for a period not to exceed ninety (90) days to [**] to Sanofi-Synthelabo on terms to be mutually agreed upon. If Cephalon and Sanofi-Synthelabo are not able to agree [**] after good faith negotiations within ninety (90) days after Sanofi-Synthelabo's notice to Cephalon, or if Sanofi-Synthelabo does not provide notice to Cephalon of its interest within the sixty (60) day period described above, [**] shall expire and shall be of no further force and effect, provided, however, Cephalon shall not enter into any agreement with a third party on terms and conditions more favorable to such third party than those offered to Sanofi-Synthelabo in accordance with the procedures set forth herein without first offering such more favorable terms to Sanofi-Synthelabo in accordance with the procedures set forth herein. (f) During the Initial Research Term and any extensions thereof, Cephalon shall not collaborate with any third party to develop or commercialize any Compound in the Field in the Joint Territory or the Exclusive Territory. (g) As of the date hereof, it is not actually aware of any claims by third parties challenging the validity of any Cephalon Patent Rights. 46 19.3 Sanofi-Synthelabo Representations, Warranties and Covenants. Sanofi-Synthelabo hereby represents, warrants and covenants to Cephalon that as of the Effective Date: (a) Sanofi-Synthelabo and/or one of its Affiliates is acknowledged by the authorities in parts of the Exclusive Territory or Joint Territory as an approved manufacturer and marketer of drugs, and is as such under the inspection of the competent authorities; and (b) During the pendency of the Research Program or the Development Program, it will not engage in any research or development activity with respect to any chemical entities that have Targets that are the same as, or substantially similar to, the Targets, other than as provided by Article 11 hereof. 19.4 Warranty Disclaimers. Nothing in this Agreement shall be construed as: (a) a warranty or representation by Cephalon as to the validity or scope of the Cephalon Technology, other than as specifically provided to the contrary herein; (b) a warranty or representation that anything made, used, sold or otherwise disposed of under this Agreement is or will be free from infringement of patents, copyrights and trademarks of third parties except as provided in Section 19.2(d); (c) an obligation to bring or prosecute actions or suits against third parties for infringement; (d) except as otherwise provided herein, conferring rights to use in advertising, publicity or otherwise any trademark or the name of Cephalon or Sanofi-Synthelabo; (e) any representation by either Party, express or implied, other than as specifically set forth herein, including representations of merchantability or fitness for a particular purpose, or that the use, manufacture, sale or distribution of Licensed Products will not infringe upon any third party patent, copyright, trademark or other rights. Article 20. Indemnification 20.1 Sanofi-Synthelabo Indemnities. Cephalon shall indemnify and hold Sanofi-Synthelabo, its parent companies, Affiliates and subsidiaries, and the officers, directors and employees of each of them (the "Sanofi-Synthelabo Indemnitees") harmless from any and all liability, loss, damages, costs or expenses (including reasonable attorneys' fees) stemming from third party claims or actions (or the threat thereof) that are based upon (i) the breach of any material covenant, representation or warranty of Cephalon contained in this Agreement; (ii) the manufacture, use, marketing, promotion, sale or distribution by Cephalon (or any Affiliate, assignee or sublicensee thereof) of any Development Compounds or Licensed Products; (iii) the use by any person of any bulk drug substance or Licensed Products that were manufactured, marketed, sold or distributed by Cephalon (or any Affiliate, assignee or sublicensee thereof), including without limitation, any claim that said use resulted in personal injury or death; and (iv) 47 the costs incurred by Sanofi-Synthelabo in the successful enforcement of its rights under this Section 20.1. Notwithstanding anything to the contrary herein, Cephalon shall have no obligation to so indemnify the Sanofi-Synthelabo Indemnitees to the extent that such losses, liabilities, obligations, claims, fees or expenses are based upon the gross negligence or willful misconduct conduct of the Sanofi-Synthelabo Indemnitees. 20.2 Cephalon Indemnitees. Sanofi-Synthelabo shall indemnify and hold Cephalon, its parent companies, Affiliates and subsidiaries, and the officers, directors and employees of each of them (the "Cephalon Indemnitees") harmless from any and all liability, loss, damages, costs or expenses (including reasonable attorneys' fees) stemming from third party claims or actions (or the threat thereof) that are based upon (i) the breach of any material covenant, representation or warranty of Sanofi-Synthelabo contained in this Agreement; (ii) the manufacture, use, marketing, promotion, sale or distribution by Sanofi-Synthelabo (or any Affiliate, assignee or sublicensee thereof) of any Development Compounds or Licensed Products; unless such claim is based upon the manufacture by Cephalon of the Development Compound or Licensed Product; (iii) the use by any person of any Development Compounds or Licensed Products that were manufactured, marketed, sold or distributed by Sanofi-Synthelabo (or any Affiliate, assignee or sublicensee thereof), including without limitation, any claim that said use resulted in personal injury or death; unless such claim is based upon the manufacture by Cephalon of the Development Compound or Licensed Product; and (iv) the costs incurred by Cephalon in the successful enforcement of its rights under this Section 20.2. Notwithstanding anything to the contrary herein, Sanofi-Synthelabo shall have no obligation to so indemnify the Cephalon Indemnitees to the extent that such losses, liabilities, obligations, claims, fees or expenses are based upon the gross negligence or willful misconduct conduct of the Cephalon Indemnitees. 20.3 Indemnification Procedures. In the event that one Party receives notice of a claim, lawsuit, or liability for which it is entitled to indemnification by the other Party, the Party receiving notice shall give prompt notification to the indemnifying Party. The Party being indemnified shall cooperate fully with the indemnifying Party throughout the pendency of the claim, lawsuit or liability, and the indemnifying Party shall have complete control over the conduct and disposition of the claim, lawsuit, or liability, except that indemnifying Party shall have no obligation to provide indemnity with respect to any amounts paid in settlement of any claims if such settlement is effected without the prior written consent of the indemnifying Party. Article 21. General. 21.1 Headings. The headings and captions used herein are for the convenience of the Parties only and are not to be construed to define, limit, or affect the construction or interpretation thereof. 21.2 Severability. The provisions of this Agreement are separate and divisible, and the invalidity or unenforceability of any part shall not affect the validity or enforceability of any remaining part or parts, all of which shall remain in full force and effect. However, the 48 Parties agree to substitute, any invalid or unenforceable provision, by a valid and enforceable provision which maintains, to the greatest extent possible, the respective interests of the Parties otherwise established hereunder. 21.3 Entire Agreement. This Agreement contains the entire agreement of the Parties regarding the subject matter hereof and supersedes all prior agreements, understandings or conditions (whether oral or written) regarding the same. This Agreement may not be changed, modified, amended or supplemented except by a written instrument signed by both Parties. 21.4 Assignability and Sublicenses. Except as otherwise provided herein, this Agreement shall not be assignable, sublicensable or transferable, either in whole or in part, by either Party without the prior written consent of the other; provided, however, that either Party may assign or sublicense this Agreement to its respective Affiliates without such consent. In any event, no such assignment, sublicense or transfer shall relieve any Party of responsibility for the performance of any accrued obligation which such Party has then hereunder. 21.5 Publications. (a) With respect to research and development activities conducted by the Parties pursuant to Research Program or Development Program, each Party agrees that prior to making any presentations or publications (individually, a "Publication") in the Joint Territory or the Exclusive Territory relating to the results of such activities, each Party shall provide to the other Party a copy of any proposed written Publication relating to the results of such activities at least thirty (30) days prior to submission or publication thereof. The Party desiring to submit such a Publication in the Joint Territory or the Exclusive Territory shall not do so without the prior written consent of the other Party, which consent shall not be unreasonably withheld. If a Party fails to object to such Publication within such thirty (30) pre-submission time period, such Party shall be deemed to have consented to such Publication. (b) With respect to activities that are conducted by certain academic and/or government institutions, each Party shall protect Confidential Information, patentable inventions, and commercially sensitive disclosures. The Parties agree to provide the JMT or its designated Committee with a copy of any proposed written or oral presentation, abstract and/or publication relating to the results of such academic and/or government activities at least thirty (30) days prior to submission thereof for publication or presentation thereof and shall delay such disclosures to the extent possible to preserve the confidential or commercially sensitive nature of such disclosures. Each Party will take due note of any comment by the other Party and shall respect the response of the other Party. 21.6 Public Announcements. Each Party agrees that, except as may be required by law, it shall not disclose the existence, substance or details of this Agreement without the prior written consent of the other Party. In cases in which disclosure is proposed or required by law, the disclosing Party, prior to such disclosure, will notify the non-disclosing Party of the contents of the proposed disclosure, provided however, that subsequent disclosure(s) of the same or substantially similar contents shall not require further consent. The non-disclosing Party shall 49 have the right to make reasonable changes to the disclosure to protect its interests. The disclosing Party shall not unreasonably refuse to include such changes in its disclosure. In addition, neither of the Parties will issue a press release or make a public announcement that has, as its major focus, any aspect of the commercialization of a Licensed Product, without the prior written approval of the other Party, which approval will not be unreasonably withheld, provided, however, the foregoing shall not apply to: (i) any public disclosure required by applicable law; (ii) any press release or public announcement relating to the commercialization of a Licensed Product the Exclusive Territory; and (iii) any sales figures for a Licensed Product communicated to the financial community. The Parties hereto expressly confirm that neither Party shall issue, nor is it required by law to issue, any public disclosure concerning the execution of this Agreement until the expiry of the time period set forth in Section 17.1(b). 21.7 Further Assurances. Each Party hereto agrees to execute, acknowledge and deliver such further instruments, and to take such other actions, as may be necessary to appropriate in order to carry out the purposes and intent of this Agreement. 21.8. Notices and Reports. All notices, consents or approvals required by this Agreement shall be in writing and sent by courier or by certified or registered air mail, postage prepaid or by facsimile or courier (confirmed by such certified or registered mail) to the Parties at the following addresses or such other addresses as may be designated in writing the respective Parties. Notices shall be deemed effective on the date of mailing. If to Cephalon: Senior Vice President & General Counsel Cephalon, Inc. 145 Brandywine Parkway West Chester, PA 19380-4245 USA Telephone: 1 (610) 738-6337 Facsimile: 1 (610) 738-6590 If to Sanofi-Synthelabo: Senior Vice President, General Counsel and Secretary Sanofi-Synthelabo Inc. 90 Park Avenue New York, New York 10016 Telephone: 1 (212) 551- 4306 Facsimile: 1 (2120 551-4921 21.9 Waiver. The waiver by either Party of a breach of any provisions contained herein shall be effective only if made in writing and shall in no way be construed as a waiver of any 50 succeeding breach of such provision or the waiver of the provision itself. 21.10 Dispute Resolution. Any dispute concerning or arising out of this Agreement or concerning the existence or validity hereof, shall be determined by the following procedure. (a) Good Faith. Both Parties understand and appreciate that their long term mutual interest will be best served by affecting a rapid and fair resolution of any claims or disputes which may arise out of services performed under this contract or from any dispute concerning the terms of this Agreement. Therefore, both Parties agree to act in good faith to resolve all such disputes as rapidly as possible on a fair and equitable basis. Toward this end both Parties agree that the JMT shall develop and follow a process for presenting, rapidly assessing, and settling claims on a fair and equitable basis that takes into account the precise subject and nature of the dispute. (b) CEO Dispute Resolution. If any dispute or claim arising under this Agreement cannot be readily resolved by the Parties pursuant to the process described in Section 21.10(a) above, the Parties agree to refer the matter to a panel consisting of the Chief Executive Officer ("CEO") of each Party for review and resolution. A copy of the terms of this Agreement, agreed upon facts (and areas of disagreement), and concise summary of the basis for the contentions of each Party will be provided to both such CEOs who shall review the same, confer, and attempt to reach a mutual resolution of the issue. (c) Mediation. If any dispute or claim arising under this Agreement has not been resolved by the CEO's within thirty (30) days of referral in accordance with Section 21.10(b), or if the CEO's fail to meet within such thirty (30) days, then the Parties agree to a non-binding mediation procedure. The non-binding mediation shall be administered by the American Arbitration Association in accordance with its commercial mediation rules. Unless otherwise mutually agreed upon by the Parties, the mediation proceedings shall be conducted in New York, New York, USA. The Parties agree that they shall share equally the cost of the mediation, including filing and hearing fees, and the cost of the mediator(s). Each Party shall have the right, at its own expense, to be represented by counsel in such a proceeding. (d) Other Disputes. All disputes other than those addressed under Section 3.3 (c), 3.5 shall be resolved through binding arbitration, which the Parties agree to accept in lieu of litigation or other legally available remedies (with the exception of injunctive relief where such relief is necessary to protect a Party from irreparable harm pending the outcome of any such arbitration proceeding). Binding arbitration shall be settled in accordance with the Rules of Arbitration of the International Chamber of Commerce by a panel of three arbitrators chosen in accordance with said Rules. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of New York and of the United States of America, without regard to the conflicts of laws provision thereof. The arbitration will be conducted in English and will be held in New York, New York, USA. Judgment upon the award rendered may be entered in any court having jurisdiction and the Parties hereby consent to the said jurisdiction and venue, and further irrevocably waive any objection which either Party may have now or hereafter to the laying of venue of any proceedings in said courts and to any claim that such proceedings have been brought in an inconvenient forum, and further 51 irrevocably agrees that a judgment or order in any such proceedings shall be conclusive and binding upon the Parties and may be enforced in the courts of any other jurisdiction thereof. For the avoidance of doubt, the Parties confirm that this Agreement is in conformity with Regulation EC Number 2659/2000 of November 29, 2000 on the application of Article 81.3 of the Treaty to Categorization of Research and Development Agreements. 21.11 Acquisition or Change in Ownership of Cephalon. (a) Notification and Sanofi-Synthelabo Rights. Cephalon shall notify Sanofi-Synthelabo of the transfer (whether through the acquisition of stock, assets or otherwise) of the ownership of a controlling interest (i.e. the ability to direct the board of directors of Cephalon, it being agreed and understood by the Parties that a transfer of ownership of less than fifty percent (50%) of the outstanding shares may have such ability, and that a transfer of fifty percent (50%) or more of the outstanding shares shall be deemed a transfer of effective control) of the issued voting securities of Cephalon. In the case of change of ownership of Cephalon, Sanofi-Synthelabo shall have the right, within one hundred eighty (180) days after receipt of Cephalon's notice, [**]. If Sanofi Synthelabo does not deliver notice within such one hundred eighty (180) day time period, [**]. (b) Consequences of Change of Control. If Cephalon delivers the notice described in Section 21.11(a) and Sanofi-Synthelabo delivers notice of its intent to exercise its rights thereunder, pursuant to the procedures set forth in Section 17.10, the Parties shall, within a further thirty (30) day period after Sanofi-Synthelabo delivers notice, [**]. Cephalon (or its successor) shall [**] 21.12 Force Majeure. A Party shall not be liable for nonperformance or delay in performance (other than of obligations regarding any payments or of confidentiality) caused by any event reasonably beyond the control of such Party including, without limitation, wars, hostilities, revolutions, riots, civil disturbances, national emergencies, strikes, lockouts, unavailability of supplies, epidemics, fires, floods, earthquakes, other forces of nature, explosions, embargoes, or any other Acts of God, or any laws, proclamations, regulations, ordinances, or other acts or orders of any court, government or governmental agency. Any occurrence of Force Majeure shall be reported promptly to the other Party. 21.12 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 21.13 No Partnership or Joint Venture. This Agreement is not intended to create, and nothing contained herein shall be construed to create, an association, joint venture, trust or partnership, or to impose a trust or partnership covenant, obligation or liability on or with regard to the other Party. Each Party shall be severally responsible for its own covenants, 52 obligations and liabilities as herein provided. Other than as expressly set forth in this Agreement (i) no Party shall be under the control of, or shall be deemed to control, any other Party; (ii) no Party is the legal representative, agent, joint venturer or employee of the other Party with respect to this Agreement for any purpose whatsoever, and no Party shall have the right or power to bind the other Party; (iii) no Party has the right or authority to assume or create any obligations of any kind or to make any representation or warranty on behalf of any other Party, whether expressed or implied, or to bind any other Party in any respect whatsoever. The provisions of this Agreement are intended only for the regulation of relations between the Parties. This Agreement is not intended for the benefit of non-Party creditors, and no rights are granted to non-Party creditors under this Agreement. 53 IN WITNESS THEREOF, the Parties have executed this Agreement by their duly authorized representatives, as of the day and year first above written. SANOFI-SYNTHELABO INC. CEPHALON, INC. By: /s/ John M. Spinnato By: /s/ Peter E. Grebow ------------------------ ------------------------- Name: John M. Spinnato Peter E. Grebow ------------------- Title: Sr. Vice President & Senior Vice President, Business Development -------------------- General Counsel --------------- By: /s/ Gregory Irace ------------------------ Name: Gregory Irace ------------------- Title: Vice President & CFO -------------------- 54 Exhibit A - Structure of CEP-7055 [GRAPHIC OMITTED] 55 Exhibit B - List of Patents and Applications (U.S.) [**] 56 Exhibit B - List of Patents and Applications (Foreign) [**] 57 Exhibit C - Third Party Obligations o H. Lundbeck A/S Research, Development and License Agreement of May 1998 o The R.W. Johnson Pharmaceutical Research Institute Collaboration and License Agreement of December 2000 58 Exhibit D -- Development Program for CEP-7055 CEP-7055 CLINICAL DEVELOPMENT PLAN 3-YEAR Plan [**] Exhibit E -- Research Program [**] Exhibit F - The Principles of the Joint Ventures [**] Exhibit G Screening, Optimization and License Agreement [**] Exhibit H Restricted Enzymes and Receptors The following list of protein kinases are reserved for Cephalon and/or its third party collaborators and are unavailable for selection as Targets under the present Agreement by and between the Parties. As of the Effective Date, several protein kinases that are restricted from becoming Targets are not identified in the table below in accordance with certain third party agreements of Cephalon; nevertheless, such unidentified protein kinases are neither Targets as defined in Section 1.50 nor, according to the state of the art as of the Effective Date, known to be angiogenic. [**] Exhibit I Materials Transfer Agreement (to be negotiated and executed within 15 business days after execution of this Research, Development and License Agreement, appended hereto and incorporated by reference) EX-10.17(B) 7 dex1017b.txt INTELLECTUAL PROPERTY - ANESTA Exhibit 10.17(b) ================================================================================ INTELLECTUAL PROPERTY AND OTHER ASSETS PURCHASE AGREEMENT Between SANOFI-SYNTHELABO And ANESTA GmbH Dated December 13, 2001 ================================================================================ **Certain portions of this document have been omitted based upon a request for confidential treatment that has been filed with the Commission. The omitted portions have been filed separately with the Commission. TABLE OF CONTENTS (Not part of this Agreement)
Page Article 1: DEFINITIONS AND TERMS.............................................................................2 1.1 Specific Definitions..............................................................................2 1.2 Other Definitional Provisions.....................................................................5 Article 2: TRANSFER OF INTELLECTUAL PROPERTY AND ASSETS AND LIABILITIES......................................5 2.1 Purchase and Sale of Transferred Assets...........................................................5 2.2 Obligations Undertaken............................................................................5 Article 3: PURCHASE PRICE - PAYMENT OF PURCHASE PRICE - Advance Payment Indemnity............................7 Article 4: CLOSING/COMPLETION................................................................................8 4.1 Closing ....................................................................................8 4.2 Deliveries by Seller..............................................................................8 4.3 Deliveries by Purchaser...........................................................................9 4.4 Completion Date...................................................................................9 4.5 Local Transfers...................................................................................9 Article 5: REPRESENTATIONS AND WARRANTIES OF SELLER.........................................................10 5.1 Corporate Organization...........................................................................10 5.2 Corporate Authorization..........................................................................10 5.3 No Violations - Consents and Approvals...........................................................11 5.4 Transferred Contracts............................................................................11 5.5 Compliance With Specifications...................................................................11 5.6 Product Registrations............................................................................11 5.7 Litigation ...................................................................................12 5.8 Title and Ownership..............................................................................12 5.9 Encumbrances.....................................................................................12 5.10 Sales and Profits Prior to Closing...............................................................12 5.11 Absence of Lease.................................................................................13 5.12 No Breach of Novo Nordisk A/S Representations and Warranties.....................................13 5.13 Brokers and Finders..............................................................................13 Article 6: REPRESENTATIONS AND WARRANTIES OF PURCHASER......................................................13 6.1 Corporate Organization...........................................................................13 6.2 Corporate Authorization..........................................................................13 6.3 No Violations - Consents and Approvals...........................................................14 6.4 Brokers and Finders..............................................................................14
