-----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, M5tK6Ouo6SHuEBB1D7rhzzJxH+4zNE6JB3yHaNZ5B6Ylr2AAs7hikybD8UBUUZQ+ v0WaSBKH15qve9BsgmCA0w== 0000884939-98-000005.txt : 19980330 0000884939-98-000005.hdr.sgml : 19980330 ACCESSION NUMBER: 0000884939-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYNAPTIC PHARMACEUTICAL CORP CENTRAL INDEX KEY: 0000884939 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 222859704 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27324 FILM NUMBER: 98576280 BUSINESS ADDRESS: STREET 1: 215 COLLEGE RD CITY: PARAMUS STATE: NJ ZIP: 07652 BUSINESS PHONE: 2012611331 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Mark One: [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number 0-27324 SYNAPTIC PHARMACEUTICAL CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 215 College Road Paramus, NJ (Address of principal executive offices) 22-2859704 (I.R.S. Employer Identification No.) 07652 (Zip Code) (201) 261-1331 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Rights to Purchase Series A Junior Convertible Preferred Stock, par value $.01 per share (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the voting and non voting common equity held by non-affiliates of the registrant was approximately $142,600,000 as of March 2, 1998, based upon the closing price of the Common Stock as reported on The Nasdaq Stock Market on such date. For purposes of this calculation, shares of Common Stock held by directors, officers and stockholders whose ownership in the registrant is known by the registrant to exceed five percent have been excluded. This number is provided only for purposes of this report and does not represent an admission by either the registrant or any such person as to the status of such person. As of March 2, 1998, there were 10,674,945 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Synaptic Pharmaceutical Corporation Proxy Statement, to be filed not later than 120 days after December 31, 1997, in connection with the registrant's 1998 Annual Meeting of Stockholders, referred to herein as the "Proxy Statement," are incorporated by reference into Part III of this Report on Form 10-K. SYNAPTIC PHARMACEUTICAL CORPORATION INDEX TO REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 Part I Page ---- Item 1. Business........................................................... 1 Item 2. Properties......................................................... 30 Item 3. Legal Proceedings.................................................. 30 Item 4. Submission of Matters to a Vote of Securityholders................. 30 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................................... 31 Item 6. Selected Financial Data............................................ 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................. 33 Item 8. Financial Statements............................................... 43 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............................................. 64 Part III Item 10. Directors and Executive Officers of the Registrant................. 65 Item 11. Executive Compensation............................................. 65 Item 12. Security Ownership of Certain Beneficial Owners and Management..... 65 Item 13. Certain Relationships and Related Transactions..................... 65 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 66 (i) Part I Item 1. Business Overview Synaptic Pharmaceutical Corporation ("Synaptic" or the "Company") is a biotechnology company engaged in the development of a broad platform of enabling technology which it calls "human receptor-targeted drug design technology." The Company is utilizing this technology to discover and clone the genes that code for human receptor subtypes associated with specific disorders and is working both independently and together with its collaborative partners to design compounds that can potentially be developed as drugs for treating these disorders. In addition to conducting several internal programs, the Company is currently collaborating with Eli Lilly and Company ("Lilly"), Merck & Co., Inc. ("Merck"), Novartis Pharma AG ("Novartis"), the Warner- Lambert Company ("Warner-Lambert") and Grunenthal GmbH ("Grunenthal") on more than twelve separate drug discovery programs covering ten therapeutic areas. Synaptic's human receptor-targeted drug design technology is the result of an integrated approach to four life science fields: molecular biology; cell biology; pharmacology; and chemistry, including medicinal, combinatorial and computer-assisted chemistry. This technology allows chemists to focus their drug discovery efforts on a specific human receptor subtype target. The Company believes that its technology provides three distinct advantages over the traditional approach to drug discovery in which compounds are screened against animal tissues containing many different receptor subtypes. First, by having an isolated receptor subtype as a target, chemists are better able to design compounds that interact with only the target of interest and not with other receptors that may be responsible for side effects. Second, the Company believes that using human receptor subtypes as drug design targets will substantially reduce the number of problems that often arise during the drug development process as a result of differences in a compound's activity in humans compared to its activity in animal tissues. Third, Synaptic believes that its technology may be more cost-effective than traditional drug discovery because the Company and its collaborative partners can eliminate or redesign compounds that react poorly with human receptor targets prior to initiating the costly activities related to preclinical testing and clinical trials. Synaptic focuses its receptor and drug discovery efforts on members of a receptor superfamily known as "G protein-coupled receptors." The Company selected this receptor