i Article 7: COVENANTS OF THE PARTIES.........................................................................14 7.1 Operation of the Transferred Assets Pending the Completion Date..................................14 7.2 Reasonable Efforts...............................................................................15 7.3 Execution of Agreements..........................................................................15 7.4 Transfer of the Product Registrations, Related Applications and Dossiers.........................15 7.5 Transfer of the Transferred Contracts............................................................18 7.6 Transfer of Books and Records and Promotional Material...........................................19 7.7 Transfer of Ongoing Clinical Studies and Adverse Event Reporting Responsibilities................19 7.8 Confidentiality..................................................................................20 7.9 Non-Competition..................................................................................21 7.10 Further Actions..................................................................................21 Article 8: CONDITIONS PRECEDENT TO CLOSING..................................................................21 8.1 General Conditions...............................................................................21 8.2 Conditions to Obligations of Purchaser...........................................................21 8.3 Conditions to Obligations of Seller..............................................................22 Article 9: TERMINATION......................................................................................22 Article 10: INDEMNIFICATION FOR BREACH OF REPRESENTATIONS AND WARRANTIES...................................22 10.1 Indemnification:.................................................................................22 10.2 Indemnification for Direct Claims................................................................23 10.3 Third Party Claims:..............................................................................23 10.4 Limitation on Indemnity Payments.................................................................24 10.5 Survival of Representations and Warranties.......................................................25 Article 11: GENERAL PROVISIONS..............................................................................25 11.1 Expenses and Taxes...............................................................................25 11.2 Amendments ......................................................................................26 11.3 Entire Agreement.................................................................................26 11.4 Public Announcements.............................................................................26 11.5 Governing Law - Arbitration......................................................................26 11.6 Counterparts ................................................................................... 27 11.7 Headings ........................................................................................27 11.8 Notices ........................................................................................27 11.9 Severability ................................................................................... 28 11.10 Binding Effect - No Assignment - Substitution....................................................28
ii LIST OF SCHEDULES ----------------- Schedule I.1 List of Categories A Countries..............................................................1 Schedule I.2 List of Categories B Countries..............................................................2 Schedule I.3 List of Categories C Countries..............................................................3 Schedule I.5 List of the Product Registrations and of Pending Applications...............................4 Schedule I.6 List of Required Consents...................................................................5 Schedule I.8 Transferred Contracts.......................................................................6 Schedule 5 Disclosure Schedule.........................................................................7 Schedule 5.10 Sales of the Licensed Product and corresponding profits/losses..............................8 Schedule 7.4(a)(i) Identity of Purchaser's Designee.....................................................9 Schedule 7.4(b)(i) List of the Countries in which Seller has not submitted an Application for a Product Registration to the competent Governmental Body.......................10 Schedule 7.4(b)(ii) List of the Countries in which Seller has submitted an Application for a Product Registration to the competent Governmental Body but where the Product Registration is not already granted ................................................11 Schedule 7.4(b)(iii) List of the Countries in which Seller has submitted an Application for a Product Registration to the competent Governmental Body but where the Licensed Product is not already marketed ....................................................12 Schedule 7.7.1 Ongoing Clinical Studies............................................................13
iii This Intellectual Property and Other Assets Purchase Agreement (the "Agreement") is made on December 13, 2001, by and between Sanofi-Synthelabo, a French corporation with its principal place of business located at 174, avenue de France, 75013 Paris, France ("Sanofi-Synthelabo" or the "Seller") and Anesta GmBH, a Swiss corporation with its principal place of business at Bachtelstrasse 9, 6048 Horw, Switzerland (the "Purchaser"). Sanofi-Synthelabo and Purchaser are individually referred to as a "Party" and collectively as the "Parties". Unless otherwise indicated, capitalized terms used herein shall have the meaning set forth in Article I hereof. WITNESSETH: ---------- Whereas, Sanofi-Synthelabo is licensed by Novo Nordisk A/S for the use of industrial property rights related to pharmaceutical drugs containing tiagabine as its active ingredient, Novo Nordisk A/S having retained full ownership of the trademark Gabitril(R) (and in South Africa Gebitril(R));Affiliates WHEREAS, Anesta GmbH intends to purchase and acquire certain intellectual property and other assets and rights (including the right to the hereinabove referred license agreement between Sanofi-Synthelabo and Novo Nordisk A/S with respect to the Territory) related to such pharmaceutical product, and Sanofi-Synthelabo intends to sell such intellectual property and other assets and rights; NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein, the Parties hereto agree as follows: 1 ARTICLE 1: DEFINITIONS AND TERMS ---------- --------------------- 1.1 Specific Definitions -------------------- As used in this Agreement, the following terms shall have the meanings set forth or as referenced below: "Affiliate" shall mean, as to any Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For the purpose of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through ownership of voting securities or otherwise. "Agreement" shall mean this Agreement, as the same may be amended or supplemented from time to time in accordance with the terms hereof, including the Annexes and Schedules hereto. "Ancillary Agreements" shall mean collectively, the Gabitril License Amendment, the Gabitril Consent to Assignment, the Transitory Distribution Agreement, the Long Term Distribution Agreement and the Toll Manufacturing Agreement. "Business Days" shall mean any day other than a Saturday, a Sunday or a day on which banks in Paris (France) are obligated by law or executive order to close. "Category A Countries" shall mean all the countries listed on Schedule I.1 where the Licensed Product is currently marketed on the basis of an existing Product Registration and where Purchaser intends, either directly or through a Purchaser's Designee, to take over the distribution and sale of such Licensed Product as soon as the corresponding Product Registration shall have been transferred to it. "Category B Countries" shall mean all the countries listed on Schedule I.2 where the Licensed Product is currently marketed on the basis of an existing Product Registration and where Purchaser intends, either directly or through a Purchaser's Designee, to take over the distribution and sale of such Licensed Product at the expiration, on a country by country basis, of the Transitory Distribution Agreement. "Category C Countries" shall mean all the countries listed on Schedule I.3 where the Licensed Product is currently marketed on the basis of an existing Product Registration and where Purchaser intends, either directly or through a Purchaser's Designee, to take over the distribution and sale of such Licensed Product at the expiration on a country by country basis, of the Long Term Distribution Agreement. "Category D Countries" shall mean all the countries of the Territory which are not Category A Countries, Category B Countries and Category C Countries, and where the Licensed Product, whether registered or not registered, is not currently marketed at the date of execution of this Agreement. 2 "Closing" shall mean the closing of the transactions contemplated in this Agreement. "Closing Date" shall have the meaning specified in Section 4.1 (a). "Disclosure Schedule" shall have the meaning specified in Article 5. "Dossiers" shall mean any and all product registration applications, their respective pricing and reimbursement approval applications (if applicable), including all supporting files, writings, data, studies and reports, compiled in final form and submitted to the competent local Governmental Body for granting of a Product Registration and of the relevant pricing and reimbursement approval (if applicable); "Completion Date" shall have the meaning specified in Section 4.4. "Gabitril License Agreement" shall mean the License Agreement dated as of December 2, 1997 between Sanofi, a French corporation the legal successor of which is Sanofi-Synthelabo, and Novo Nordisk A/S. "Gabitril License Amendment" shall mean the Amendment to the Gabitril License Agreement to be entered into prior to the Closing between Novo Nordirsk A/S and Sanofi-Synthelabo. "Gabitril Consent to Assignment" shall mean the agreement to be entered into, on, or prior to, the Closing, between Novo Nordisk A/S, Purchaser and Sanofi-Synthelabo whereby Novo Nordisk A/S consents to the assignment by Seller to Purchaser of its rights and obligations under the Gabitril License Agreement with respect to the Territory. "Governmental Body" shall mean any government or governmental or regulatory body thereof, or political subdivision thereof, whether national, federal, state, local or foreign, or any other agency or instrumentality thereof. "Licensed Product" shall have the meaning specified in Section 1.6 of the Gabitril License Agreement. "Long Term Distribution Agreement" shall mean the distribution agreement to be entered into, on the Closing, between Sanofi Winthrop Industrie and Purchaser, according to which Sanofi Winthrop Industrie and/or certain Affiliates will continue after the Completion Date to distribute the Licensed Products for a long term period after the Completion Date in the Category C Countries. "Net Sales" shall mean Seller and/or Seller's Affiliates gross receipt from sales of Licensed Product when invoiced to a third party, less the following deductions actually allowed and taken by such third party: (i) trade, cash and/or quantity discounts allowed, if any (ii) refund, credit, return, rebate or allowances effectively reducing the selling price, (iii) value added taxes and sales taxes, (iv) duties, (v) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such on the total amount invoiced. "Obligations Undertaken" shall have the meaning specified in Section 2.2 (a). 3 "Person" shall mean any individual, corporation, partnership, association, trust or other legal entity or organization, having legal personality, or the right to sue in its own name. "Product Registration" shall mean, to the extent transferable, any approvals issued by the relevant Governmental Bodies of any country in the Territory to import, distribute and/or sell the Licensed Product in such country. To the extent transferable, the Product Registration shall include the pricing and reimbursement approval (if applicable). Schedule I.5 sets forth the list of (i) all Product Registrations issued to the Seller and/or to its Affiliates relating to the importation, distribution and sale of the Licensed Product, and (ii) of all applications for a Product Registration currently pending. "Purchaser's Designee" shall have the meaning specified in Section 14.10. "Required Consents" shall mean the consents, approvals and waivers referred to on Schedule I.6. "Specifications" shall mean the specifications of the Licensed Product and raw materials as defined in the Product Registrations. "Territory" shall mean the territory licensed to Seller under the Gabitril License Agreement, as such territory is specified in Section 1.16 of such Gabitril License Agreement, with the exception of France. "Toll Manufacturing Agreement" shall mean the toll manufacturing agreement to be entered into on the Closing between Sanofi-Synthelabo Ltd, an Affiliate of Seller, and Purchaser, pursuant to which Sanofi-Synthelabo Ltd will toll manufacture the Licensed Products after the Completion Date in its manufacturing plant located at Fawdon (UK) for a certain period of time after the Completion Date. "Transferred Assets" shall have the meaning specified in Section 2.1 (a). "Transferred Books and Records" shall mean all books and records relating exclusively to the Licensed Product, including without limitation accounting books and records and the results of tests and studies made by Sanofi-Synthelabo or its Affiliates in connection with the Licensed Product, with the exception of such books and records which relate exclusively to France, and excluding customer lists if any. "Transferred Contracts" shall mean the contracts listed on Schedule I.8 and Unsatisfied Orders. "Transitory Distribution Agreements" shall mean the distribution agreements to be entered into between Sanofi-Synthelabo, acting on behalf of certain of its Affiliates (or directly by such Affiliates), and Purchaser, pursuant to which such Sanofi-Synthelabo Affiliates will continue after the Completion Date to distribute the Licensed Products for a short term period after the Completion Date in the Category A and B Countries. "Unsatisfied Order" shall have the meaning specified in Section 2.1(a). 4 [**] 1.2 Other Definitional Provisions ----------------------------- (a) The words "hereof", "herein", "hereinafter", "hereinabove" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not any particular provision of this Agreement. A reference to an Article, Section, Schedule or Annex is, except as otherwise expressly stated, a reference to an Article or Section of, or a Schedule or Annex to, this Agreement. (b) Terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. (c) The words "include", "includes" and "including" are not limiting. ARTICLE 2: TRANSFER OF INTELLECTUAL PROPERTY AND ASSETS AND LIABILITIES ---------- ------------------------------------------------------------ 2.1 Purchase and Sale of Transferred Assets --------------------------------------- (a) Upon the terms and subject to the conditions of this Agreement, subject to the conditions precedent set forth in Article 8, on the Completion Date, Seller shall, and/or shall cause its Affiliates to, sell, transfer, and assign to Purchaser, and Purchaser shall purchase, acquire and assume from Seller and/or its Affiliates, all right, title, and interest of the Seller and/or such Affiliates under the Gabitril License Agreement, to which Sanofi-Synthelabo is entitled as of the date hereof, including the product development rights (as provided for in the Gabitril License Agreement), all the rights inuring to Sanofi-Synthelabo under the license of trademarks and patents granted thereunder, and all related goodwill (including without limitation Unsatisfied Orders of Licensed Products received from third parties (other than Affiliates of Seller) within the Territory prior to the Completion Date), but in each case only with respect to the Territory. "Unsatisfied Orders" shall mean for the purposes of this Agreement, any order of Licensed Products which is not shipped by Seller or its Affiliates on the Completion Date. (b) The Transferred Assets shall exclude any asset or right not specifically listed in Section 2.1(a). In particular, shall not be included in the Transferred Assets, any and all rights to the accounts receivable related to the sales of the Licensed Product prior to the Completion Date (other than with respect to any Unsatisfied Orders of Licensed Products), such rights remaining vested in Seller and/or its Affiliates. 2.2 Obligations Undertaken ---------------------- (a) Upon the terms and subject to the conditions of this Agreement, subject to the conditions precedent set forth in Article 8, on the Completion Date, Purchaser shall undertake to fulfill and be liable for the following obligations, liabilities, commitments and/or 5 indebtedness of the Seller and/or its Affiliates (the "Obligations Undertaken") in each case only with respect to the Territory: (i) any obligation, liability, commitment and/or indebtedness incurred after the Completion Date in respect of any of the Transferred Assets, including, but not limited to, any obligation arising under the Gabitril License Agreement, including any liabilities of the Seller related to Seller's representations and warranties in the Gabitril License Agreement; (ii) any obligation, liability, commitment and/or indebtedness incurred after the Completion Date with respect to the manufacture, marketing, distribution and/or sale of the Licensed Product; and (iii) any obligation, liability, commitment and/or indebtedness specifically undertaken by Purchaser under this Agreement. (b) The Parties agree that Purchaser shall not hereunder assume or become liable for any obligation, commitment and or indebtedness other than the Assumed Liabilities. In particular, the following shall not be included in the Assumed Liabilities (i) any and all obligations related to accounts payable with respect to goods purchased or services rendered prior to the Completion Date, Seller and/or its Affiliates remaining liable for the payment of such accounts payable, and (ii) any and all obligations, liabilities, commitments and/or indebtedness relating to the employment contract of Seller's and Seller's Affiliates' employees dedicated to the operation of the Transferred Assets and of the related business, Seller and Seller's Affiliates remaining fully liable for any such obligations, liabilities, commitments and/or indebtedness. (c) For the avoidance of doubt, prior to the Completion Date, Sanofi-Synthelabo shall terminate, and shall cause each of its Affiliates to terminate, at its own cost and expenses, to the extent they relate to the Licensed Product and the Territory (i) the sub-license agreement between Sanofi-Synthelabo and Sanofi-Winthrop Industrie according to which Sanofi-Synthelabo has granted to Sanofi-Winthrop Industrie a sub-license of the industrial property rights related to the Licensed Product, and (ii) any and all the existing distribution agreements between Sanofi-Winthrop Industrie and Seller's Affiliates pertaining to the distribution of Licensed Products in the Territory, as such agreements are referred to in the Recitals to this Agreement. Seller shall indemnify and hold harmless Purchaser from and against any claim of any of such Seller's Affiliates in connection with the termination of the here above referred agreements and/or the collection of the Purchase Price. For the further avoidance of doubt, it is expressly understood and agreed that none of the employees of Seller or its Affiliates is employed in whole, or for more than one half of his working hours in connection with the distribution or sale of Licensed Product and therefore Purchaser shall not be or be deemed liable for any transfer or deemed transfer of employees, in consequence of which Seller shall indemnify Purchaser if its becomes obliged to bear any liability related to Seller's employees of Seller or its Affiliates. 6 ARTICLE 3: PURCHASE PRICE - PAYMENT OF PURCHASE PRICE - ---------- -------------------------------------------- ADVANCE PAYMENT INDEMNITY ------------------------- (a)Upon the terms and subject to the conditions of this Agreement, Purchaser shall deliver or cause to be delivered to Seller at the Closing, in full payment of the aforesaid sale, transfer and assignment of the Transferred Assets, immediately available funds in the total amount of Euros [**]. Payment of the purchase price shall be made by a bank check ("cheque de banque") drawn on Credit Suisse, or another bank of first rank international reputation, to be delivered to Seller on the Closing. The Purchase Price shall not be subject to any adjustment or revision and represents the entire purchase price of the Transferred Assets. (b)In consideration for the fact that the Purchaser shall pay the Purchase Price on the Closing Date but that the transfer of the Transferred Assets shall only occur on the Completion Date, Seller shall pay to Purchaser, as an advance payment indemnity, an amount equal to the net margin of Seller 's Affiliates or any order of Licensed Product shipped to third party customers in the Territory (other than Affiliates of Seller) from, and including, the Closing Date to the Completion Date (the "Net Margin"). For the purpose of this clause, Net Margin shall be equal to the following: [**] Net Sales shall have the same meaning as in the Transitory Distribution Agreement(s). Net Sales from the Closing Date to December 31 shall be deemed to be equal to 18/31st of the Net Sales during the entire month of December. Seller shall notify Purchaser of the amounts of Net Margin, together with the amount and localization of the Net Sales on which such Net Margin was made, within 20 Business Days from the Completion Date. Purchaser (or a designated representative of Purchaser) shall have the right to review all work papers and procedures used to calculate the Net Sales and shall have the right to perform any other reasonable procedures necessary to verify the accuracy thereof. Unless, within fifteen (15) Business Days after notification to Purchaser of the amount of the Net Margin, Purchaser notifies Seller in writing that it objects to the calculation of the Net Margin and specifies the basis for such objection, such calculation of Net Margin shall become final and binding upon the Parties for the purpose of this Article 3. If Purchaser objects and if Purchaser and Seller are unable to resolve all of Purchaser's objections within fifteen (15) Business Days after such notification has been given, all remaining matters in dispute shall be submitted to the office of KPMG-Peat Marwick located in the Paris Region, or if such office of KPMG-Peat Marwick is not available or refuses to act, another accounting firm to be chosen among the offices of internationally reputed accounting firms ("big five") in the Paris Region other than the auditors of Seller or Purchaser (KPMG - Peat Marwick or such other firm, as the case may be, are referred to herein as the "Accounting Firm"). In the event Seller and Purchaser are unable to agree upon the selection of the Accounting Firm within five (5) Business Days after expiration of the herein above referred fifteen (15) Business Day period, the Accounting Firm shall be appointed by the International Center for Expertise of the International Chamber of Commerce, Paris, France at the request of the most diligent party. The International Center for Expertise shall not, however, administer the dispute resolution procedure. The request to the International Center 7 for Expertise shall include a copy of the present clause and shall stipulate that the Accounting Firm shall be a French firm affiliated to one of the "big five" networks and based in the Paris Region. The Accounting Firm shall, acting as experts and not as arbitrators, make a final determination as to all remaining matters in dispute with respect to Net Margin which determination shall be conclusive and binding on Purchaser and Seller. Purchaser and Seller agree to cooperate with each other in order to resolve any and all matters in dispute as soon as possible. Purchaser shall provide Seller and Seller's accountants full access to the Transferred Books and Records, to any other information, and to its employees, and shall cooperate with Seller, to the extent necessary for Seller to calculate the Net Margin. Within thirty (30) Business Days after the Net Margin has been finally determined in accordance with the procedure set forth above, Seller shall pay the Net Margin to Purchaser. Such payment shall be made by wire transfer to the account specified by Purchaser to this effect. ARTICLE 4: CLOSING/COMPLETION ---------- ------------------ 4.1 Closing ------- (a) Unless otherwise mutually agreed between the Parties, the Closing will take place at 10:00 a.m. at the Geneva offices of Sanofi S.A./AG on December 13, 2001 (the "Closing Date") provided that all the conditions precedent set forth in Article 8 have been satisfied, or such later date as the Parties hereto may agree. (b) Notwithstanding anything to the contrary contained in this Agreement, to the extent that the sale, transfer and assignment of any Transferred Asset requires any Required Consent and such Required Consent shall not have been obtained at or prior to the Closing Date, this Agreement shall not constitute a sale, transfer and/or assignment, or any attempted sale, transfer and/or assignment with respect to such Transferred Asset, until such Required Consent is obtained. 4.2 Deliveries by Seller -------------------- At the Closing, Seller shall deliver or cause to be delivered to Purchaser the following: (a) The Gabitril License Amendment, duly executed by Novo-Nordisk A/S and Sanofi-Synthelabo; (b) The Gabitril Consent to Assignment, duly executed by Novo-Nordisk A/S and Sanofi-Synthelabo; (c) The Toll Manufacturing Agreement duly executed by Sanofi-Synthelabo Ltd, and (d) The Transitory Distribution Agreements and the Long Term Distribution Agreement duly executed by Seller, and 8 (e) All such other deeds, endorsements, assignments and other instruments as, in the reasonable opinion of Purchaser, shall be necessary to vest in Purchaser title to the Transferred Assets. (f) The Inventory Purchase Agreement duly executed by Sanofi-Winthrop Industrie. 4.3 Deliveries by Purchaser ----------------------- At the Closing, Purchaser shall deliver or cause to be delivered to Seller the following: (a) The payment of the Purchase Price as set forth in Section 3.1; (b) Subject to delivery under Section 4.2 (b), the Gabitril Consent to Assignment, duly executed by Novo-Nordisk A/S, Sanofi-Synthelabo and Purchaser; (c) Toll Manufacturing Agreement duly executed by Purchaser, and (d) The Transitory Distribution Agreements and the Long Term Distribution Agreement duly executed by Purchaser, and (e) All such other instrument of assignment as, in the reasonable opinion of Seller, shall be necessary to vest in Purchaser the Obligations Undertaken as of the Completion Date. (f) The payment of the Initial Purchase Price as specified in the Inventory Purchase Agreement. 4.4 Completion Date --------------- Notwithstanding any other provision of this Agreement, the Parties agree that the transfer of the Transferred Assets and the Undertaking to fulfill the Obligations Undertaken, as provided in Article 2 hereof shall be effective on January 31st, 2002 (the "Completion Date"), in order to enable the parties to take all measures each of them deems appropriate in order to implement the transaction contemplated hereby without description. 4.5 Local Transfers --------------- If required by local laws or regulations, including but not limited to tax laws or regulations, or necessary for tax purposes, and as evidenced by appropriate legal opinions of Purchaser's counsels and/or Seller's counsel, local closings in each such country shall take place on Completion or as promptly as practicable after the Completion (the "Local Transfers") and Seller and Purchaser shall, or shall cause their respective Affiliates, to execute and deliver such instruments and take such actions, consistent with the terms and conditions of this Agreement, as in the reasonable opinion of Purchaser's counsels and/or Seller's counsels, as the case may be, may be required to complete such Local Transfers. Any portion of the Purchase Price that would be payable for such Local Transfers by Purchaser or by any Purchaser's Designee will be determined by mutual agreement of the Parties, provided 9 that if the Parties do not reach an agreement on this issue within thirty days, such price shall be equal to a portion of the Purchase Price determined pro-rata to net sales of Licensed Product over the twelve month period from December 1, 2000 to November 30, 2001, and shall be deemed (i) to be included in the Purchase Price, and (ii) to have been paid to Seller, or the concerned Seller's Affiliate, as anticipated payment, with the Purchase Price. Accordingly, to the extent any amount needs to be paid by Purchaser or Purchaser's Designee to Seller in connection with any such Local Transfer, Seller shall, within three (3) Business Days after the date of each Local Transfer, reimburse Purchaser for the full amount of the payment made in respect of the Transferred Assets transferred at such Local Transfer. Such Local Transfers shall be subject to the provisions of Section 11.1. In no case shall the transactions contemplated under this Agreement be deemed to be conditioned upon, or subject to, the execution of the here above referred instruments. ARTICLE 5: REPRESENTATIONS AND WARRANTIES OF SELLER ---------- ---------------------------------------- Seller hereby represents and warrants to Purchaser that, except as disclosed in Schedule 5 attached hereto (the "Disclosure Schedule"): 5.1 Corporate Organization ---------------------- Each of Seller and of its Affiliates in the Territory is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of such incorporation and Seller and such Affiliates of Seller have all requisite corporate power and authority to own and operate their properties and to carry on their businesses as now conducted. 5.2 Corporate Authorization ----------------------- Each of Seller and of its Affiliates in the Territory has full corporate power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement to be executed by Seller or such Affiliates of Seller in connection with the consummation of the transactions contemplated hereby and thereby and to perform fully its obligations hereunder and thereunder. The execution, delivery and performance by Seller of this Agreement and the execution, delivery and performance by Seller and/or such Affiliates of Seller of any of the Ancillary Agreements has been duly authorized or, as far as the Ancillary Agreements are concerned, shall have been duly authorized at the Closing Date, by all necessary corporate action on the part of Seller and/or such Affiliates of Seller. This Agreement constitutes, and each of the Ancillary Agreements when so executed and delivered will constitute, legal, valid and binding obligations of Seller and/or such Affiliates of Seller enforceable against each of them in accordance with their respective terms. 5.3 No Violations - Consents and Approvals -------------------------------------- Subject to receipt of the Required Consents, if any, the execution, delivery and performance of this Agreement and of the Ancillary Agreements and the consummation of 10 the transactions contemplated hereby and thereby, do not and will not (i) conflict with, violate, result in the breach of, or constitute a default under any law or regulation applicable to Seller and/or any of the Affiliates of Seller (ii) conflict with, violate, result in the breach of, or constitute a default under, any provision of the certificate of incorporation or by-laws or similar documents of Seller or of any of the Affiliates of Seller, (iii) conflict with, violate, result in the breach of, constitute a default under, or result in the termination, cancellation, acceleration of any right or obligation of Seller or such Affiliates of Seller under the Gabitril License Agreement and/or the Transferred Contracts, or more generally otherwise modify the terms or conditions of such Gabitril License Agreement and/or Transferred Contracts, except as provided under the Gabitril License Amendment. Except for the Required Consents, no consents, approvals or waivers are required on the part of Seller or such Affiliates of Seller in connection with the execution delivery and performance of this Agreement or of any of the Ancillary Agreements, or the consummation of the transactions contemplated hereby and thereby. 5.4 Transferred Contracts --------------------- Seller and/or its Affiliates have performed all of the obligations required to be performed under the Transferred Contracts, and none of them is in material default thereunder. To Seller's knowledge, no party to any of the Transferred Contracts is in material default thereunder. Neither Seller nor any of its Affiliates has received from any party to any of the Transferred Contracts (i) any notice that any such party intends to terminate any such Transferred Contract, or (ii) any claim of material breach from any such party with respect to the performance of obligations pursuant to any such Transferred Contract. Each such Transferred Contract constitutes the legal, valid and binding obligations of Seller or its Affiliates, and such Transferred Contract is enforceable in accordance with its terms. Except for Required Consents, Purchaser will succeed to all rights, title and interests of Seller and/or its Affiliates under each Transferred Contract without necessity to obtain the consent by the other party or parties to the assignment of such Transferred Contract. 5.5 Compliance With Specifications ------------------------------ All the Licensed Product under its finished form sold or to be sold prior to the Completion Date was in compliance with the Specifications. 5.6 Product Registrations --------------------- (a) To Seller's knowledge, each Product Registration listed on Schedule I.5 has been validly issued by the appropriate Governmental Body. (b) Seller and/or its Affiliates are in material compliance with all regulatory, agency and other requirements of all competent Governmental Bodies relating to the Product Registrations listed on Schedule I.5, and (ii) neither Seller nor any of its Affiliates has received any notice or charge, which has not been complied with or withdrawn, by such Governmental Bodies asserting any material violation of any such regulatory, agency or other requirement. 11 5.7 Litigation ---------- There are no Legal Proceedings pending against Seller or any of its Affiliates, or to Seller's knowledge currently threatened, that relate (i) to the manufacture, distribution and/or sale of the Product, or (ii) to any of the Transferred Assets. [**]. 5.8 Title and Ownership ------------------- Seller and/or its relevant Affiliate has good and marketable title to, and ownership of, the Transferred Assets and related business which have been created and/or developed by them on the basis of the rights granted by Novo-Nordisk A/S under the Gabitril License Agreement. Except as otherwise expressly set forth herein, Seller does not make any express or implied warranty regarding the condition of any of the Transferred Assets or of it related business. 5.9 Encumbrances ------------ The Transferred Assets are free and clear of all pledges, liens or other encumbrances. 5.10 Sales and Profits Prior to Closing ---------------------------------- Schedule 5.10 attached to this Agreement contain the information relating to the sales of the Licensed Product, as realized by Seller and/or its Affiliates with non-related customers, during the three (3) year period preceding the Closing and the corresponding net profits or losses during the same period. Considering the specificity of the Transferred Assets, Purchaser acknowledges and agrees that such profit and loss figures, which have been determined according to Sanofi-Synthelabo group's accounting rules and extracted from Sanofi-Synthelabo group's analytical accounting system, are only estimates prepared in good faith on the basis of the books and records of Seller and of the structure of operations in place within the Sanofi-Synthelabo group, and that, as such, they are not relevant to assess the expected profitability in the future of the business related to the Transferred Assets as such business may be operated in a group other than the Sanofi-Synthelabo group. Purchaser acknowledges and agrees that through the Due Diligence Process referred to in Section 10.3 (a) of this Agreement it has had access, prior to the date hereof, to all information necessary for Purchaser to assess the expected profitability of the business related to the Transferred Assets, following the Closing Date. 12 5.11 Absence of Lease ---------------- No right to occupancy of any real estate to the benefit of Purchaser shall result from, or arise out of, the sale, transfer and assignment of the Transferred Assets under this Agreement. 5.12 No Breach of Novo Nordisk A/S Representations and Warranties ------------------------------------------------------------ There is no specific fact, event or circumstance which it considers likely to constitute a breach by Novo Nordisk A/S of Novo Nordisk's representations and warranties under Section 18 of the Gabitril License Agreement. 5.13 Brokers and Finders ------------------- There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Seller or any Affiliate of Seller who might be entitled to any fee or commission from Purchaser or any Affiliate of Purchaser in connection with the transactions contemplated by this Agreement or any of the Ancillary Agreements. ARTICLE 6: REPRESENTATIONS AND WARRANTIES OF PURCHASER ---------- ------------------------------------------- Purchaser hereby represents and warrants to Seller as follows: 6.1 Corporate Organization ---------------------- Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and Purchaser has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted. 6.2 Corporate Authorization ----------------------- Purchaser has full corporate power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement to be executed by Purchaser in connection with the consummation of the transactions contemplated hereby and thereby and to perform fully its obligations hereunder and thereunder. The execution, delivery and performance by Purchaser of this Agreement and of any of the Ancillary Agreements has been duly authorized by all necessary corporate action on the part of Purchaser. This Agreement constitutes, and each of the Ancillary Agreements when so executed and delivered on or prior to the Closing Date will constitute, legal, valid and binding obligations of Purchaser enforceable against it in accordance with their respective terms. 13 6.3 No Violations - Consents and Approvals -------------------------------------- The execution, delivery and performance by Purchaser of this Agreement or of any of the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby, do not, and will not, (i) conflict with, violate, result in the breach of, or constitute a default under any law or regulation applicable to Purchaser, (ii) conflict with, violate, result in the breach of, or constitute a default under, any provision of the certificate of incorporation or by-laws of Purchaser, (iii) conflict with, violate, result in the breach of, constitute a default under, or result in the termination, cancellation, acceleration of any right or obligation of Purchaser or under any contract by which Purchaser is bound. No consents, approvals or waivers are required on the part of Purchaser in connection with the execution and delivery of this Agreement or of any of the Ancillary Agreements, or the consummation of the transactions contemplated hereby and thereby. 6.4 Brokers and Finders ------------------- There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Purchaser or any of its Affiliates who might be entitled to any fee or commission from Seller or any Affiliate of Seller in connection with the transactions contemplated by this Agreement or any of the Ancillary Agreements. ARTICLE 7: COVENANTS OF THE PARTIES ---------- ------------------------ 7.1 Operation of the Transferred Assets Pending the Completion Date --------------------------------------------------------------- Until the Completion Date, Seller shall, and shall cause its Affiliates to, (unless prior written consent of Purchaser or except as otherwise contemplated by this Agreement): (a) Continue to deal with the Transferred Assets consistent with past practices; in particular and without limitation to the generality of the foregoing, Seller shall and shall cause its Affiliates to deal with any Unsatisfied Orders of Licensed Products in the ordinary course of business consistent with past practice and taking into according specific requirement of third party customers. (b) In the event that Seller or any of its Affiliates receives written notice by a competent Governmental Body of a material violation of any regulatory, agency or other requirement relating to the Product Registrations, undertake all such actions as may be necessary to cure such material violation; (c) Not amend or terminate the Gabitril License Agreement. Notwithstanding the foregoing, nothing in this Agreement shall be interpreted or construed to create, for Seller or for any of its Affiliates, an obligation to launch during this period, or after the Completion Date, the Licensed Product in any country of the Territory where, at the date hereof, there is a Product Registration but the Licensed Product is not already marketed. 14 7.2 Reasonable Efforts ------------------ Upon the terms and subject to the conditions hereof, each of the Parties shall use its commercially reasonable efforts to fulfill the conditions precedent set forth in Article 8 hereof to the extent if is within its power to fulfill such conditions. Each Party shall use all its commercially reasonable efforts to cooperate with the other Party for such purpose. 7.3 Execution of Agreements ----------------------- On the Closing Date, Seller and Purchaser shall execute the Gabitril Consent to Assignment and shall execute, or shall cause their respective Affiliates to execute, the Ancillary Agreements. 7.4 Transfer of the Product Registrations, Related Applications and Dossiers ---------------------------------------------------------------- The Product Registrations and related applications shall be transferred to Purchaser, or the Purchaser's Designee in accordance with the following provisions: (a) In all countries of the Territory with the exception of the Category D Countries, the following provisions shall apply (on a country by country basis): (i) In Category A Countries, Seller and/or the relevant Affiliates of Seller shall use all commercially reasonable efforts to complete the transfer of the corresponding Product Registrations as promptly as practicable after the Completion Date to the benefit of the Purchaser's Designee, the identity of which is specified in Schedule 7.4 (a) (i). Purchaser shall cause each of the Purchaser's Designee to accept the transfer of the corresponding Product Registrations and, for such purpose, shall formalize with Seller and/or Seller's Affiliates, as promptly as practicable, all necessary documents. More generally, Purchaser shall use all commercially reasonable efforts, and shall cause the hereinabove referred Purchaser's Designees to use all commercially reasonable efforts to assist Seller and/or Seller's Affiliates for the transfer of such Product Registrations. If the transfer is not possible within the hereafter referred time limits, and/or permitted under applicable laws and regulations in any country in the Territory, Seller and/or the relevant Affiliates of Seller shall have the right in such country (i) to discontinue the promotion of the Licensed Product at the expiration of a period of [**] after the Completion Date, and (ii) to discontinue the sale of the Licensed Product at the expiration of a period of [**] after the Completion Date, it being understood that, in such case, Seller and/or the relevant Affiliates of Seller shall use all commercially reasonable efforts to maintain the corresponding Product Registration in full force and not to withdraw it until the expiration of a period of [**] after the Completion Date, unless said date is extended by mutual written agreement of the Parties. At the expiration of such [**] period, Seller and/or the relevant Affiliates of Seller shall have the right to withdraw such Product Registration. (ii) In Category B Countries, Seller shall cause its corresponding Affiliates to continue to distribute and sell the Licensed Product after the Completion Date under the terms and conditions of the Transitory Distribution Agreements. 15 According to such Transitory Distribution Agreements: (x) the corresponding Seller's Affiliate shall continue to sell the Licensed Product in its country, consistent with past practice, in its name but as Purchaser's distributor under conditions identical to the conditions described in paragraph (i) hereinabove. (y) Not later than [**] after the Completion Date, Purchaser shall notify to Seller the name of the Purchaser's Designee for each Category B Country, and Seller and/or the relevant Seller's Affiliate shall use all commercially reasonable efforts to complete the transfer of the corresponding Product Registrations as promptly as practicable after the expiration of this [**] period, to the benefit of such Purchaser's Designee. Purchaser shall cause each of the Purchaser's Designee to accept the transfer of the corresponding Product Registration and, for such purpose, to formalize with Seller and/or the relevant Seller's Affiliates, as soon as possible, all necessary documents. More generally, Purchaser shall use all commercially reasonable efforts, and shall cause the hereinabove referred Purchaser's Designee to use all commercially reasonable efforts, to assist Seller for the transfer of such Product Registration. Should Purchaser not have communicated to Seller, at the expiration of the hereinabove referred [**] period, the name of Purchaser's Designee for any specific country, then the corresponding Product Registration shall be transferred by Seller, and/or by the relevant Seller's Affiliates, to Purchaser, every time that such transfer is possible and permitted by applicable laws and regulations. If the transfer is not possible within the hereafter referred time limits, and/or not permitted under applicable laws and regulations, the corresponding Seller's Affiliate shall have the right (i) to discontinue the promotion of the Licensed Product at the expiration of a period of [**] from the date of expiration of the hereabove referred [**] period, and (ii) to discontinue the sale of the Licensed Product at the expiration of a period of [**] from the date of expiration of such [**] period, it being understood that, in such case, Seller shall cause its corresponding Affiliates to use all commercially reasonable efforts to maintain the corresponding Products Registration in full force and not to withdraw it until the expiration of a period of [**] from the date of expiration of such [**] period, unless said date is extended by mutual written agreement of the Parties. At the expiration of such [**] period, Seller and/or the corresponding Seller's Affiliates shall have the right to withdraw such Product Registration. Accordingly, the Transitory Distribution Agreements shall terminate, on a country by country basis, either (i) on the date at which the corresponding Product Registration shall have been transferred to Purchaser or to Purchaser's Designee in accordance with the hereinabove provisions, or (ii) should the transfer not be possible within the hereabove referred time limits and/or not permitted under applicable laws and regulations, on the date at which Seller and/or the relevant Seller's Affiliates shall have decided to discontinue the sale of the Licensed Product in accordance with the hereinabove provisions. 