family for two principal reasons. First, many G protein-coupled receptors have been shown to be effective drug targets, as evidenced by the commercial availability of drugs for a wide variety of therapeutic applications that work by means of their interactions with G protein-coupled receptors. Second, the G protein-coupled receptor superfamily is extremely large and diverse and, based on several estimates, exceeds 1,000 receptors, with its members being involved in the mediation of a broad array of physiological functions. Accordingly, the Company believes that there are substantial opportunities to use many members of the G protein-coupled receptor superfamily as targets for novel drugs. The Company and Lilly have been collaborating since 1991 to develop drugs for a variety of therapeutic applications. One of their drug discovery programs, focused on the development of a drug for the treatment of migraine, is in Phase II clinical trials in Europe. Two other programs that are the subject of the collaboration, which are focused on the development of drugs for the prophylactic treatment of migraine and for the treatment of depression, are in the late preclinical stage of development. In addition, two programs that are the subject of the collaboration, which are focused on the development of drugs for the treatment of smoking cessation and obesity, are in the early preclinical stage of development. The Company and Merck have been collaborating since 1 1993 on a program focused on the development of a drug for the treatment of benign prostatic hyperplasia ("BPH"). This program is in the late preclinical stage of testing. The Company and Novartis have been collaborating since 1994 on a program focused on the development of a drug for the treatment of obesity. This program is in the early preclinical stage of development. In July 1997, the Company entered into a collaborative arrangement with Warner-Lambert focused on multiple therapeutic applications, including obesity, diabetes, Alzheimer's Disease, depression and pain. Finally, in January 1998, the Company entered into a collaborative arrangement with Grunenthal. Unlike the Company's other collaborations which are focused on a single receptor family but which may result in drugs for multiple therapeutic applications, the Grunenthal collaboration is focused on the development of drugs for a single therapeutic application--pain--but may involve multiple receptor families. Three of the Company's collaborative partners, Lilly, Merck and Novartis, provide the Company with financial support for research. In addition, as part of its collaboration with the Company, Warner-Lambert is required upon the occurrence of certain events to provide the Company with financial support for research and, at the Company's option, to purchase equity in the Company. Each of these four collaborative partners is responsible for all development costs and is required to make payments to the Company upon the achievement of certain milestones and to pay royalties to the Company based upon net sales of any drugs resulting from its collaboration with the Company. With respect to the Grunenthal collaboration, the Company and Grunenthal are responsible for their own expenses incurred during the research stage of any project undertaken as part of the collaboration but will each be responsible for 50% of all development costs incurred as part of the project with respect to any resulting drug candidates up to the commencement of Phase III clinical trials. Synaptic will retain manufacturing and marketing rights in the United States, Canada and Mexico with respect to any drug candidates resulting from the collaboration, while Grunenthal will retain manufacturing and marketing rights in Europe, Central America (other than Mexico) and South America with respect to any such candidates. The two companies will share these rights in all other countries. With respect to each country in its own territories and in the shared territories in which it desires to market a drug candidate, each of Synaptic and Grunenthal will be responsible for conducting Phase III clinical trials, if required, for obtaining any necessary regulatory approval and for all associated costs. In March 1998, the Company entered into an Option and License Agreement (the "Glaxo Agreement") with Glaxo Group Limited ("Glaxo") pursuant to which the Company granted Glaxo a license under its patent rights, as well as an option to obtain an additional license under its patent rights, relating to certain of the Company's technology. In consideration for the license and option, Glaxo paid the Company $2 million. In addition to the $2 million payment, Glaxo is required to pay royalties to the Company based upon net sales of drugs covered by the license. An additional payment is required in order for Glaxo to exercise the option to obtain the additional license and, if Glaxo exercises the option, it is required to pay to the Company royalties based upon net sales of drugs covered by such additional license, as well as to make payments to the Company upon the achievement of certain milestones. Unlike the agreements with Lilly, Merck, Novartis, Warner-Lambert and Grunenthal, the Glaxo Agreement does not provide for any collaboration between the Company and Glaxo. In November 1997, the Company received net proceeds of $33,822,000, after deducting offering expenses payable by the Company, from an underwritten public offering of its Common Stock. Certain discussions in this Report refer to various phases of preclinical testing and clinical trials. For a description of such phases, see the footnotes in the table entitled "Summary of Synaptic's Receptor and Drug Discovery Programs" set forth under "--Receptor and Drug Discovery Programs: Focus on G Protein-Coupled Receptor Superfamily." 