16 (iii) In Category C Countries, Seller shall cause its Affiliates to continue, to distribute and sell the Licensed Product after the Completion Date under the terms and conditions of the Long Term Distribution Agreement. The corresponding Product Registrations shall be transferred to Purchaser, or Purchaser's Designee at the expiration of the Long Term Distribution Agreement under the conditions defined in such agreement. (b) In category D Countries, the following provisions shall apply (on a country by country basis): (i) In countries in which, at the date hereof, Seller, and/or the relevant Seller's Affiliates, has not submitted an application for a Product Registration to the competent Governmental Body, a list of which is attached hereto as Schedule 7.4 (b) (i), on or as soon as practicable after the Completion Date, Seller, or the relevant Seller's Affiliates, shall hand over the corresponding Dossiers to Purchaser, to the extent such Dossiers exist at the date hereof and regardless of the status of the preparation of such Dossiers at such date. For the avoidance of doubt, nothing in this Agreement shall interpreted or construed to create for Seller, or for any of its Affiliates, an obligation to complete, after Closing, the preparation of any Dossier with respect to any country of the Licensed Territory. (ii) In countries of the Licensed Territory in which, at the date hereof, Seller, and/or the relevant Seller's Affiliates, has submitted an application for a Product Registration to the competent Governmental Body but such Product Registration is not already granted at the Completion Date, a list of which, at the date hereof, is attached hereto as Schedule 7.4 (b) (ii), on or as soon as practicable after the Completion Date, Seller, or the relevant Seller's Affiliates, shall transfer the benefit of said Product Registration application and shall hand over the related Dossier to Purchaser, or to Purchaser's Designee, every time said transfer is possible and permitted under applicable laws and regulations. Purchaser shall use all commercially reasonable efforts, and shall cause the hereinabove referred Purchaser's Designee, to assist Seller, and/or the relevant Seller's Affiliates, for the transfer of such Product Registration application. If the transfer is not possible and/or permitted under applicable laws and regulations, Seller shall not proceed with and/or shall withdraw such Product Registration application, at Seller's discretion (but after consultation with Purchaser) and Purchaser shall, if it so decides, submit a new application. For such purpose, Seller shall hand over to Purchaser a clean copy of the Dossier submitted for such application along with the corresponding registration history. (iii) In countries of the Territory in which, at the date hereof, Seller and/or the relevant Seller's Affiliates has obtained a Product Registration from the competent Governmental Body but where the Licensed Product is not already marketed, a list of which is attached hereto as Schedule 7.4 (b) (iii), on or as soon as practicable after the Completion Date, Seller or the relevant Seller's Affiliates, shall transfer said Product Registration and shall hand over the related Dossier to Purchaser, or to Purchaser's Designee, every time said transfer is possible and permitted under applicable law and regulations. 17 Purchaser shall use its commercially reasonable efforts, and shall cause the hereinabove referred Purchaser's Designee, to assist Seller, and/or the relevant Seller's Affiliates, for the transfer of such Product Registration If the transfer is not possible and/or permitted under applicable laws and regulations, Seller, and/or the relevant Seller's Affiliates, shall have the right, at Seller's discretion (but after consultation with Purchaser), to withdraw such Product Registration and Purchaser shall, if it so decides, submit a new application. For such purpose, Seller, or the relevant Seller's Affiliates, shall hand over to Purchaser a clean copy of the related Dossier along with the corresponding registration history. (c) Each of the Parties shall bear all its internal costs resulting from the implementation of the provisions this Section 7.4. Purchaser, or Purchaser's Designee, shall bear all external costs resulting from the implementation of the provisions of this Section 7.4. Purchaser shall therefore, upon presentation of the appropriate documentation evidencing such costs, reimburse to Seller or its Affiliates, as appropriate all the external costs incurred by Seller and such Affiliates, for the implementation of the provisions of this Section 7.4. Such reimbursement shall be made on a quarterly basis and at cost. (d) During the period from the Completion Date to the date at which the transfer of each Product Registration shall have been completed for a specific country, Seller and/or the relevant Affiliates and/or Distributors of Seller shall continue to sell, provide, market and distribute the Licensed Product in such country, or shall cause its Affiliates to continue to do so, consistent with past practice, in its name but as Purchaser's distributor, according to the conditions, and for the duration of the relevant Transitory Distribution Agreement. 7.5 Transfer of the Transferred Contracts ------------------------------------- (a) On the Completion Date, and subject to the Required Consents, Seller shall transfer, or shall cause its Affiliates to transfer, to Purchaser the Transferred Contracts, including any and all Unsatisfied Orders for Licensed Products received from customers in the Territory prior to such Completion Date. Seller shall use, and shall cause each of its Affiliates to use, all its commercially reasonable efforts to obtain the Required Consents as promptly as practicable after the Completion Date (to the extent relating to Transferred Contracts it entered into). (b) In each instance in which a Required Consent cannot be obtained, or if an attempted transfer or assignment would be ineffective or would adversely affect the ability of Seller and/or the relevant Affiliates of Seller to convey the interest in question to Purchaser, Seller and/or such relevant Affiliates shall use all its commercially reasonable efforts to enter into any such alternative arrangement and agreement with Purchaser as may be appropriate in order to allow Purchaser to realize, receive and enjoy substantially similar and equivalent rights and benefits. For the avoidance of doubt, nothing in this Agreement shall be interpreted or construed (i) as an attempt to transfer or assign any Transferred Contract that is by its terms non-transferable or assignable without the consent of the other party or parties thereto, and (ii) as far as any such Required Consent is concerned, as a condition precedent to Purchaser's obligations under this Agreement. 18 7.6 Transfer of Books and Records and Promotional Material ------------------------------------------------------ As promptly as reasonably possible after the Completion Date, Seller shall transmit, and/or shall cause its Affiliates to transmit, to Purchaser all Transferred Books and Records, Dossiers and promotional material relating to the Licensed Product, with the exception of the Transferred Books and Records and the promotional material the possession of which will be necessary or useful to Seller and/or such Affiliates for the implementation of its/their obligations under this Agreement or under any of the Ancillary Agreements, such Transferred Books and Records being, in such case, transmitted to Purchaser following full completion of such obligations by Seller and/or its Affiliates. Seller and/or its Affiliates shall have the right to retain the Transferred Books and Records for legal, regulatory, tax or accounting purposes, so long as Seller or its Affiliates provide at least one copy of such Books and Records to Purchaser. Seller shall give, and shall cause its Affiliates to give, access to its and/or their books and records that relate only partially to the Licensed Product subject to the following conditions: (i) the information relating to the Licensed Product will be necessary to Purchaser for the manufacture and/or sale of the Licensed Product or to satisfy Purchaser's tax or financial reporting requirements, (ii) such books and records do not contain information relating to the activities of Seller, any of its Affiliates, and/or any third party the nature and/or content of which would be confidential for Seller, its Affiliates, or to any third party, (iii) the access will be given in Seller's offices at normal business hours, and (iv) all information included in such books and records that do not relate to the Licensed Product shall be subject to the signature by Purchaser, prior to disclosure, of a confidentiality and restricted use agreement containing provisions at least as strict as the provisions defined in Section 20.2 of the Gabitril License Agreement. If the information relating to the Licensed Product can be physically extracted from the corresponding books and records, Purchaser shall have the right to require Seller to extract such information. All internal and external costs incurred by Seller as consequence of such extraction shall be borne by Purchaser. 7.7 Transfer of Ongoing Clinical Studies and Adverse Event Reporting Responsibilities -------------------------------------------------------------- 7.7.1 (a) As of the Completion Date, Purchaser shall assume all responsibilities and costs, and obtain all rights, including ownership of the corresponding results with respect to ongoing clinical studies the list of which is attached hereto as Schedule 7.7.1. (the "Ongoing Clinical Trials"). (b) In the event that a transfer of responsibilities from Seller or any of its Affiliates under the hereabove provision can be proven to cause a detrimental effect on any of such Ongoing Clinical Trials, the Parties agree that, upon Purchaser's reasonable request, Seller or its relevant Affiliates, shall continue its activities on Purchaser's behalf provided that (i) Purchaser shall reimburse Seller or its relevant Affiliates for its direct internal and external costs associated with such activities, and (ii) Purchaser shall use its best efforts to be or become able to carry out such activities by itself, and (iii) Seller shall in no event be obliged, to continue such activities, except, as otherwise agreed, beyond March 31st, 2002. 19 (c) Not later than thirty (30) days after the date hereof, the Parties shall define in good faith the detailed conditions of implementation of the hereabove provisions. 7.7.2. (i) In countries of the Territory in which Seller and/or relevant Affiliates of Seller shall continue to sell the Licensed Product according to the Transitory Distribution Agreements and to the Long Term Distribution Agreement, Seller and/or the relevant Affiliates of Seller shall comply with the Adverse Event Reporting provisions contained in such distribution agreements for the duration hereof. (ii) In countries of the Territory in which, at the Completion Date, Seller and/or the relevant Seller's Affiliates has obtained a Product Registration from the competent Governmental Body but where the Licensed Product is not marketed, Seller shall, on a country by country basis, ensure that, it and each of the relevant Seller's Affiliates shall (i) record, investigate, summarize and review all adverse events and serious adverse events and (ii) adhere to all requirements of local law which relate to the reporting and investigation of adverse events and serious adverse events, until the date of transfer of the Product Registration to Purchaser's Designee. In addition, until the date of transfer of the Product Registration to Purchaser's Designee, on a country per country basis, each Party shall report to the other (with respect to Purchaser, via its Affiliate Cephalon Inc.) all safety information relating to the Licensed Product in accordance with the "agreement concerning the exchange of information on Adverse Drug Reactions / Adverse Events (Adverse Experiences) and Quality Deficiencies (Potentially resulting in Medical Risks) with regard to Pharmaceutical Products" entered by and between Cephalon Inc., the parent company of Purchaser, and the Seller on April 24, 2001. Promptly following the Completion Date, the Purchaser agrees to enter with Cephalon Inc., in an agreement with respect to the reporting of adverse events and serious adverse events, which terms shall be consistent with the above mentioned adverse event reporting agreement. 7.8 Confidentiality --------------- The terms and conditions of this Agreement shall be maintained in confidence by each of the Parties from and after the date hereof with the same degree of care as it maintains its own confidential and proprietary information and shall not be - without the prior written consent of the other Party not to be unreasonably withheld - published, disseminated or disclosed to any third party nor used by such Party for any purpose except to the extent necessary for the performance of this Agreement. 7.9 Non-Competition --------------- During a period of three (3) years after the Completion Date, Seller shall not, directly or through any of its Affiliates, except in accordance with the terms and conditions of any agreement (including the Ancillary Agreements) between Seller and/or its Affiliates, on the one hand, Purchaser and/or its Affiliates, on the other hand, manufacture, distribute and/or 20 sell any pharmaceutical product containing Tiagabine (as such term is defined in Section 1.17 of the Gabitril License Agreement) as active ingredient, in the Territory. 7.10 Further Actions --------------- Each of the Parties shall, and shall cause its Affiliates, to execute and deliver such instruments and take such other actions as, in the reasonable opinion of the other Party, may be required to carry out the intent of this Agreement, and consummate the transactions contemplated hereby. In particular and without limitation to the foregoing, Seller shall cause its Affiliates to cooperate with Purchaser and its Affiliates in order to ensure a smooth and orderly transfer of the manufacturing and distribution of the Licensed Products upon termination or expiration of the Transitory Distribution Agreements and of the Toll Manufacturing Agreement, as provided pursuant to the provisions of such agreements. ARTICLE 8: CONDITIONS PRECEDENT TO CLOSING ---------- ------------------------------- 8.1 General Conditions ------------------ The obligations of each Party hereto to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) No order, statute, rule, regulation, executive order, injunction, stay, decree or restraining order shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or Governmental Body that prohibits the consummation of the transactions contemplated hereby, and no Proceeding by any third party, including, but not limited to, any Governmental Body shall be pending which seeks to prohibit or declare illegal or invalid or which seeks to enjoin or obtain monetary damages in respect of, the transactions contemplated hereby; (b) Novo Nordisk A/S shall have executed the Gabitril License Amendment; and (c) Novo Nordisk A/S shall have executed the Gabitril Consent to Assignment. 8.2 Conditions to Obligations of Purchaser -------------------------------------- The obligations of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, or waiver by Purchaser, at or prior to the Closing, of the following conditions: (i) Seller shall have performed in all material respects its obligations required under this Agreement to be performed by it at or prior to the Closing (including, but not limited to deliveries according to Section 4.2), and (ii) the representations and warranties made by Seller according to the provisions of this Agreement shall be true and correct in all material respects at and as of the date hereof and at and as of the Closing Date as though restated on and as of such date (except in the case of any representation or warranty that by its terms is made as of a date specified therein, in which case such representation or warranty shall be true and correct in all material respect as of such date). 21 8.3 Conditions to Obligations of Seller ----------------------------------- The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, or waiver by Seller, at or prior to the Closing, of the following conditions: (i) Purchaser shall have performed in all material respects its obligations required under this Agreement to be performed by it at or prior to the Closing (including, but not limited to, deliveries according to Section 4.3) and (ii) the representations and warranties made by Purchaser according to the provisions of this Agreement shall be true and correct in all material respects at and as of the date hereof and at and as of the Closing Date as though restated on and as of such date (except in the case of any representation or warranty that by its terms is made as of a date specified therein, in which case such representation or warranty shall be true and correct in all material respect as of such date). ARTICLE 9: TERMINATION ---------- ----------- This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) by the written agreement of each of Purchaser and Seller; or (b) by either Purchaser or Seller, by giving written notice of such termination to the other Party, if the Closing shall have not occurred on, or before the expiration of a period of three (3) months after the date of execution of this Agreement. ARTICLE 10: INDEMNIFICATION ----------- --------------- FOR BREACH OF REPRESENTATIONS AND WARRANTIES -------------------------------------------- 10.1 Indemnification: ---------------- (a) Indemnification by Seller: From, and after, the Closing, and subject to the provisions of this Article 10, Seller hereby agrees to indemnify and hold harmless Purchaser and/or its Affiliates from and against any and all claims, liabilities, obligations, judgments, penalties, losses, costs and expenses (including, without limitation, the reasonable fees and expenses of counsel (collectively referred to as the "Damages") incurred by Purchaser and/or its Affiliates in connection with (i) any material inaccuracy or breach of any representation or warranty on the part of Seller contained herein, and (ii) any obligation, liability, commitment and/or indebtedness incurred in connection with the operation of the Transferred Assets and of the related business prior to the Closing. (b) Indemnification by Purchaser: From, and after, the Closing, and subject to the provisions of this Article 10, Purchaser hereby agrees to indemnify and hold harmless Seller and/or its Affiliates from and against any and all Damages incurred by Seller or Seller's Affiliates in connection with (i) any material inaccuracy or breach of any representation or warranty on the part of Purchaser contained herein, and (ii) any of the Obligations Undertaken. 22 (c) All claims made by any Party (the "Indemnifiable Party") against the other Party (the "Indemnifying Party") under this Article 10 shall be asserted as contemplated by Section 10.2 below. 10.2 Indemnification for Direct Claims --------------------------------- In the event of a claim (other than a Third Party Claim as defined in Section 10.3) made by one party and/or its Affiliates under Section 10.1 (a) or (b) as the case may be (a "Direct Claim"), the Indemnifiable Party shall notify such Direct Claim in writing to the Indemnifying Party with reasonable promptness, specifying the nature of such Direct Claim and the amount or estimated amount thereof (which estimate shall not be conclusive of the final amount of such Direct Claim). 10.3 Third Party Claims: ------------------- (a) In the event that (i) any claim, demand or action, suit or legal, administrative, arbitration or other alternative dispute resolution proceeding or investigation (each, a "Proceeding" and collectively, "Proceedings") is asserted or instituted by any party other than the Parties and their Affiliates which could give rise to Damages for which an Indemnifying Party would be liable to an Indemnifiable Party hereunder (such Proceeding being hereinafter referred to as a "Third Party Claim"), the Indemnifiable Party shall with reasonable promptness send to the Indemnifying Party a written notice specifying the nature of such claim or demand and the amount or estimated amount (which estimate shall not be conclusive of the final amount of such claim and demand) (a "Third Party Claim Notice"). (b) In the event of a Third Party Claim, the Indemnifying Party may retain counsel of its choice, reasonably acceptable to the Indemnifiable Party, to represent the Indemnifiable Party and any others the Indemnifying Party may reasonably designate in connection with such claim or demand and shall pay the fees and disbursements of such counsel with regard thereto. If requested by the Indemnifying Party, the Indemnifiable Party agrees to cooperate with the Indemnifying Party and its counsel in contesting any claim or demand which the Indemnifying Party defends, or, if appropriate and related to the claim in question, in making any counterclaim against the person asserting the Third Party Claim or demand, or any cross-complaint against any person. No claim or demand may be settled without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. (c) From and after the delivery of a Third Party Claim Notice hereunder, at the reasonable request of the Indemnifying Party, the Indemnifiable Party shall grant the Indemnifying Party and its representatives all reasonable access to the books, records and properties of the Indemnifiable Party to the extent reasonably related to the matters to which the Third Party Claim Notice relates. The Indemnifying Party will not, and shall require that its representatives do not, use (except in connection with such Third Party Claim Notice) or disclose to any third Person other than the Indemnifying Party's representatives (except as may be required by applicable Laws) any information obtained pursuant to this Section which is designated confidential by the Indemnifiable Party. All such access shall be granted during normal business hours and shall be granted under conditions which will not interfere with the business and operations of the Indemnifiable Party. 23 10.4 Limitation on Indemnity Payments. -------------------------------- (a) General Limitations: ------------------- (i) Subject to the provisions of Section 10.4 (b) (i), if an Indemnifying Party pays to an Indemnifiable Party an amount in respect of a Claim, and the Indemnifiable Party subsequently recovers or is entitled to recover part or all of such amount from a third party (including tax authorities) in relation to the same Claim, the Indemnifiable Party shall take all reasonable steps to obtain such payment and, immediately thereupon, shall pay to the Indemnifying Party the amount thereby recovered from such third party; provided, however, that the cumulated sums paid to the Indemnifying Party shall not exceed the amount paid by the Indemnifying Party and shall also not exceed the amount paid by such third party less any costs, fees and expenses, duly evidenced, incurred by the Indemnifiable Party in connection with the recovery of such amount from such third party. (ii) No Party hereto shall be entitled, under Section 10.1, to claim any indemnification (x) on the basis of any and all facts, events or circumstances which are explicitly disclosed in this Agreement or in any Schedule hereto or (y) in respect of any breach of a representation or warranty to the extent it was aware of such breach at the date hereof. In particular, Purchaser acknowledges that it has been given access by Seller to the documents listed in the Data Room Index communicated today by Seller to Purchaser during a due diligence process (the "Due Diligence Process"), and that, without limiting in any way the generality of the foregoing, Purchaser shall not be entitled to claim any indemnification under this Agreement on the basis of any and all facts or matters which have been explicitly disclosed to Purchaser during such Due Diligence Process. (iii) No Indemnifiable Party may seek or obtain indemnification more than one (1) time from the same Indemnifying Party for any claim in which the facts and circumstances are identical in all material respects to the facts and circumstances with respect to which there was a final determination or settlement under this Article 10 of a claim brought by such Indemnifiable Party against such Indemnifying Party. If any claim for indemnification is based upon a liability which is contingent only, the Indemnifiable Party shall not be liable to make any indemnification payment unless and until such contingent liability becomes due and payable; provided however that any claim for indemnification that is made with respect to a contingent liability prior to the termination of the survival period defined in Section 10.4 shall not be denied, and no Indemnifying Party's liability hereunder shall be extinguished because such liability remains contingent at the end of such survival period. (iv) The Indemnifiable Party shall take all reasonable steps to avoid or mitigate any Damages in respect of which it might be entitled to indemnification pursuant to this Article 10. (b) Limitation on Indemnity Payments by Seller ------------------------------------------ (i) No claim for indemnification under Article 10 may be made by Purchaser or aggregated for the purposes of paragraph (ii) below, and no payment in respect 24 thereof shall be required from Seller or any of its Affiliates with respect to any Damage for which Purchaser shall be entitled to a claim towards Novo Nordisk A/S according to the provisions of Section 19 of the Gabitril License Agreement. (ii) No claim for indemnification under this Article 10 may be made by Purchaser and no payment in respect of any material inaccuracy or breach of any representation or warranty on the part of Seller contained herein shall be required from Seller or any of its Affiliates unless (x) the amount of each individual claim for which indemnification is sought exceeds Euros [**], and (y) the aggregate amount of Damages resulting from such individual claims exceeds Euros [**] (and then only for the amount of such excess). 10.5 Survival of Representations and Warranties ------------------------------------------ (a) The Parties hereby agree that, except as set forth in Section 10.4 (b), the representations and warranties contained in this Agreement shall survive the execution and delivery of this Agreement and the Closing hereunder for a period of three (3) years after the Closing and any claim for indemnification arising out, or resulting from, an alleged inaccuracy or breach of any such representations and warranties must be made prior to the termination of such period. (b) Each representation and warranty contained in Sections 5.1, 5.2, 5.3, 6.1, 6.2 and 6.3 shall survive the execution and delivery of this Agreement and the Closing hereunder until the applicable statute of limitations governing claims with respect to such representations and warranties has expired. ARTICLE 11: GENERAL PROVISIONS ----------- ------------------ 11.1 Expenses and Taxes ------------------ Each Party shall pay all fees and expenses incurred by it in connection with this Agreement and the transactions contemplated hereby, except that the Parties agree that all applicable excise, sales, use, registration and/or value added transfer, stamp, documenting, filing, recordation, and other similar taxes (excluding, for the avoidance of doubt, income taxes), levies, fees and charges, if any, that may be imposed upon, or payable or collectible or incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by Purchaser, regardless of the Party on which such taxes, levies, fees or charges are imposed. 11.2 Amendments ---------- This Agreement may be amended, supplemented or modified and any provision hereof may be waived, only pursuant to a written instrument making specific reference to this Agreement and executed by duly authorized representatives of the Parties. 25 11.3 Entire Agreement ---------------- This Agreement constitutes the entire agreement among the Parties with respect to the matters herein and supersedes any previous agreements and understandings between the Parties with respect to those matters. 11.4 Public Announcements -------------------- Purchaser and Seller will consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement, the other Party's name or the transactions contemplated hereby and neither Anesta nor Sanofi-Synthelabo shall issue any such press release or make any such public statement without having first submitted a draft thereof to the other Party. The issuance thereof shall not be made without the prior written approval of the other Party (such approval not to be unreasonably withheld). However, such approval shall be unnecessary if the disclosing Party is subject to a legal requirement to disclose the existence and terms of this Agreement. In such event, the disclosing Party shall notify without delay the other Party and provide the other Party with a copy of the contemplated disclosure prior to submission or release as the case may be, unless notifying is impossible due to circumstances beyond the Party's control. The other Party may provide comments to the submission or release and the disclosing Party shall in such case take into consideration all such reasonable comments. Unless otherwise agreed with the other Party the disclosing Party shall only disclose such information that is needed to comply with the applicable law. 11.5 Governing Law - Arbitration --------------------------- (a) This Agreement shall be governed in all respects by the laws of France, including validity, interpretation and effect, without regards to the principle of conflicts of laws that might otherwise be applicable. (b) All disputes arising in connection herewith shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce ("ICC") as in effect as of the date of commencement of the arbitration proceedings, by three (3) arbitrators. The arbitration proceeding shall take place in Paris (France) and shall be conducted in the English language. The arbitration decision shall be binding upon the Parties and judgment upon any award rendered may be entered in any court having jurisdiction. 11.6 Counterparts ------------ This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. 11.7 Headings -------- The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 26 11.8 Notices ------- All notices and other communications under this Agreement shall be in writing and in English language and shall be deemed to have been duly given when delivered in person or upon confirmation of receipt when transmitted by facsimile transmission or on receipt after dispatch by registered or certified mail, postage prepaid, addressed as follows (or at such other address as the Party to whom notice is to be given has furnished in writing to the other Party): If to Seller: Sanofi-Synthelabo 174, Avenue de France 75013 Paris (France) Attention: General Counsel Telephone: +33(0) 1 53 77 42 30 Facsimile: +33(0) 1 53 77 40 85 With a copy to: Jones, Day, Reavis & Pogue 120, rue du Faubourg Saint-Honore 75008 Paris (France) Attention: Gael Saint Olive Telephone: +33(0) 1 56 59 39 39 Facsimile: +33(0) 1 56 59 39 38 If to Purchaser: Anesta GmbH Bachtelstrasse 9 6048 Horw, Switzerland Attention: General Manager Telephone: + 41 41 342 1866 Facsimile: + 41 41 342 1870 With a copy to: Cephalon, Inc. 145 Brandywine Parkway, West Chester Pennsylvania 19380-4245 (U.S.A.) Attention: General Counsel & Secretary Telephone: + 1 610 738 6337 Facsimile: + 1 610 738 6590 27 With a copy to: Dechert 55, avenue Kleber 75116 Paris (France) Attention: Joseph Smallhoover Telephone: +33(0) 1 53 65 05 00 Facsimile: +33(0) 1 53 65 05 05 11.9 Severability ------------ The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or unenforceability of any other provision of this Agreement, each of which shall remain in full force and effect. However the Parties agree to substitute any invalid or unenforceable provision by a valid and enforceable provision which maintains, to the greatest extent possible, the respective interests of the Parties as established by the present terms and conditions of the Agreement. 11.10 Binding Effect - No Assignment - Substitution --------------------------------------------- This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. Nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any Person not party to this Agreement. No assignment of this Agreement or of any rights or obligations hereunder may be made by any Party without the prior written consent of the other Party and any attempted assignment without such required consent shall be null and void. Notwithstanding the foregoing, Seller acknowledges and agrees that Purchaser may designate any Affiliate or any third party to which it decides to grant the right to distribute and sell the Licensed Product (the "Purchaser's Designee) to substitute Purchaser as transferee of the Product Registrations in accordance with the provisions of Section 7.4, provided however that no such substitution shall relieve Purchaser of, and shall not modify in any way, any of Purchaser's obligations, liabilities, and/or commitments hereunder. 28 IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written in ................. originals, in Geneva - Switzerland Seller: SANOFI-SYNTHELABO /s/ Jose Ferer ..................... By: Jose Ferer Title: Director, Legal Operations Purchaser: ANESTA GmbH /s/ Peter Grebow ..................... By: Peter Grebow Title: Attorney in Fact SCHEDULE I.1 LIST OF CATEGORIES A COUNTRIES [**] SCHEDULE I.2 LIST OF CATEGORIES B COUNTRIES [**] SCHEDULE I.3 LIST OF CATEGORIES C COUNTRIES [**] SCHEDULE I.5 LIST OF THE PRODUCT REGISTRATIONS AND OF PENDING APPLICATIONS [**] SCHEDULE I.6 LIST OF REQUIRED CONSENTS [**] SCHEDULE I.8 TRANSFERRED CONTRACTS [**] SCHEDULE 5 DISCLOSURE SCHEDULE [**] SCHEDULE 5.10 SALES OF THE LICENSED PRODUCT AND CORRESPONDING PROFITS/LOSSES [**] SCHEDULE 7.4(A)(I) IDENTITY OF PURCHASER'S DESIGNEE [**] SCHEDULE 7.4(B)(I) LIST OF THE COUNTRIES IN WHICH SELLER HAS NOT SUBMITTED AN APPLICATION FOR A PRODUCT REGISTRATION TO THE COMPETENT GOVERNMENTAL BODY [**] SCHEDULE 7.4(B)(II) LIST OF THE COUNTRIES IN WHICH SELLER HAS SUBMITTED AN APPLICATION FOR A PRODUCT REGISTRATION TO THE COMPETENT GOVERNMENTAL BODY BUT WHERE THE PRODUCT REGISTRATION IS NOT ALREADY GRANTED [**] SCHEDULE 7.4(B)(III) LIST OF THE COUNTRIES IN WHICH SELLER HAS SUBMITTED AN APPLICATION FOR A PRODUCT REGISTRATION TO THE COMPETENT GOVERNMENTAL BODY BUT WHERE THE LICENSED PRODUCT IS NOT ALREADY MARKETED [**] SCHEDULE 7.7.1 ONGOING CLINICAL STUDIES [**] EX-10.17(C) 8 dex1017c.txt INTELLECTUAL PROPERTY - CEPHALON FRANCE Exhibit 10.17(c) ================================================================================ INTELLECTUAL PROPERTY AND OTHER ASSET PURCHASE AGREEMENT Between SANOFI-SYNTHELABO And CEPHALON FRANCE Dated December 13, 2001 ================================================================================ **Certain portions of this document have been omitted based upon a request for confidential treatment that has been filed with the Commission. The omitted portions have been filed separately with the Commission. TABLE OF CONTENTS ----------------- ARTICLE 1: DEFINITIONS AND TERMS.............................................................................1 1.1 Specific Definitions................................................................................1 1.2 Other Definitional Provisions.......................................................................3 ARTICLE 2: TRANSFER OF INTELLECTUAL PROPERTY AND ASSETS AND LIABILITIES......................................4 2.1 Purchase and Sale of Transferred Assets:............................................................4 2.2 Obligations Undertaken..............................................................................4 ARTICLE 3: PURCHASE PRICE - PAYMENT OF PURCHASE PRICE........................................................5 ARTICLE 4: CLOSING/COMPLETION DATE...........................................................................7 4.1 Closing.............................................................................................7 4.2 Deliveries by Seller................................................................................7 4.3 Deliveries by Purchaser.............................................................................7 4.4 Completion Date.....................................................................................8 ARTICLE 5: REPRESENTATIONS AND WARRANTIES OF SELLER..........................................................8 5.1 Corporate Organization..............................................................................8 5.2 Corporate Authorization.............................................................................8 5.3 No Violations - Consents and Approvals..............................................................8 5.4 Transferred Contracts...............................................................................9 5.5 Compliance With Specifications......................................................................9 5.6 Product Registrations...............................................................................9 5.7 Litigation..........................................................................................9 5.8 Title and Ownership................................................................................10 5.9 Encumbrances.......................................................................................10 5.10 Sales and Profits Prior to Closing................................................................10 5.11 Absence of Lease..................................................................................10 5.12 No Breach of Novo Nordisk A/S Representations and Warranties......................................10 5.13 Brokers and Finders...............................................................................10 ARTICLE 6: REPRESENTATIONS AND WARRANTIES OF PURCHASER......................................................11 6.1 Corporate Organization.............................................................................11 6.2 Corporate Authorization............................................................................11 6.3 No Violations - Consents and Approvals.............................................................11 6.4 Brokers and Finders................................................................................11 ARTICLE 7: COVENANTS OF THE PARTIES.........................................................................12 7.1 Operation of the Transferred Assets Pending the Closing............................................12 7.2 Reasonable Efforts.................................................................................12 7.3 Execution of Agreements............................................................................12 7.4 Transfer of the Product Registrations, Related Applications and Dossiers...........................12 7.5 Transfer of the Transferred Contracts..............................................................13 7.6 Transfer of Books and Records and Promotional Material.............................................14 7.7 Adverse Event Reporting Responsibilities...........................................................14
i 7.8 Confidentiality....................................................................................14 7.9 Non - competition:.................................................................................14 7.10 Further Actions...................................................................................15 ARTICLE 8: CONDITIONS PRECEDENT TO CLOSING..................................................................15 8.1 General Conditions.................................................................................15 8.2 Conditions to Obligations of Purchaser.............................................................15 8.3 Conditions to Obligations of Seller................................................................16 ARTICLE 9: TERMINATION......................................................................................16 ARTICLE 10: INDEMNIFICATION FOR BREACH OF REPRESENTATIONS AND WARRANTIES....................................16 10.1 Indemnification....................................................................................16 10.2 Indemnification for Direct Claims..................................................................17 10.3 Third Party Claims.................................................................................17 10.4 Limitation on Indemnity Payments...................................................................18 10.5 Survival of Representations and Warranties.........................................................19 ARTICLE 11: GENERAL PROVISIONS..............................................................................19 11.1 Expenses and Taxes.................................................................................19 11.2 Amendments.........................................................................................19 11.3 Entire Agreement...................................................................................20 11.4 Public Announcements...............................................................................20 11.5 Governing Law - Arbitration........................................................................20 11.6 Counterparts.......................................................................................20 11.7 Headings...........................................................................................20 11.8 Notices............................................................................................21 11.9 Severability.......................................................................................22 11.10 Binding Effect - No Assignment.....................................................................22 11.11 Language...........................................................................................22
ii LIST OF SCHEDULES AND ANNEXES Schedule I.4 List of the Product Registrations and of Pending Applications..............................24 Schedule I.5 List of Required Consents..................................................................25 Schedule I.7 List of Transferred Contracts..............................................................26 Schedule 5 Disclosure Schedule........................................................................27 Schedule 5.10 Information Relating to the Sales of the Licensed Products.................................28
iii This Intellectual Property and Other Asset Purchase Agreement (the " Agreement ") is made on December 13, 2001, by and between Sanofi-Synthelabo, a French corporation with its principal place of business located at 174, avenue de France, 75013 Paris, France ("Sanofi-Synthelabo" or the "Seller"), and Cephalon France, a French corporation with its principal place of business located at 14, rue Albert Einstein, 77420 Champs sur Marne (the "Purchaser"). Sanofi-Synthelabo and Purchaser are individually referred to as a "Party" and collectively as the "Parties". Unless otherwise indicated, capitalized terms used herein shall have the meaning set forth in Article I hereof. WITNESSETH: ----------- WHEREAS, Sanofi-Synthelabo is licensed by Novo Nordisk A/S for the use in France of industrial property rights related to pharmaceutical drugs containing tiagabine as its active ingredient, Novo Nordisk A/S having retained full ownership of the trademark Gabitril(R). WHEREAS, Purchaser intends to purchase and acquire certain Intellectual property and other assets and rights (including the right to the hereinabove referred license agreement between Sanofi-Synthelabo and Novo Nordisk A/S with respect to the Territory) related to such pharmaceutical product, and Sanofi-Synthelabo intends to sell such intellectual property and other assets and rights; NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained herein, the Parties hereto agree as follows: ARTICLE 1: DEFINITIONS AND TERMS -------------------------------- 1.1 Specific Definitions -------------------- As used in this Agreement, the following terms shall have the meanings set forth or as referenced below: "Affiliate" shall mean, as to any Person, any other Person which, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For the purpose of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through direct or indirect ownership of voting securities or otherwise. 1 "Agreement" shall mean this Agreement, as the same may be amended or supplemented from time to time in accordance with the terms hereof, including the Annexes and Schedules hereto. "Ancillary Agreements" shall mean collectively, the Gabitril License Amendment and the Gabitril Consent to Assignment. "Business Days" shall mean any day other than a Saturday, a Sunday or a day on which banks in Paris (France) are obligated by law or executive order to close. "Closing" shall mean the closing of the transactions contemplated in this Agreement. "Closing Date" shall have the meaning specified in Section 4.1 (a). "Completion Date" shall have the meaning specified in Section 4.4. "Disclosure Schedule" shall have the meaning specified in Article 5. "Dossiers" shall mean any and all product registration applications, their respective pricing and reimbursement approval applications (if applicable), including all supporting files, writings, data, studies and reports, compiled in final form and submitted to the competent Governmental Body for granting of a Product Registration and of the relevant pricing and reimbursement approval (if applicable); "Gabitril License Agreement" shall mean the License Agreement dated as of December 2, 1997 between Sanofi, a French corporation the legal successor of which is Sanofi-Synthelabo, and Novo Nordisk A/S. "Gabitril License Amendment" shall mean the Amendment to the Gabitril License Agreement to be entered into prior to the Closing between Novo Nordirsk A/S and Sanofi-Synthelabo. "Gabitril Consent to Assignment" shall mean the agreement to be entered into, on, or prior to, the Closing, between Novo Nordisk A/S, Purchaser and Sanofi-Synthelabo whereby Novo Nordisk A/S consents to the assignment by Seller to Purchaser of its rights and obligations under the Gabitril License Agreement with respect to the Territory. "Governmental Body" shall mean any government or governmental or regulatory body thereof, or political subdivision thereof, whether national, federal, state, local or foreign, or any other agency or instrumentality thereof. "Licensed Product" shall have the meaning specified in Section 1.6 of the Gabitril License Agreement. "Obligations Undertaken" shall have the meaning specified in Section 2.2 (a). "Person" shall mean any individual, corporation, partnership, association, trust or other legal entity or organization, having legal personality, or the right to sue in its own name. 2 "Product Registration" shall mean, to the extent transferable, any approvals issued by the relevant Governmental Bodies of the Territory to import, distribute and/or sell the Licensed Product in such country. To the extent transferable, the Product Registration shall include the pricing and reimbursement approval (if applicable). Schedule I.4 sets forth the list of (i) all Product Registrations issued to the Seller and/or to its Affiliates relating to the importation, distribution and sale of the Licensed Product, and (ii) of all applications for a Product Registration currently pending. "Purchaser's Designee" shall have the meaning specified in Section 12.10. "Required Consents" shall mean the consents, approvals and waivers referred to on Schedule I.5. ""Specifications" shall mean the specifications of the Licensed Product and raw materials as defined in the Product Registrations. "Territory" shall mean France. "Transferred Assets" shall have the meaning specified in Section 2.1 (a). "Transferred Books and Records" shall mean all books and records relating exclusively to the Licensed Product, including without limitation accounting books and records and the results of tests and studies made by Sanofi-Synthelabo or its Affiliates in connection with the Licensed Product, but only to the extent they relate exclusively to the Territory and excluding customer lists, if any. "Transferred Contracts" shall mean the contracts listed on Schedule I.7 and Unsatisfied Orders. "Transitory Distribution Agreement" shall mean the distribution agreement to be signed between Sanofi-Synthelabo France and Purchaser pursuant to which Sanofi-Synthelabo France will continue after the Completion Date to distribute the Licensed Product for a short term period. "Unsatisfied Order" shall have the meaning specified in Section 2.1 (a). [**]. 1.2 Other Definitional Provisions ----------------------------- (a) the words "hereof", "herein", "hereinafter", "hereinabove" and words of similar import, when used in this Agreement, shall refer to this Agreement as a whole and not any particular provision of this Agreement. A reference to an Article, Section, Schedule or Annex is, except as otherwise expressly stated, a reference to an Article or Section of, or a Schedule or Annex to, this Agreement. (b) Terms defined in the singular shall have a comparable meaning when used in the plural, and vice versa. 3 (c) The words "include", "includes" and "including" are not limiting. ARTICLE 2: TRANSFER OF INTELLECTUAL PROPERTY AND ASSETS AND LIABILITIES ----------------------------------------------------------------------- 2.1 Purchase and Sale of Transferred Assets: ---------------------------------------- (a) Upon the terms and subject to the conditions of this Agreement, subject to the conditions precedent set forth at Article 8, on the Completion Date, Seller shall, and/or shall cause its Affiliates to, sell, transfer, and assign to Purchaser, and Purchaser shall purchase, acquire and assume from Seller and/or its Affiliates, all right, title, and interest of the Seller and/or such Affiliates under the Gabitril License Agreement, to which Sanofi-Synthelabo is entitled as of the date hereof, including the product development rights (as provided for in the Gabitril License Agreement), all the rights inuring to Sanofi-Synthelabo under the license of trademarks and patents granted thereunder, and all related goodwill (including without limitation Unsatisfied Orders of Licensed Products received from third parties (other than Affiliates of Seller) within the Territory prior to the Completion Date), but in each case only with respect to the Territory. "Unsatisfied Order" shall mean for the purposes of this agreement any order of Licensed Products which is not shipped by Seller or its Affiliates on the Completion Date. (b) The Transferred Assets shall exclude any asset or right not specifically listed in Section 2.1 (a). In particular, shall not be included in the Transferred Assets, any and all rights to the accounts receivable related to the sales of the Licensed Product prior to the Completion Date (other than with respect to any Unsatisfied Orders of Licensed Products), such rights remaining vested in Seller and/or its Affiliates. 