2 Business Strategy Synaptic's business strategy is to develop, together with its collaborative partners, a broad array of drugs based upon the Company's human receptor-targeted drug design technology. This strategy consists of four principal objectives, the first of which is to aggressively discover and clone G protein-coupled receptor genes. As of March 2, 1998, Synaptic had received United States patents relating to eleven of these receptor genes and related drug discovery systems and several United States patent applications relating to the Company's receptor gene discoveries were pending. In addition, several corresponding patents had been issued in other countries and additional corresponding patent applications had been filed in other countries. The Company's second objective is to efficiently discover and design potential drugs through the use of its human receptor-targeted drug design technology. The Company and its collaborative partners are using this technology to design, synthesize and optimize compounds for further development. The Company's two approaches to designing and synthesizing compounds include traditional medicinal chemistry and the newer technology of combinatorial chemistry, each of which is supported by the Company's expertise in computer-assisted molecular modeling. With both approaches, the Company's chemists and pharmacologists use their knowledge of the structures of targeted receptor subtypes to design and synthesize initial chemical structures that are then optimized. Synaptic's chemists are currently involved in six drug discovery programs, three of which are being conducted in collaboration with the Company's partners. The Company's partners may select compounds for testing in the Company's drug discovery systems from the Company's existing libraries of compounds, their own existing libraries of compounds or newly discovered or designed compounds. The Company's third objective is to leverage resources and generate royalty-based revenues through collaborations and licensing arrangements with pharmaceutical companies. Towards this objective, the Company to date has focused most of its scientific resources on the discovery and design phases of the drug development process and has entered into royalty-based collaborations in which its pharmaceutical partners participate in the early phases of the drug development process and assume principal responsibility for preclinical testing, clinical trials and commercialization. In these types of arrangements, the Company's collaborative partners are generally required to provide the Company with financial support for research, milestone payments and royalties tied to net sales of any drugs resulting from the collaborations. By pursuing this objective, Synaptic gains access to the expertise and resources of its partners, while simultaneously maintaining relatively low capital requirements. In addition to these collaborations, the Company has licensed certain patent rights to Glaxo under the Glaxo Agreement. Glaxo is conducting the research and development activities relating to the license independently of Synaptic and is required to pay Synaptic royalties tied to net sales of any drugs covered by the license. The Company's fourth objective is to retain ownership rights to certain products developed through the use of its technology. The Company is seeking to achieve this objective in a variety of manners, including the exploration of and entry into collaborations with pharmaceutical companies in which the Company increases its participation in and funding of drug development activities conducted as part of such collaborations. Through such arrangements, the Company believes that it may be able to gain access to additional chemistry, in vivo pharmacology, preclinical and clinical expertise, as well as to retain a greater portion of the downstream financial benefits associated with the commercialization of any products resulting from such arrangements. 3 Background The Role of Receptors in Controlling Cellular Function The human body coordinates its activities through communication among its great variety of cells and tissues. One of the principal means of communication occurs through chemical signaling, when one cell releases a chemical messenger, called a "ligand," which ultimately binds to and activates a protein molecule, called a "receptor," on the surface of another cell. The activation of the receptor on the surface of the receiving cell triggers a cascade of events in which the message received by the receptor is, in turn, transmitted to the interior of the cell, thereby causing some aspect of the behavior of the receiving cell to change. The nature of this change depends upon a number of factors, including the specific ligand and receptor involved in the communication. Many different kinds of receptors involved in cellular communication exist in the human body. Receptors are first classified into categories, called "superfamilies," based upon similarities in their biochemical and structural properties. There are four principal superfamilies of receptors: the G protein-coupled receptor superfamily, the receptor protein-tyrosine kinase superfamily, the ligand-gated ion channel superfamily and the intracellular receptor superfamily. The receptors included within each superfamily are then subcategorized into groups, called "families," based upon the specific ligands with which they interact. Examples of receptor families within the G protein-coupled receptor superfamily are the serotonin, adrenergic, neuropeptide Y ("NPY") and galanin families of receptors. Each member of each family is called a "receptor subtype." Historically, it was believed that each family of receptors had only one or two members. In recent years, however, scientists have discovered that many families of receptors have more than two receptor subtypes. The number of receptor subtypes within each family of receptors varies, with some families, such as the serotonin family, comprising at least 14 known receptor subtypes, and other families, such as the alpha