2.2 Obligations Undertaken ---------------------- (a) Upon the terms and subject to the conditions of this Agreement, subject to the conditions precedent set forth at Article 8, on the Completion Date, Purchaser shall undertake to fulfill and be liable for the following obligations, liabilities, commitments and/or indebtedness of the Seller and/or its Affiliates (the "Obligations Undertaken"), in each case only with respect to the Territory: (i) any obligation, liability, commitment and/or indebtedness incurred after the Completion Date in respect of any of the Transferred Assets , including, but not limited to, any obligation arising under the Gabitril License Agreement, including any liabilities of the Seller related to Seller's representations and warranties in the Gabitril License Agreement; (ii) any obligation, liability, commitment and/or indebtedness incurred after the Completion Date with respect to the manufacture, marketing, distribution and/or sale of the Licensed Product; and (iii) any obligation, liability, commitment and/or indebtedness specifically undertaken by Purchaser under this Agreement. 4 (b) The Parties agree that Purchaser shall not hereunder assume or become liable for any obligation, commitment and or indebtedness other than the Obligations Undertaken. In particular, the following shall not be included in the Obligations Undertaken (i) any and all obligations related to accounts payable with respect to goods purchased or services rendered prior to the Completion Date, Seller and/or its Affiliates remaining liable for the payment of such accounts payable, and (ii) any and all obligations, liabilities, commitments and/or indebtedness relating to the employment contract of Seller's and Seller's Affiliates' employees dedicated to the operation of the Transferred Assets and of the related business, Seller and Seller's Affiliates remaining fully liable for any such obligations, liabilities, commitments and/or indebtedness. (c) For the avoidance of doubt, prior to the Completion Date, Sanofi-Synthelabo shall terminate, and shall cause each of its Affiliates to terminate, at its own cost and expenses, to the extent they relate to the Licensed Product and the Territory (i) the sub-license agreement between Sanofi-Synthelabo and Sanofi-Winthrop Industrie according to which Sanofi-Synthelabo has granted to Sanofi-Winthrop Industrie a sub-license of the industrial property rights related to the Licensed Product, and (ii) any and all the existing distribution agreements between Sanofi-Winthrop Industrie and Sanofi-Synthelabo France according to which the Licensed Product is marketed in the Territory. Seller shall indemnify and hold harmless Purchaser from and against any claim of any of such Affiliates in connection with the termination of the hereabove referred agreements and/or with the collection of the Purchase Price. For the further avoidance of doubt, it is expressly understood and agreed that none of the employees of Seller or its Affiliates is employed in whole, or for more than one half of his working hours in connection with the distribution or sale of Licensed Product and therefore Purchaser shall not be or be deemed liable for any transfer or deemed transfer of employees, in consequence of which Seller shall indemnify Purchaser if its becomes obliged to bear any liability related to Seller's employees of Seller or its Affiliates. ARTICLE 3: PURCHASE PRICE - PAYMENT OF PURCHASE PRICE - ADVANCE ---------------------------------------------------------------- PAYMENT INDEMNITY ----------------- (a) Upon the terms and subject to the conditions of this Agreement, Purchaser shall deliver or cause to be delivered to Seller at the Closing, in full payment of the aforesaid sale, transfer and assignment of the Transferred Assets, immediately available funds in the total amount of Euros [**] (the "Purchase Price"). Payment of the purchase price shall be made by a bank check ("cheque de banque") drawn on a French bank reasonably acceptable by Seller, to be delivered to Seller on the Closing. The Purchase Price shall not be subject to any adjustment or revision except as provided hereafter and represents the entire purchase price of the Transferred Assets. (b) In consideration for the fact that the Purchaser shall pay the Purchase Price on the Closing Date but that the transfer of the Transferred Assets shall only occur on the Completion Date, Seller shall pay to Purchaser, as an advance payment indemnity, an amount equal to the net margin of Seller 's Affiliates or any order of Licensed Product shipped to third party customers in the Territory (other than Affiliates of Seller) from, and including, the 5 Closing Date to the Completion Date (the "Net Margin"). For the purpose of this clause, Net Margin shall be equal to [**] of Net Sales in the Territory. Net Sales shall have the same meaning as in the Transitory Distribution Agreement. Net Sales from the Closing Date to December 31, 2001 shall be deemed to be equal to 18/31st of the Net Sales during the entire month of December. Seller shall notify the amounts of Net Margin, together with the amount and localization of the Net Sales on which such Net Margin was made, within 20 Business Days from the Completion Date. Purchaser (or a designated representative of Purchaser) shall have the right to review all work papers and procedures used to calculate the Net Sales and shall have the right to perform any other reasonable procedures necessary to verify the accuracy thereof. Unless, within fifteen (15) Business Days after notification to Purchaser of the amount of the Net Margin, Purchaser notifies Seller in writing that it objects to the calculation of the Net Margin and specifies the basis for such objection, such calculation of Net Margin shall become final and binding upon the Parties for the purpose of this Article 3. If Purchaser objects and if Purchaser and Seller are unable to resolve all of Purchaser's objections within fifteen (15) Business Days after such notification has been given, all remaining matters in dispute shall be submitted to the office of KPMG-Peat Marwick located in the Paris Region, or if such office of KPMG-Peat Marwick is not available or refuses to act, another accounting firm to be chosen among the offices of internationally reputed accounting firms ("big five") in the Paris Region other than the auditors of Seller or Purchaser (KPMG - Peat Marwick or such other firm, as the case may be, are referred to herein as the "Accounting Firm"). In the event Seller and Purchaser are unable to agree upon the selection of the Accounting Firm within five (5) Business Days after expiration of the herein above referred fifteen (15) Business Day period, the Accounting Firm shall be appointed by the International Center for Expertise of the International Chamber of Commerce, Paris, France at the request of the most diligent party. The International Center for Expertise shall not, however, administer the dispute resolution procedure. The request to the International Center for Expertise shall include a copy of the present clause and shall stipulate that the Accounting Firm shall be a French firm affiliated to one of the "big five" networks and based in the Paris Region. The Accounting Firm shall, acting as experts and not as arbitrators, make a final determination as to all remaining matters in dispute with respect to Net Margin which determination shall be conclusive and binding on Purchaser and Seller. Purchaser and Seller agree to cooperate with each other in order to resolve any and all matters in dispute as soon as possible. Purchaser shall provide Seller and Seller's accountants full access to the Transferred Books and Records, to any other information, and to its employees, and shall cooperate with Seller, to the extent necessary for Seller to calculate the Net Margin. Within thirty (30) Business Days after the Net Margin has been finally determined in accordance with the procedure set forth above, Seller shall pay the Net Margin to Purchaser. Such payment shall be made by wire transfer to the account specified by Purchaser to this effect. ARTICLE 4: CLOSING/COMPLETION DATE ---------------------------------- 4.1 Closing ------- 6 (a) Unless otherwise mutually agreed between the Parties, the Closing will take place at 10:00 a.m. at the Geneva offices of Sanofi S.A./AG on December 13, 2001 (the "Closing Date"), provided that all conditions precedent set for in Article 8 have been satisfied, or at such later date as the Parties hereto may agree. (b) Notwithstanding anything to the contrary contained in this Agreement, to the extent that the sale, transfer and assignment or attempted sale, transfer and assignment, of any Transferred Asset requires any Required Consent and such Required Consent shall not have been obtained at or prior to the Closing Date, this Agreement shall not constitute a sale, transfer and/or assignment, or any attempted sale, transfer and/or assignment with respect to such Transferred Asset, until such Required Consent is obtained. 4.2 Deliveries by Seller -------------------- At the Closing, Seller shall deliver or cause to be delivered to Purchaser the following: (a) The Gabitril License Amendment, duly executed by Novo-Nordisk A/S and Sanofi-Synthelabo; (b) The Gabitril Consent to Assignment, duly executed by Novo-Nordisk A/S and Sanofi-Synthelabo; (c) The Transitory Distribution Agreement duly executed by Sanofi-Synthelabo France; and (d) all such other deeds, endorsements, assignments and other instruments as, in the reasonable opinion of Purchaser, shall be necessary to vest in Purchaser title to the Transferred Assets. 4.3 Deliveries by Purchaser ----------------------- At the Closing, Purchaser shall deliver or cause to be delivered to Seller the following: (a) the payment of the Purchase Price by bank check as set forth in Section 3.(a); (b) subject to delivery under Section 4.2 (b), the Gabitril Consent to Assignment, duly executed by Novo-Nordisk A/S, Sanofi-Synthelabo and Purchaser; (c) The Transitory Distribution Agreement duly executed by Purchaser; and (d) all such other instrument of assumption as, in the reasonable opinion of Seller, shall be necessary to vest in Purchaser the Obligations Undertaken as of the Completion Date. 4.4 Completion Date --------------- Notwithstanding any other provision of this Agreement, the Parties agree that the 7 transfer of the Transferred Assets, and the undertaking to fulfill the Obligations Undertaken as provided in Article 2 hereof shall only be effective on January 31st, 2002, in order to enable the parties to take all measures each of them deems appropriate in order to implement the transaction contemplated hereby without disruption. ARTICLE 5: REPRESENTATIONS AND WARRANTIES OF SELLER --------------------------------------------------- Seller hereby represents and warrants to Purchaser that, except as disclosed in Schedule 5 attached hereto (the "Disclosure Schedule"): 5.1 Corporate Organization ---------------------- Each of Seller and each of its Affiliates in the Territory is a corporation duly organized, validly existing and in good standing under the laws of France and Seller and such Affiliates have all requisite corporate power and authority to own and operate their properties and to carry on their businesses as now conducted. 5.2 Corporate Authorization ----------------------- Each of Seller and each of its Affiliates in the Territory has full corporate power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement to be executed by Seller or any of such Affiliates in connection with the consummation of the transactions contemplated hereby and thereby and to perform fully its obligations hereunder and thereunder. The execution, delivery and performance by Seller of this Agreement and the execution, delivery and performance by Seller of any of the Ancillary Agreements has been duly authorized or, as far as the Ancillary Agreements are concerned, shall have been duly authorized at the Closing Date, by all necessary corporate action on the part of Seller. This Agreement constitutes, and each of the Ancillary Agreements when so executed and delivered will constitute, legal, valid and binding obligations of Seller enforceable against it in accordance with their respective terms. 5.3 No Violations - Consents and Approvals -------------------------------------- Subject to receipt of the Required Consents, if any, the execution, delivery and performance of this Agreement and of the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby do not and will not, (i) conflict with, violate, result in the breach of, or constitute a default under any law or regulation applicable to Seller and/or any of its Affiliates, (ii) conflict with, violate, result in the breach of, or constitute a default under, any provision of the certificate of incorporation or by-laws or similar documents of Seller or any of its Affiliates, (iii) conflict with, violate, result in the breach of, constitute a default under, or result in the termination, cancellation, acceleration of any right or obligation of Seller or any of its Affiliates under the Gabitril License Agreement and/or the Transferred Contracts, or more generally otherwise modify the terms or conditions of such Gabitril License Agreement and/or Transferred Contracts, except as provided under the Gabitril License Amendment. Except for the Required Consents, no consents, approvals or waivers are required on the part of Seller or any of its Affiliates in connection with the execution delivery and performance of this Agreement or of any of the Ancillary 8 Agreements, or the consummation of the transactions contemplated hereby and thereby. 5.4 Transferred Contracts --------------------- Seller and/or its Affiliates have performed all of the obligations required to be performed under the Transferred Contracts, and none of them is in material default thereunder. To Seller's knowledge, no party to any of the Transferred Contracts is in material default thereunder. Neither Seller nor any of its Affiliates, has received from any party to any of the Transferred Contracts (i) any notice that any such party intends to terminate any such Transferred Contract, or (ii) any claim of material breach from any such party with respect to the performance of obligations pursuant to any such Transferred Contract. Each such Transferred Contract constitutes the legal, valid and binding obligations of Seller or its corresponding Affiliate, and such Transferred Contract is enforceable in accordance with its terms. Except for Required Consents, Purchaser will succeed to all rights, title and interests of Seller and/or the corresponding Affiliate under each Transferred Contract without necessity to obtain the consent by the other party or parties to the assignment of such Transferred Contract. 5.5 Compliance With Specifications ------------------------------ All the Licensed Product under its finished form sold prior to the Closing was in compliance with the Specifications. 5.6 Product Registrations --------------------- (a) To Seller's knowledge, each Product Registration listed on Schedule I.4 has been validly issued by the appropriate Governmental Body. (b) Seller and/or its Affiliates are in material compliance with all regulatory, agency and other requirements of all competent Governmental Bodies relating to the Product Registrations listed on Schedule I.4, and (ii) neither Seller nor such any of such Affiliates has received any notice or charge, which has not been complied with or withdrawn, by such Governmental Bodies asserting any material violation of any such regulatory, agency or other requirement. 5.7 Litigation ---------- There are no Legal Proceedings pending against Seller or any of the Affiliates, or to Seller's knowledge currently threatened, that relate (i) to the manufacture, distribution and/or sale of the Product, or (ii) to any of the Transferred Assets. [**]. 9 5.8 Title and Ownership ------------------- Seller and/or its Affiliates have good and marketable title to, and ownership of, the Transferred Assets and related business which have been created and/or developed by them on the basis of the rights granted by Novo-Nordisk A/S under the Gabitril License Agreement. Except as otherwise expressly set forth herein, Seller does not make any express or implied warranty regarding the condition of any of the Transferred Assets or of it related business. 5.9 Encumbrances ------------ The Transferred Assets are free and clear of all pledges, liens or other encumbrances. 5.10 Sales and Profits Prior to Closing ---------------------------------- Schedule 5.10 attached to this Agreement contain the information relating to the sales of the Licensed Product, as realized by Seller and/or its Affiliates with non-related customers, during the three (3) year period preceding the Closing and the corresponding net profits or losses during the same period. Considering the specificity of the Transferred Assets, Purchaser acknowledges and agrees that such profit and loss figures, which have been determined according to Sanofi-Synthelabo group's accounting rules and extracted from Sanofi-Synthelabo group's analytical accounting system, are only estimates prepared in good faith on the basis of the books and records of Seller and of the structure of operations in place within the Sanofi-Synthelabo group, and that, as such, they are not relevant to assess the expected profitability in the future of the business related to the Transferred Assets as such business may be operated in a group other than the Sanofi-Synthelabo group. Purchaser acknowledges and agrees that through the Due Diligence Process referred to in Section 10.3 (a) of this Agreement it has had access, prior to the date hereof, to all information necessary for Purchaser to assess the expected profitability of the business related to the Transferred Assets, following the Closing Date. 5.11 Absence of Lease ---------------- No right to occupancy of any real estate to the benefit of Purchaser shall result from, or arise out of, the sale, transfer and assignment of the Transferred Assets under this Agreement. 5.12 No Breach of Novo Nordisk A/S Representations and Warranties ------------------------------------------------------------ There is no specific fact, event or circumstance which it considers likely to constitute a breach by Novo Nordisk A/S of Novo Nordisk's representations and warranties under Section 18 of the Gabitril License Agreement. 5.13 Brokers and Finders ------------------- There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Seller or any Affiliate of Seller who might be entitled to any fee or commission from Purchaser or any Affiliate of Purchaser in connection with the transactions contemplated by this Agreement or any of the Ancillary Agreements. 10 ARTICLE 6: REPRESENTATIONS AND WARRANTIES OF PURCHASER ------------------------------------------------------ Purchaser hereby represents and warrants to Seller as follows: 6.1 Corporate Organization ---------------------- Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and Purchaser has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted. 6.2 Corporate Authorization ----------------------- Purchaser has full corporate power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement to be executed by Purchaser in connection with the consummation of the transactions contemplated hereby and thereby and to perform fully its obligations hereunder and thereunder. The execution, delivery and performance by Purchaser of this Agreement and of any of the Ancillary Agreements has been duly authorized by all necessary corporate action on the part of Purchaser. This Agreement constitutes, and each of the Ancillary Agreements when so executed and delivered on or prior to the Closing Date will constitute, legal, valid and binding obligations of Purchaser enforceable against it in accordance with their respective terms. 6.3 No Violations - Consents and Approvals -------------------------------------- The execution, delivery and performance by Purchaser of this Agreement or of any of the Ancillary Agreements and the consummation of the transactions contemplated hereby and thereby, do not, and will not, (i) conflict with, violate, result in the breach of, or constitute a default under any law or regulation applicable to Purchaser, (ii) conflict with, violate, result in the breach of, or constitute a default under, any provision of the certificate of incorporation or by-laws of Purchaser, (iii) conflict with, violate, result in the breach of, constitute a default under, or result in the termination, cancellation, acceleration of any right or obligation of Purchaser or under any contract by which Purchaser is bound. No consents, approvals or waivers are required on the part of Purchaser in connection with the execution and delivery of this Agreement or of any of the Ancillary Agreements, or the consummation of the transactions contemplated hereby and thereby. 6.4 Brokers and Finders ------------------- There is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf of Purchaser or any of its Affiliates who might be entitled to any fee or commission from Seller or any Affiliate of Seller in connection with the transactions contemplated by this Agreement or any of the Ancillary Agreements. 11 ARTICLE 7: COVENANTS OF THE PARTIES ----------------------------------- 7.1 Operation of the Transferred Assets Pending the Closing ------------------------------------------------------- Until the Completion Date, Seller shall, and shall cause its Affiliates to, (unless prior written consent of Purchaser or except as otherwise contemplated by this Agreement): (a) continue to deal with the Transferred Assets consistent with past practices. In particular, and without limitation to the generality of the foregoing, Seller shall and shall cause its Affiliates to deal with any Unsatisfied Order of Licensed Products in the ordinary course of business, consistent with past practice and taking into account any specific requirement of third party customers; (b) in the event that Seller or any of its Affiliates receives written notice by a competent Governmental Body of a material violation of any regulatory, agency or other requirement relating to the Product Registrations, undertake all such actions as may be necessary to cure such material violation; (c) not amend or terminate the Gabitril License Agreement. 7.2 Reasonable Efforts ------------------ Upon the terms and subject to the conditions hereof, each of the Parties shall use its commercially reasonable efforts to fulfill the conditions precedent set forth in Article 8 hereof, to the extent it is within its power to fulfill such conditions. Each Party shall use all its commercially reasonable efforts to cooperate with the other Party for such purpose. 7.3 Execution of Agreements ----------------------- On the Closing Date, Seller and Purchaser shall execute the Gabitril Consent to Assignment. 7.4 Transfer of the Product Registrations, Related Applications and Dossiers ----------------------------------------------------------- The Product Registrations and related applications shall be transferred to Purchaser, in accordance with the following provisions: (a) Seller shall use, and shall cause its Affiliates to use, all commercially reasonable efforts to complete the transfer of the corresponding Product Registrations as promptly as practicable after the Completion Date to the benefit of Purchaser. Purchaser shall accept the transfer of the corresponding Product Registrations and, for such purpose, shall formalize with Seller and/or its Affiliates, as promptly as practicable, all necessary documents. More generally, Purchaser shall use all commercially reasonable efforts to assist Seller for the transfer of such Product Registrations. If the transfer is not possible within the hereafter referred time limits, and/or permitted under applicable laws and regulations, Seller and/or its Affiliates shall have the right (i) to discontinue the promotion of the Licensed Product at the expiration of a period of [**] after 12 the Completion Date, and (ii) to discontinue the sale of the Licensed Product at the expiration of a period of [**] after the Completion Date, it being understood that, in such case, Seller and/or its Affiliates shall use all commercially reasonable efforts to maintain the corresponding Product Registration in full force and not to withdraw it until the expiration of a period of [**] after the Completion Date, unless said date is extended by mutual written agreement of the Parties. At the expiration of such [**] period, Seller and/or its Affiliates shall have the right to withdraw such Product Registration. During the period from the Completion Date to the date at which the transfer of the Product Registration shall have been completed, Seller shall continue to promote, market, distribute and sell the Licensed Product in France, or shall cause its Affiliates to continue to do so, consistent with past practice, in its name but as Purchaser's distributor, on an interim basis, in accordance with the conditions of the Transitory Distribution Agreement. (b) Each of the Parties shall bear all its internal costs resulting from the implementation of the provisions of this Section 7.4. Purchaser shall bear all external costs resulting from the implementation of the provisions of this Section 7.4. Purchaser shall therefore, upon presentation of the appropriate documentation evidencing such costs, reimburse to Seller or to its Affiliates, as appropriate all the external costs incurred by Seller and such Affiliates for the implementation of the provisions of this Section 7.4. Such reimbursement shall be made on a quarterly basis and at cost. 7.5 Transfer of the Transferred Contracts ------------------------------------- (a) On the Completion Date, and subject to the Required Consents, Seller shall transfer, or shall cause its Affiliates to transfer, to Purchaser the Transferred Contracts, including any and all Unsatisfied Orders for Licensed Products received from customers in the Territory prior to such Completion Date. Seller shall use, and shall cause each of its Affiliates to use, all its commercially reasonable efforts to obtain the Required Consents as promptly as practicable after the Completion Date (to the extent relating to Transferred Contracts it entered into). (b) In each instance in which a Required Consent cannot be obtained, or if an attempted transfer or assignment would be ineffective or would adversely affect the ability of Seller and/or the corresponding Affiliate to convey the interest in question to Purchaser, Seller shall use, and/or shall cause the corresponding Affiliate to use, all its commercially reasonable efforts to enter into any such alternative arrangement and agreement with Purchaser as may be appropriate in order to allow Purchaser to realize, receive and enjoy substantially similar and equivalent rights and benefits. For the avoidance of doubt, nothing in this Agreement shall be interpreted or construed (i) as an attempt to transfer or assign any Transferred Contract that is by its terms non-transferable or assignable without the consent of the other party or parties thereto, and (ii) as far as any such Required Consent is concerned, as a condition precedent to Purchaser's obligations under this Agreement. 13 7.6 Transfer of Books and Records and Promotional Material ------------------------------------------------------ As promptly as reasonably possible after the Completion Date, Seller shall transmit, and/or shall cause its Affiliates to transmit, to Purchaser all Transferred Books and Records, Dossiers and promotional material relating to the Licensed Product, with the exception of the Transferred Books and Records and the promotional material the possession of which will be necessary or useful to Seller and/or its Affiliates for the implementation of its/their obligations under this Agreement or under any of the Ancillary Agreements, such Transferred Books and Records being, in such case, transmitted to Purchaser following full completion of such obligations by Seller and/or its Affiliates. Seller and/or its Affiliates shall have the right to retain the Transferred Books and Records for legal, regulatory, tax or accounting purposes, so long as Seller or such Affiliates provide at least one copy of such Books and Records to Purchaser. Seller shall give, and shall cause its Affiliates to give, access to its and/or their books and records that relate only partially to the Licensed Product subject to the following conditions: (i) the information relating to the Licensed Product will be necessary to Purchaser for the manufacture and/or sale of the Licensed Product or to satisfy Purchaser's tax or financial reporting requirements, (ii) such books and records do not contain information relating to the activities of Seller, any of its Affiliates, and/or any third party the nature and/or content of which would be confidential for Seller, its Affiliates, or to any third party, (iii) the access will be given in Seller's offices at normal business hours, and (iv) all information included in such books and records that do not relate to the Licensed Product shall be subject to the signature by Purchaser, prior to disclosure, of a confidentiality and restricted use agreement containing provisions at least as strict as the provisions defined in Section 20.2 of the Gabitril License Agreement. If the information relating to the Licensed Product can be physically extracted from the corresponding books and records, Purchaser shall have the right to require from Seller to extract such information. All internal and external costs incurred by Seller as consequence of such extraction shall be borne by Purchaser. 7.7 Adverse Event Reporting Responsibilities ---------------------------------------- Seller shall comply with the Adverse Event Reporting Provisions contained in the Transitory Distribution Agreement for the duration hereof. 7.8 Confidentiality --------------- The terms and conditions of this Agreement shall be maintained in confidence by each of the Parties from and after the date hereof with the same degree of care as it maintains its own confidential and proprietary information and shall not be - without the prior written consent of the other Party not to be unreasonably withheld - published, disseminated or disclosed to any third party nor used by such Party for any purpose except to the extent necessary for the performance of this Agreement. 7.9 Non - Competition: ------------------- During a period of three (3) years after the Completion Date, Seller shall not, directly or through any of its Affiliates, except in accordance with the terms and conditions of any 14 agreement between Seller and/or its Affiliates, on the one hand, Purchaser and/or its Affiliates, on the other hand, manufacture, distribute and/or sell any pharmaceutical product containing Tiagabine (as such term is defined in Section 1.17 of the Gabitril License Agreement) as active ingredient, in the Territory. 7.10 Further Actions --------------- Each of the Parties shall, and shall cause its Affiliates, to execute and deliver such instruments and take such other actions as, in the reasonable opinion of the other Party, may be required to carry out the intent of this Agreement, and consummate the transactions contemplated hereby. In particular and without limitation to the foregoing, Seller shall cause its Affiliates to cooperate with Purchaser and its Affiliates in order to ensure a smooth and orderly transfer of the manufacturing and distribution of the Licensed Products upon termination or expiration of the Transitory Distribution Agreement, as provided pursuant to the provisions of such agreement. ARTICLE 8: CONDITIONS PRECEDENT TO CLOSING ------------------------------------------ 8.1 General Conditions ------------------ The obligations of each Party hereto to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction at or prior to the Closing of the following conditions: (a) No order, statute, rule, regulation, executive order, injunction, stay, decree or restraining order shall have been enacted, entered, promulgated or enforced by any court of competent jurisdiction or Governmental Body that prohibits the consummation of the transactions contemplated hereby, and no Proceeding by any third party, including, but not limited to, any Governmental Body shall be pending which seeks to prohibit or declare illegal or invalid or which seeks to enjoin or obtain monetary damages in respect of, the transactions contemplated hereby, (b) Novo Nordisk A/S shall have executed the Gabitril License Amendment; and (c) Novo Nordisk A/S shall have executed the Gabitril Consent to Assignment. 8.2 Conditions to Obligations of Purchaser -------------------------------------- The obligations of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, or waiver by Purchaser, at or prior to the Closing, of the following condition: (i) Seller shall have performed in all material respects its obligations required under this Agreement to be performed by it at or prior to the Closing (including, but not limited to deliveries according to Section 4.2), and (ii) the representations and warranties made by Seller according to the provisions of this Agreement shall be true and correct in all material respects at and as of the date hereof and at and as of the Closing Date as though restated on and as of such date (except in the case of any representation or warranty that by its terms is made as of a date specified therein, in which case such representation or warranty shall be true and correct in all material respect as of such date). 15 8.3 Conditions to Obligations of Seller ----------------------------------- The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, or waiver by Seller, at or prior to the Closing, of the following conditions: (i) Purchaser shall have performed in all material respects its obligations required under this Agreement to be performed by it at or prior to the Closing (including, but not limited to, deliveries according to Section 4.3 and (ii) the representations and warranties made by Purchaser according to the provisions of this Agreement shall be true and correct in all material respects at and as of the date hereof and at and as of the Closing Date as though restated on and as of such date (except in the case of any representation or warranty that by its terms is made as of a date specified therein, in which case such representation or warranty shall be true and correct in all material respect as of such date); ARTICLE 9: TERMINATION ---------------------- This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) by the written agreement of each of Purchaser and Seller; or (b) by either Purchaser or Seller, by giving written notice of such termination to the other Party, if the Closing shall have not occurred on, or before the expiration of a period of three (3) months after the date of execution of this Agreement. ARTICLE 10: INDEMNIFICATION FOR BREACH OF REPRESENTATIONS AND WARRANTIES ------------------------------------------------------------------------ 10.1 Indemnification --------------- (a) Indemnification by Seller: From, and after, the Closing, and subject to the provisions of this Article 10, Seller hereby agrees to indemnify and hold harmless Purchaser and/or its Affiliates from and against any and all claims, liabilities, obligations, judgments, penalties, losses, costs and expenses (including, without limitation, the reasonable fees and expenses of counsel (collectively referred to as the "Damages") incurred by Purchaser and/or its Affiliates in connection with (i) any material inaccuracy or breach of any representation or warranty on the part of Seller contained herein, and (ii) any obligation, liability, commitment and/or indebtedness incurred in connection with the operation of the Transferred Assets and of the related business prior to the Closing other than the Obligations Undertaken. (b) Indemnification by Purchaser: From, and after, the Closing, and subject to the provisions of this Article 10, Purchaser hereby agrees to indemnify and hold harmless Seller and/or its Affiliates from and against any and all Damages incurred by Seller or Seller's Affiliates in connection with (i) any material inaccuracy or breach of any representation or warranty on the part of Purchaser contained herein, and (ii) any of the Obligations Undertaken. (c) All claims made by any Party (the "Indemnifiable Party") against the other Party 16 (the "Indemnifying Party") under this Article 10 shall be asserted as contemplated by section 10.2 below. 10.2 Indemnification for Direct Claims --------------------------------- In the event of a claim (other than a Third Party Claim as defined in Section 10.3) made by one party and/or its Affiliates under Section 10.1 (a) or (b) as the case may be (a "Direct Claim"), the Indemnifiable Party shall notify such Direct Claim in writing to the Indemnifying Party with reasonable promptness, specifying the nature of such Direct Claim and the amount or estimated amount thereof (which estimate shall not be conclusive of the final amount of such Direct Claim). 10.3 Third Party Claims ------------------ (a) In the event that (i) any claim, demand or action, suit or legal, administrative, arbitration or other alternative dispute resolution proceeding or investigation (each, a "Proceeding" and collectively, "Proceedings") is asserted or instituted by any party other than the Parties and their Affiliates which could give rise to Damages for which an Indemnifying Party would be liable to an Indemnifiable Party hereunder (such Proceeding being hereinafter referred to as a "Third Party Claim"), the Indemnifiable Party shall with reasonable promptness send to the Indemnifying Party a written notice specifying the nature of such claim or demand and the amount or estimated amount (which estimate shall not be conclusive of the final amount of such claim and demand) (a "Third Party Claim Notice"). (b) In the event of a Third Party Claim, the Indemnifying Party may retain counsel of its choice, reasonably acceptable to the Indemnifiable Party, to represent the Indemnifiable Party and any others the Indemnifying Party may reasonably designate in connection with such claim or demand and shall pay the fees and disbursements of such counsel with regard thereto. If requested by the Indemnifying Party, the Indemnifiable Party agrees to cooperate with the Indemnifying Party and its counsel in contesting any claim or demand which the Indemnifying Party defends, or, if appropriate and related to the claim in question, in making any counterclaim against the person asserting the Third Party Claim or demand, or any cross-complaint against any person. No claim or demand may be settled without the consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. (c) From and after the delivery of a Claim Notice hereunder, at the reasonable request of the Indemnifying Party, the Indemnifiable Party shall grant the Indemnifying Party and its representatives all reasonable access to the books, records and properties of the Indemnifiable Party to the extent reasonably related to the matters to which the Third Party Claim Notice relates. The Indemnifying Party will not, and shall require that its representatives do not, use (except in connection with such Third Party Claim Notice) or disclose to any third Person other than the Indemnifying Party's representatives (except as may be required by applicable Laws) any information obtained pursuant to this Section which is designated confidential by the Indemnifiable Party. All such access shall be granted during normal business hours and shall be granted under conditions which will not interfere with the business and operations of the Indemnifiable Party. 17 10.4 Limitation on Indemnity Payments -------------------------------- (a) General Limitations: (i) Subject to the provisions of Section 10.4 (b) (i), if an Indemnifying Party pays to an Indemnifiable Party an amount in respect of a Claim, and the Indemnifiable Party subsequently recovers or is entitled to recover part or all of such amount from a third party (including tax authorities) in relation to the same Claim, the Indemnifiable Party shall take all reasonable steps to obtain such payment and, immediately thereupon, shall pay to the Indemnifying Party the amount thereby recovered from such third party; provided, however, that the cumulated sums paid to the Indemnifying Party shall not exceed the amount paid by the Indemnifying Party and shall also not exceed the amount paid by such third party less any costs, fees and expenses, duly evidenced, incurred by the Indemnifiable Party in connection with the recovery of such amount from such third party. (ii) No Party hereto shall be entitled, under Section 10.1, to claim any indemnification (x) on the basis of any and all facts, events or circumstances which are explicitly disclosed in this Agreement or in any Schedule hereto or (y) in respect of any breach of a representation or warranty to the extent it was aware of such breach at the date hereof. In particular, Purchaser acknowledges that it has been given access by Seller to the documents listed in the Data Room Index communicated today by Seller to Purchaser during a due diligence process (the "Due Diligence Process"), and that, without limiting in any way the generality of the foregoing, Purchaser shall not be entitled to claim any indemnification under this Agreement on the basis of any and all facts or matters which have been explicitly disclosed to Purchaser during such Due Diligence Process. (iii) No Indemnifiable Party may seek or obtain indemnification more than one (1) time from the same Indemnifying Party for any claim in which the facts and circumstances are identical in all material respects to the facts and circumstances with respect to which there was a final determination or settlement under this Article 10 of a claim brought by such Indemnifiable Party against such Indemnifying Party. If any claim for indemnification is based upon a liability which is contingent only, the Indemnifiable Party shall not be liable to make any indemnification payment unless and until such contingent liability becomes due and payable; provided however that any claim for indemnification that is made with respect to a contingent liability prior to the termination of the survival period defined in Section 10.4 shall not be denied, and no Indemnifying Party's liability hereunder shall be extinguished because such liability remains contingent at the end of such survival period. (iv) The Indemnifiable Party shall take all reasonable steps to avoid or mitigate any Damages in respect of which it might be entitled to indemnification pursuant to this Article 10. (b) Limitation on Indemnity Payments by Seller (i) No claim for indemnification under Section 10.1 may be made by Purchaser or aggregated for the purposes of paragraph (ii) and no payment in respect 18 thereof shall be required from Seller or any of its Affiliates with respect to any Damage for which Purchaser shall be entitled to a claim towards Novo Nordisk A/S according to the provisions of Section 19 of the Gabitril License Agreement. (ii) No claim for indemnification under Article 10 may be made by Purchaser and no payment in respect of any material inaccuracy or breach of any representation or warranty on the part of Seller contained herein shall be required from Seller or any of its Affiliates unless (x) the amount of each individual claim for which indemnification is sought exceeds Euros [**], and (y) the aggregate amount of Damages resulting from such individual claims exceeds Euros [**] (and then only for the amount of such excess). 10.5 Survival of Representations and Warranties ------------------------------------------ (a) The Parties hereby agree that, except as set forth in Section 10.4 (b), the representations and warranties contained in this Agreement shall survive the execution and delivery of this Agreement and the Closing hereunder for a period of three (3) years after the Closing and any claim for indemnification arising out, or resulting from, an alleged inaccuracy or breach of any such representations and warranties must be made prior to the termination of such period. (b) Each representation and warranty contained in Sections 5.1, 5.2, 5.3, 6.1, 6.2 and 6.3 shall survive the execution and delivery of this Agreement and the Closing hereunder until the applicable statute of limitations governing claims with respect to such representations and warranties has expired. ARTICLE 11: GENERAL PROVISIONS ------------------------------ 11.1 Expenses and Taxes ------------------ Each Party shall pay all fees and expenses incurred by it in connection with this Agreement and the transactions contemplated hereby, except that the Parties agree that all applicable excise, sales, use, registration and/or value added, transfer, stamp, documenting, filing, recordation and other similar taxes (excluding, for the avoidance of doubt, income taxes), levies, fees and charges, if any, that may be imposed upon, or payable or collectible or incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by Purchaser, regardless of the Party on which such taxes, levies, fees or charges are imposed. Purchaser shall provide Seller with a copy of this Agreement, duly registered with French tax authorities pursuant to Article 719 of the French General Tax Code and bearing the corresponding registration references. 11.2 Amendments ---------- This Agreement may be amended, supplemented or modified and any provision hereof may be waived, only pursuant to a written instrument making specific reference to this Agreement and executed by duly authorized representatives of the Parties. 19 11.3 Entire Agreement ---------------- This Agreement constitutes the entire agreement among the Parties with respect to the matters herein and supersedes any previous agreements and understandings between the Parties with respect to those matters. 11.4 Public Announcements -------------------- Purchaser and Seller will consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement, the other Party's name or the transactions contemplated hereby and neither Purchaser nor Seller shall issue any such press release or make any such public statement without having first submitted a draft thereof to the other Party. The issuance thereof shall not be made without the prior written approval of the other Party (such approval not to be unreasonably withheld). However, such approval shall be unnecessary if the disclosing Party is subject to a legal requirement to disclose the existence and terms of this Agreement. In such event, the disclosing Party shall notify without delay the other Party and provide the other Party with a copy of the contemplated disclosure prior to submission or release as the case may be, unless notifying is impossible due to circumstances beyond the Party's control. The other Party may provide comments to the submission or release and the disclosing Party shall in such case take into consideration all such reasonable comments. Unless otherwise agreed with the other Party the disclosing Party shall only disclose such information that is needed to comply with the applicable law. 11.5 Governing Law - Arbitration --------------------------- (a) This Agreement shall be governed in all respects by the laws of France, including validity, interpretation and effect, without regards to the principle of conflicts of laws that might otherwise be applicable. (b) All disputes arising in connection herewith shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce ("ICC") as in effect as of the date of commencement of the arbitration proceedings, by three (3) arbitrators. The arbitration proceeding shall take place in Paris (France) and shall be conducted in the English language. The arbitration decision shall be binding upon the Parties and judgment upon any award rendered may be entered in any court having jurisdiction. 11.6 Counterparts ------------ This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute a single instrument. 11.7 Headings -------- The descriptive headings of the several Articles and Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. 20 11.8 Notices ------- All notices and other communications under this Agreement shall be in writing and in English language and shall be deemed to have been duly given when delivered in person or upon confirmation of receipt when transmitted by facsimile transmission or on receipt after dispatch by registered or certified mail, postage prepaid, addressed as follows (or at such other address as the Party to whom notice is to be given has furnished in writing to the other Party): If to Seller: Sanofi-Synthelabo 174, Avenue de France 75013 Paris (France) Attention: General Counsel Telephone: + 33 (0) 1 53 77 42 30 Facsimile: + 33 (0) 1 53 77 40 85 With a copy to: Jones, Day, Reavis & Pogue 120, rue du Faubourg Saint-Honore 75008 Paris (France Attention: Gael Saint Olive Telephone: +33(0) 1 56 59 39 39 Facsimile: +33(0) 1 56 59 39 38 If to Purchaser: Cephalon France 14 Rue Albert Einstein 77420 Champs-sur-Marne (France) Attention: President Telephone: + 33 (0) 1 64 61 05 05 Facsimile: + 33 (0) 1 64 61 05 00 With a copy to: Cephalon, Inc. 145 Brandywine Parkway, West Chester Pennsylvania 19380-4245 (U.S.A.) Attention: General Counsel & Secretary Telephone: + 1 610 738 6337 Facsimile: + 1 610 738 6590 21 With a copy to: Dechert 55, Avenue Kleber 75116 Paris Attention: Joseph Smallhoover Telephone: +33(0) 1 53 65 05 00 Facsimile: +33(0) 1 53 65 05 05 11.9 Severability ------------ The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or unenforceability of any other provision of this Agreement, each of which shall remain in full force and effect. However the Parties agree to substitute any invalid or unenforceable provision by a valid and enforceable provision which maintains, to the greatest extent possible, the respective interests of the Parties as established by the present terms and conditions of the Agreement. 