adrenergic family, comprising at least six known receptor subtypes. In general, each receptor subtype is distributed differently throughout the body and often controls physiological functions that are different from those controlled by other receptor subtypes within the same family. By interacting with all of its receptor subtypes that are located throughout the body, a single ligand thus plays a role in numerous physiological functions. For example, the ligand for adrenergic receptor subtypes, noradrenaline (also known as norepinephrine), interacts with at least nine different receptor subtypes (six alpha and three beta receptor subtypes), one of which has been shown to contract the muscles surrounding the prostate and another of which has been shown to regulate blood pressure. In some cases, the same receptor subtype is found in different tissues of the human body. A compound designed to bind selectively to a receptor subtype for treating a disorder in one tissue could, therefore, potentially cause an adverse side effect in other tissues that contain the same receptor subtype. The tissue affected by the disorder may, however, have certain other characteristics that can be exploited to guide receptor subtype-targeted compounds to that tissue. Receptor-Based Drug Therapy--The Traditional Approach Many illnesses arise because of abnormalities in intercellular communication, and the concept of receptor-based drug therapy was developed to address this problem. The goal of receptor-based drug therapy is to develop drugs that will interact with the receptor believed to be associated with the targeted abnormality, thereby inhibiting or enhancing the cascade of events that is mediated by the receptor. A number of receptor- based drugs have been developed and are currently being used. In general, however, these drugs do not differentiate among receptor subtypes and, while they may indeed interact with the targeted receptor subtypes, 4 thereby having some therapeutic effect, they may also interact with other receptor subtypes within the same family as the targeted receptor subtypes. These other receptor subtypes may be associated with other physiological functions, and interactions of these drugs with them often result in undesirable side effects. In addition, many of these drugs have limited therapeutic utility because they must be used in suboptimal doses in order to minimize these side effects. The reason that most of these currently available drugs are unable to differentiate among receptor subtypes stems from the fact that they were discovered through traditional drug discovery methods. The traditional approach to drug discovery involves the screening of compounds against animal tissues containing multiple receptor subtypes to determine their relevant biological activity. This approach is limited in its ability to yield optimally effective drugs because of inherent limitations in the use of animal tissues to test drugs intended for humans. First, by using animal tissues containing multiple receptor subtypes, it is usually difficult and often impossible both to measure with precision the effect of a compound on the receptor subtype that is the target of a drug discovery effort and to determine whether the compound is binding to other receptor subtypes in the tissue that are not the intended drug target. Second, due to differences in the receptor systems of various species of animals as compared to humans, there are often significant differences between a drug's activity in animals and the same drug's activity in humans. In fact, there are several examples of drug development candidate failures in human clinical trials that were due to differences in the properties of such candidates in humans as compared to their properties in the animal tissues that were initially used for drug discovery. As a consequence, compounds initially tested against animal tissues often do not have the desired effects when they are ultimately administered to humans in clinical trials. Synaptic's Human Receptor-Targeted Drug Design Technology Synaptic believes that its human receptor-targeted drug design technology can overcome the limitations of the traditional approach to drug discovery. This technology involves three steps: (i) the discovery and cloning of the human genes that code for the targeted receptor subtypes; (ii) the use of each of these genes to create a cell line that can be used to measure, or assay, the pharmaceutical properties of compounds that bind to the targeted receptor subtype and that are, therefore, candidates for drug development; and (iii) the design, synthesis and optimization of compounds that are highly selective for the targeted human receptor subtype. In the first step, the Company's molecular biologists employ genetic engineering techniques to clone the gene that codes for the receptor subtype of interest. In the second step, the Company's cell biologists place the gene into a recipient cell which then expresses the human receptor subtype on its surface. This recipient cell, which expresses a single population of the targeted human receptor subtype and is devoid of all other related receptor subtypes, is then propagated by the Company's cell biologists, resulting in the establishment of a cell line. Finally, this cell line is used as a drug discovery system by the Company's pharmacologists to evaluate compounds synthesized by the Company's or its collaborative partners' chemists. Since each of these cell lines expresses a single receptor subtype, it is possible to design compounds with high affinity for the ultimate target of a drug discovery program--the appropriate human receptor subtype--and low affinity for those subtypes suspected of being associated with side effects. The Company's technology makes it possible not only to clone receptor subtypes previously believed or known to exist, but also to discover and clone receptor subtypes which had previously been undetectable in animal tissues because they were present in concentrations too low to detect using traditional pharmacological techniques. Many of these newly discovered receptor subtypes may provide opportunities for the design of novel drugs. In addition, the Company believes that its ability to access and to use individual cloned human receptor subtypes in its drug design efforts will yield safer and more effective drugs than those currently available. 