11.10 Binding Effect - No Assignment ------------------------------ This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns. Nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any Person not party to this Agreement. No assignment of this Agreement or of any rights or obligations hereunder may be made by any Party without the prior written consent of the other Party and any attempted assignment without such required consent shall be null and void. 11.11 Language -------- This Agreement is executed in the English and French languages. In the event of an inconsistency between the two versions, the English language version shall prevail. IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first above written in three originals including one for registration purposes, in Geneva, Switzerland. 22 Seller: SANOFI-SYNTHELABO /s/ Jose Ferer .................... By: Jose Ferer Title: Director, Legal Operations Purchaser: CEPHALON FRANCE /s/ Peter Grebow .................... By: Peter Grebow Title: Attorney in Fact Schedule I.4 LIST OF THE PRODUCT REGISTRATIONS AND OF PENDING APPLICATIONS [**] SCHEDULE I.5 LIST OF REQUIRED CONSENTS [**] SCHEDULE I.7 LIST OF TRANSFERRED CONTRACTS [**] SCHEDULE 5 DISCLOSURE SCHEDULE [**] SCHEDULE 5.10 INFORMATION RELATING TO THE SALES OF THE LICENSED PRODUCTS [**] EX-10.18 9 dex1018.txt CONSULTING AGREEMENT EXHIBIT 10.18 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (the "Agreement"), is entered into as of October 1, 2001, by and between CEPHALON, INC., a Delaware corporation ("Cephalon"), and Martyn D. Greenacre ("Consultant"). WHEREAS, Cephalon wishes to obtain the services of Consultant for certain purposes, and Consultant wishes to provide such services, all subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth, and intending to be legally bound hereby, Cephalon and Consultant hereby agree as follows: 1. Services to be Provided. During the term of this Agreement, ----------------------- Consultant shall perform for Cephalon the services described on EXHIBIT A attached hereto and made a part hereof (the "Services"). The scope and extent of such Services may be modified by mutual agreement of the parties pursuant to written modification of Exhibit A, and, if such modification results in an increase in any amounts payable hereunder, a purchase order amendment. 2. Term. The initial term of this Agreement shall begin on October 1, ---- 2001 and shall continue until March 31, 2002 unless terminated prior thereto pursuant to paragraph 6 below. This Agreement may be renewed upon mutual agreement of the parties in writing. 3. Compensation; No Benefits. ------------------------- (a) As compensation for Consultant's performance of the Services to be performed by Consultant under this Agreement, Cephalon shall pay Consultant the amounts specified in EXHIBIT A attached hereto, in accordance with the schedule set forth on EXHIBIT A. All work to be undertaken pursuant to this Agreement shall not commence until a preauthorized purchase order is in place between Cephalon and Consultant. The budget for Services may not be increased without the prior written approval of an authorized representative of Cephalon in the form of a purchase order amendment. In addition, Cephalon shall reimburse Consultant for out-of-pocket travel, hotel and meal expenses reasonably incurred by Consultant provided that the travel was approved in advance by Cephalon and the expenses are incurred in accordance with Cephalon's reimbursement policies. (b) Consultant is not an employee of Cephalon and will not be entitled to participate in or receive any benefit or right as a Cephalon employee under any Cephalon employee benefit and welfare plans, including, without limitation, employee insurance, pension, savings and security plans as a result of Consultant entering into this Agreement. (c) The parties agree that the compensation provided hereunder has been established pursuant to arms length negotiations between the parties and is consistent with the fair market value of the Services provided by Consultant during the term of this Agreement. Nothing herein shall be construed to require Consultant to purchase, order, recommend, or arrange for, the purchase, order or recommendation of any products manufactured and/or marketed by Cephalon. 4. Ownership of Results. -------------------- (a) All results of each project that are prepared or made by Consultant, either alone or with others, in the performance of the Services or which result, to any extent, from the use of Cephalon's premises or property by Consultant (collectively "Project Results") and any materials (including the information contained therein) produced by Consultant for Cephalon pursuant to the terms of this Agreement ("Master Materials") shall be the sole and exclusive property of Cephalon. All hard copies or other assets, including without limitation graphics, mixed sound tracks, videos and similar program elements, produced by Consultant for Cephalon pursuant to the terms of this Agreement shall be the sole and exclusive property of Cephalon. Consultant acknowledges that Cephalon intends to use such Project Results and Master Materials in presentations to physicians and other customers at trade shows or other fora. In the event that such Project Results or Master Materials will be presented or shown on television, motion picture, newspaper, periodical or other public media, Cephalon will use its best efforts to provide notice to Consultant prior to any such use or publicity relating thereto. (b) All materials subject to copyright protection prepared by or on behalf of Consultant in the course of performing the Services, or that relate directly to or involve the use of confidential information of Cephalon, shall be "works made for hire," the entire right, title and interest of which shall vest and reside in Cephalon. All copyrightable works prepared by or on behalf of Consultant in the course of performing the Services hereunder, or that relate directly to, or involve the use of confidential information of Cephalon, which may not be interpreted as "works made for hire" shall be subject to Consultant's granting to Cephalon an exclusive, non-royalty bearing, perpetual, worldwide license, with the to right assign or sub-license such works. Cephalon shall have the right to use all materials and other works subject to copyright protection prepared by or on behalf of Consultant in the course of performing the Services or that relate directly to or involve the use of confidential information of Cephalon. (c) Consultant acknowledges that Cephalon is subject to regulatory restrictions concerning the dissemination, distribution or use of promotional materials of approved drugs. Accordingly, Consultant shall not disseminate, distribute or use the materials prepared on behalf of Consultant in the course of performing the Services without the prior express written permission of Cephalon. (d) The provisions of this paragraph 4 shall survive the expiration or sooner termination of the term of this Agreement. 5. Confidentiality and Insider Trading Policy. ------------------------------------------ (a) Consultant will not, either during or after the term of this Agreement disclose to any third person or use any confidential or proprietary information of Cephalon or its corporate collaborators for any purpose other than the performance of the Services, without the prior written authorization of Cephalon. This obligation shall not apply to information that is in the public domain through no fault of Consultant. For purposes of this paragraph 5, "confidential and proprietary information" includes, without limitation, the structure and activity of chemical compositions, biomaterials, micro-organisms, cells, cell lines and the progeny and derivatives thereof, including all modified and recombinant DNA molecules and all vectors and hosts containing the same, patent applications, marketing methods and plans, pricing information, manufacturing information and other unpublished information related to the business or the financial condition of Cephalon and its affiliates and corporate collaborators. The provisions of this paragraph 5 shall survive the expiration or sooner termination of the term of this Agreement. (b) Consultant agrees to honor the terms of Cephalon's insider trading policy, a copy of which is attached as Exhibit B hereto, for as long as Consultant is in the possession of nonpublic information about Cephalon obtained in Consultant's capacity as a party to this Agreement. 6. Termination. Notwithstanding the provisions of paragraph 2, Cephalon ----------- may terminate this Agreement for any reason whatsoever, upon thirty (30) days written notice to Consultant. In such event, Cephalon shall be responsible only for that portion of the compensation and expenses owed to Consultant under paragraph 3 for any Services rendered prior to the effective date of such termination. 7. Return of Cephalon Property. Consultant will return to Cephalon any --------------------------- property of Cephalon in his/her possession, at any time when so requested by Cephalon and in any event upon termination or expiration of this Agreement. Consultant will not remove any Cephalon property from Cephalon premises without written authorization from Cephalon. 8. No Conflicting Agreements. Consultant represents that Consultant is ------------------------- not a party to any existing agreement that would prevent Consultant from entering into and performing this Agreement. Consultant will not enter into any other agreement that is in conflict with his/her obligations under this Agreement. Consultant shall not seek funding to support the Services from any third party (including U.S. Government), without the prior written consent of Cephalon. 9. Independent Contractor. Consultant is an independent contractor under ---------------------- this Agreement. Neither party shall have the power to bind the other party to any agreement, contract, obligation or liability. 10. Entire Agreement, Amendment and Assignment. This Agreement is the ------------------------------------------ sole agreement between Consultant and Cephalon with respect to the Services to be performed hereunder and it supersedes all prior agreements and understandings with respect thereto, whether oral or written. No modification to any provision of this Agreement shall be binding unless in writing and signed by both Consultant and a duly authorized representative of Cephalon. All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of Consultant hereunder are of a personal nature and shall not be assignable or delegable in whole or in part by Consultant. 11. Governing Law. This Agreement shall be governed by and interpreted in ------------- accordance with laws of the State of Delaware, without giving effect to any conflict of laws provisions. 12. Notices. All notices and other communications required or permitted ------- hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered, sent by facsimile or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to Cephalon, to: Cephalon, Inc. 145 Brandywine Parkway West Chester, PA 19380 Attention: Frank Baldino, Jr., Ph.D. Facsimile No.: (610) 344-7563 With a copy to: General Counsel If to Consultant, to: Martyn D. Greenacre 327 South Valley Road Paoli, PA 19301 Facsimile No.: (610) 722-9112 or to such other names or addresses as Cephalon or Consultant, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this paragraph. NOTE: All invoices and/or changes in billing should be directed to the Accounting Department at: Cephalon, Inc. 145 Brandywine Parkway West Chester, PA 19380-4245 Attention: Accounts Payable 13. Counterparts. This Agreement shall become binding when any one or ------------ more counterparts hereof, individually or taken together, shall bear the signatures of Consultant and Cephalon. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, but all of which together shall constitute but one and the same instrument. 14. Severability. If any provision of this Agreement is deemed to be ------------ invalid or unenforceable by a court of competent jurisdiction or in arbitration, the same shall be deemed severable from the remainder of this Agreement and shall not cause the invalidity or unenforceability of the remainder of the Agreement. 15. Social Security Number. Consultant certifies that his or her social ----------------------- security number is ###-##-####. Consultant acknowledges that Cephalon will rely upon the foregoing certification in filing certain documents and instruments required by law in connection with this Agreement, including, without limitation, form 1099 under the Internal Revenue Code of 1986, as amended (or any successor form). 16. Further Action. Each party hereto shall take, or cause to be taken, -------------- all actions, and do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations (including without limitation those regulations promulgated by the U.S. Internal Revenue Service), and execute and deliver such further documents as may be reasonably requested by the other party in connection with the operation of this Agreement. 17. Non-Solicitation. During the term of this Agreement, and for one (1) ---------------- year thereafter, Consultant agrees to refrain from hiring or attempting to hire any of Cephalon's employees without the consent of Cephalon. 18. Compliance With Law. Consultant agrees to comply with all applicable ------------------- laws and regulations relating to the performance of the Services. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have duly executed, or caused to be duly executed, this Agreement as of the date first above written. CEPHALON, INC. By: /s/ Frank Baldino, Jr. ---------------------- Name: Frank Baldino, Jr., Ph.D. Title: Chairman and Chief Executive Officer MARTYN D. GREENACRE By: /s/ Martyn D. Greenacre ----------------------- Name: Martyn D. Greenacre EXHIBIT A DESCRIPTION OF CONSULTING SERVICES AND COMPENSATION Scope of Services: Consultant shall provide consulting services as requested relating to the possible expansion of Cephalon's European operations, including without limitation, a possible transaction in France. Compensation: Cephalon shall pay Consultant a total of $16,700 per month as compensation for the Services, as well as travel, hotel and meal expenses. Schedule of Payments: Cephalon shall pay Consultant twice each month during the term of this Agreement. Please send all invoices to: Cephalon, Inc. Attn: Accounts Payable 145 Brandywine Parkway West Chester, PA 19380 EXHIBIT B UPDATED 6/01 POLICY STATEMENT ON SECURITIES TRADING BY CEPHALON PERSONNEL PURPOSE Because Cephalon stock is publicly-traded, all of us must be aware of and scrupulously observe the various laws and rules prohibiting what is commonly referred to as "insider trading". This policy statement has been adopted by the Board of Directors of Cephalon to protect the Company's reputation for integrity and ethical conduct that we have all worked hard to achieve. The policy applies to every employee, whether full or part-time. It also affects members of your family as well as your friends and associates. Consultants of the Company also are expected to abide by this policy. Failure to comply with this policy statement may result in the loss of your job as well as substantial civil and criminal penalties. Please read this Policy Statement carefully and keep it in your files for future reference. POLICY It is our policy that a director, officer or employee (or a related person) who has material, non-public information relating to Cephalon may not buy or sell securities of Cephalon or engage in any other action to take advantage of, or pass on to others, that information. This policy also applies to non-public information about any other company that is obtained in the course of your employment. Transactions that may be necessary for independent reasons (such as the need to raise money for an emergency) are no exception. Even the appearance of an improper transaction must be avoided. As a consequence, the following transactions are prohibited, even if you are not in the possession of material, non-public information: o Purchases of Cephalon stock on margin. Although margin purchases are restricted, you may establish loan accounts secured by Cephalon stock. o "Short" sales of stock. o Buying or selling puts or calls of stock. Employees are responsible for ensuring that members of their household and their immediate family comply with this policy, including the procedures set forth below. WHAT IS INSIDER TRADING? Insider trading occurs when a person buys or sells Cephalon stock (or engages in similar transactions such as taking a "long" or "short" position in Cephalon stock) while in possession of material, non-public information about the Company. Liability also can occur if this kind of information is passed on to a person (a practice known as "tipping") who then trades in the security. Insider trading is not confined to Cephalon stock. If, for example, a Cephalon employee learns that a contract is about to be entered into with another public company, trading in the securities of that other company also is prohibited if the information is material and not yet disclosed to the public. Intent generally is not relevant. A casual comment made to another person could be a "tip", even without knowledge or intent that the other person will trade in the stock. In essence, being in possession of material inside information imposes an obligation not to disclose that information to an unauthorized person. This non-disclosure obligation is in addition to any confidentiality responsibilities you may have under the Company's standard confidentiality agreement with employees. WHAT IS MATERIAL INFORMATION? Information which is material, as used in this context, is any fact or circumstance which, if known to a reasonable investor, would have a reasonable likelihood of influencing the decision to invest or to sell. Both good and bad news can be material. In simple terms, material information is anything that is likely to affect the price of the stock. Examples of material information include: o an earnings estimate or revision of a previous public earnings estimate o a significant expansion or cutback of operations o a significant increase or decline in sales or earnings o a proposal for a merger or the purchase or sale of substantial assets o a proposal for a joint venture, license agreement, research and development contract, or distribution arrangement o the discovery of a new product or the issuance of an important patent o the receipt of FDA or other regulatory approvals o the threat of major litigation o changes in management, such as resignations or new appointments o the issuance of additional securities by the Company or a stock split, stock combination, etc. This list is not exhaustive. If in doubt about whether information is material, do not trade in Cephalon stock and do not discuss the information outside of the Company unless and until the information becomes public through proper channels. Please understand that trading activities may give the impression, when viewed in hindsight, that you acted improperly even if you did not in fact have knowledge of any material, non-public information. WHAT IS NON-PUBLIC INFORMATION? As a normal rule, information is considered non-public until at least two full trading days have passed after the information is released by the Company to a national wire service. For example, if an announcement is made prior to the opening of business on a Monday, trading should not occur until Wednesday morning. What are the penalties for insider trading? The consequences of insider trading violations can be enormous: o For individuals who trade on inside information or who tip information to others: -a civil penalty of up to three times the profit gained or the loss avoided; -a criminal fine (no matter how small the profit) of up to $1 million; and -a jail term of up to ten years Directors and officers also may be prohibited from serving in such capacity with Cephalon or any other public company. These penalties are in addition to any sanctions the Company itself may impose, including dismissal for cause. o For a company (and possibly supervisory persons) that fails to take appropriate steps to prevent illegal trading: -a civil penalty of the greater of $l million or three times the profit gained or the loss avoided; and -a criminal penalty of up to $2.5 million. PROCEDURES FOR SECURITIES TRADING BY DIRECTORS AND EXECUTIVE OFFICERS All persons who file reports with the SEC pursuant to Section 16 of the Securities Exchange Act of 1934 and Rule 144 promulgated under the Securities Act of 1933 (e.g., all directors and executive officers) must obtain authorization from the General Counsel in each case to trade. All other employees of the Company should contact the Human Resources Department if you have any questions about the timing or nature of the proposed securities trade. WINDOW PERIODS RELATING TO TRADING No employee may trade in the securities of the Company during the period commencing approximately two weeks prior to the public disclosure of annual or quarterly revenue and earnings information, and ending after two full trading days have passed following the public disclosure of such information. Please note that this trading limitation covers the exercise of Cephalon stock options on a "cashless" basis, but does not cover the purchase and holding of shares pursuant to the exercise of options without the sale of the underlying shares. In addition, all directors, officers, and certain other key employees may only trade in the Company's securities during the period commencing after two full trading days have passed following the public disclosure of annual or quarterly revenue and earnings information, and ending not more than thirty calendar days thereafter; provided, however, that such key employees may not trade in any event if they are in possession of material, non-public information or are otherwise restricted under the terms of this policy. In the event that this window must be shortened due to anticipated events, the directors, officers and key employees affected will be notified. Regardless of these limitations, employees may make an irrevocable election to sell Cephalon securities under a sales plan that meets the legal requirements of SEC Rule10b5-1. Under such a sales plan, employees must make their election during an open trading window and must not otherwise be in possession of material, non-public information when the election is made. Employees will be advised of the precise dates of each window period. EX-23.1 10 dex231.txt CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statement File No. 33-43716, No. 33-71920, No. 33-74320, No. 333-02888, No. 333-20321, No. 333-69591, No. 333-89909, No. 333-75281, No. 333-87421, No. 333-88985, No. 333-94219, No. 333-52640, No. 333-43104, No. 333-62234 and No. 333-59410. Arthur Andersen LLP Philadelphia, Pennsylvania April 1, 2002 EX-23.2 11 dex232.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 33-74320, 333-20321, 333-75281, 333-88985, 333-94219, 333-62234, 333-59410) and Forms S-8 (Nos. 33-43716, 33-71920, 333-02888, 333-69591, 333-89909, 333-87421, 333-52640, 333-43104) of Cephalon, Inc. of our report dated February 18, 2000, except as to the information presented in Note 14 for which the date is March 13, 2000, relating to the financial statements of Anesta Corp. (not presented separately herein), which appears in the Current Report on Form 10-K of Cephalon, Inc. dated April 1, 2002. PricewaterhouseCoopers LLP Salt Lake City, Utah April 1, 2002 EX-99.1 12 dex991.txt LETTER RESPONSIVE TO TEMPORARY NOTE 3T EXHIBIT 99.1 [LOGO] Cephalon March 29, 2002 Securities and Exchange Commission Washington, DC 20549 Re: Letter responsive to Temporary Note 3T to Article 3 of Regulation S-X --------------------------------------------------------------------- Dear Sir or Madam: In compliance with Temporary Note 3T to Article 3 of Regulation S-X, I am writing to inform you that Arthur Andersen LLP ("Andersen") has represented to Cephalon, Inc. ("Cephalon"), that Andersen's audit of the consolidated balance sheets of Cephalon and its subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three fiscal years in the period ended December 31, 2001, was subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards and that there was appropriate continuity of Andersen personnel working on the audit, availability of national office consultation and availability of personnel at foreign affiliates of Andersen to conduct the relevant portions of the audit. Sincerely, /s/ J. Kevin Buchi J. Kevin Buchi Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----