5 Synaptic further believes that its technology may make the drug development process more predictive and cost-effective than the traditional approach because the Company and its collaborative partners eliminate or redesign non-subtype-selective compounds and compounds that react poorly with human targets at an early stage of the process rather than at the costly later stages of preclinical testing and clinical trials. Finally, drugs developed through the use of the Company's human receptor-targeted drug design technology will be small molecule drugs which offer possibilities of avoiding specialized delivery approaches and which may be delivered orally. The Company also believes that its success in the discovery of receptor subtypes will enable it to further refine the understanding of many disease processes. There is increasing evidence to suggest that some disorders may actually involve the malfunctioning of any one of a variety of receptor subtypes included within different receptor families. For example, in the case of obesity, there are pharmacological data indicating that an NPY receptor subtype is involved in controlling appetite, while a galanin receptor subtype may be involved in craving for fats in the diet. As a result, more than one drug could be developed to treat obesity, but such drugs would work through different biological mechanisms by exerting their therapeutic effects by interacting with receptor subtypes belonging to different families. The Company believes that its human receptor-targeted drug design technology may make it possible to discover two or more separate drugs that could benefit distinct patient populations whose symptoms (for example, obesity), while identical, stem from different physiological disorders and therefore require different treatments. Consequently, it has initiated several programs in which different receptor subtypes are being used as drug targets for the same therapeutic application. To date, the Company has not completed development of any drugs and does not expect that drugs developed by it or its collaborative partners will be commercially available for a number of years. Receptor Gene Discovery and Cloning The Company's principal receptor cloning projects to date have focused on four families of receptors within the G protein-coupled superfamily of receptors: the serotonin, alpha adrenergic, NPY and galanin receptor families. Additional projects directed toward other receptor families are ongoing. The Company's collection of cloned genes that code for receptors in the G protein-coupled receptor superfamily comprises human genes, as well as genes from various other mammalian species that correspond to the human genes. These receptor genes include genes that were discovered by the Company and genes that were discovered by others about which information is publicly available. In general, the Company seeks to patent those cloned receptor genes and those drug discovery systems that it has discovered or invented. As of March 2, 1998, the Company had received United States patents relating to eleven receptor genes and related drug discovery systems and several United States patent applications relating to the Company's receptor gene discoveries were pending. In addition, several corresponding patents had been issued in other countries and additional corresponding patent applications had been filed in other countries. There can be no assurance that the Company will be awarded patents in respect of any of its pending patent applications. Drug Discovery Systems Once the Company clones the gene for a targeted receptor subtype, it places the gene into a recipient cell which then expresses the targeted receptor subtype on its surface. This cell, which expresses a single population of the targeted human receptor subtype, is then propagated in the laboratory by the Company's cell biologists, resulting in the establishment of a cell line. This cell line, which constitutes a drug discovery system, is used in 6 two different types of assays: binding assays and functional assays. In Synaptic's binding assays, the Company's pharmacologists measure the affinity of a compound for both the receptor subtype that is the target of a particular drug discovery program and the other receptor subtypes that could be associated with side effects. These measurements help to predict the potency of a compound, as well as the degree of selectivity that the compound has for the targeted receptor subtype over other receptor subtypes. The data obtained from binding assays enable the chemists to design compounds toward or away from one or more of the relevant subtypes, as appropriate, for optimal therapeutic efficacy. In Synaptic's functional assays, the Company's pharmacologists determine the nature of the response of the receptor subtype to the compound. Data from the functional assays show whether the compound is acting to inhibit or enhance the activity of the receptor subtype. By enabling the Company's pharmacologists to evaluate compounds rapidly at their ultimate human receptor subtype targets, the Company's proprietary drug discovery systems serve as tools that the Company's and its partners' or licensees' chemists can use to rationally design drugs that will be more effective and have fewer or substantially less severe side effects than existing drugs. Although the Company believes that its drug discovery systems accurately measure the properties of a compound's interaction with the human receptor subtypes, there are many additional factors, such as the drug's stability in the body or its ability to be administered orally, that impact the ultimate pharmaceutical success of a compound. Chemistry and Molecular Pharmacology The Company employs two approaches to designing and synthesizing receptor subtype-selective compounds, traditional medicinal chemistry and the newer technology of combinatorial chemistry, both of which are supported by the Company's expertise in computer-assisted molecular modeling. With both approaches, the Company's chemists and pharmacologists use their knowledge of the structures of the targeted receptor subtypes and known compounds to design and synthesize structures that will have activity at these subtypes. Combinatorial chemistry involves automated synthesis of a variety of novel compounds by assembling them using different combinations of chemical building blocks. The use of combinatorial chemistry greatly accelerates the process of generating compounds. The resulting arrays of compounds are called libraries and are used to screen for compounds ("lead compounds") that demonstrate a sufficient level of activity at receptors of interest. The Company is using combinatorial chemistry to synthesize "focused" libraries of compounds anticipated to be highly biased toward the Company's drug discovery targets. The Company's scientists have successfully generated lead compounds through the use of these combinatorial chemistry techniques. Once lead compounds are identified, whether through the use of combinatorial chemistry or traditional medicinal chemistry, a variety of analogues are prepared to facilitate an understanding of the relationship between chemical structure and biological activity. These studies help define structure activity relationships which can then be used to design drug candidates with improved potency, selectivity and pharmacokinetic properties. Combinatorial chemistry is used to rapidly generate a variety of structures for lead optimization. Traditional medicinal chemistry, which involves the synthesis of compounds one at a time, is also used for further refinement and to generate compounds not accessible by automated techniques. Receptor and Drug Discovery Programs: Focus on G Protein-Coupled Receptor Superfamily The superfamily of receptors to which the Company has chosen to apply its human receptor-targeted drug design technology is the G protein-coupled receptor superfamily, so called because the cascade of events that 7 ensues within the receiving cell following the occurrence of the ligand-receptor interaction is mediated by a class of proteins called "GTP-binding regulatory proteins," or "G proteins," found within the cell. The Company chose to focus on the G protein-coupled receptor superfamily because it believes that this superfamily provides the optimum opportunity for the exploitation of its human receptor-targeted drug design technology. First, it is known that G protein-coupled receptors play a major role in intercellular communication and that drugs that block ("antagonists") or enhance ("agonists") their activity have therapeutic utility. Examples of such drugs include: Zantac(R), a histamine receptor antagonist for the treatment of ulcers; Claritin(R), a histamine receptor antagonist for the treatment of allergy; Propulsid(R), a serotonin receptor agonist for the treatment of gastric motility disorder; Imitrex(R), a serotonin receptor agonist for the treatment of migraine headache; and Hytrin(R), an adrenergic receptor antagonist for the treatment of hypertension and BPH. Second, there is a large body of knowledge about some of the basic structural elements of drugs that interact with these receptors that has accumulated over the years from which the Company and its collaborative partners can draw in beginning their drug discovery programs. Third, the G protein-coupled receptor superfamily is extremely large and, based on several estimates, exceeds 1,000 receptor subtypes belonging to more than 40 known families and an unknown number of additional families the ligands of which have not yet been identified. To the Company's knowledge, fewer than half of the genes that code for these subtypes have been cloned. The Company's primary drug discovery programs are focused on human serotonin, adrenergic, NPY and galanin receptor subtypes. The serotonin programs are being conducted by the Company in collaboration with Lilly. One of the alpha adrenergic programs is being conducted by the Company in collaboration with Merck and the other alpha adrenergic program is being conducted by the Company in collaboration with Grunenthal. Of the Company's three NPY programs, one is being conducted by the Company in collaboration with Novartis and two are being conducted by the Company independently. The galanin program is being conducted by the Company in collaboration with Warner-Lambert. Total operating expenses incurred by the Company for each of the fiscal years 1997, 1996 and 1995 were $17,853,000, $14,319,000 and $12,078,000, respectively, of which approximately $9,785,000, $6,943,000 and $7,670,000, respectively, was funded by the Company's collaborative partners. In 1996, following the completion of its initial public offering in December 1995, the Company increased its internal research and development spending. The Company again increased internal research and development spending during 1997 and the Company intends to further increase such spending during 1998. 8 Certain of the Company's receptor and drug discovery programs are summarized in the following table: Summary of Synaptic's Receptor and Drug Discovery Programs Program(1) Receptor(s) Primary Indication(s) Status(2) Partner - -------------- ------------ ---------------------- ----------------- --------- Serotonin 1F Acute Migraine Phase II Clinical Eli Lilly 2B Migraine Prophylaxis Late Preclinical Eli Lilly __(3) Depression Late Preclinical Eli Lilly 1A Smoking Cessation Early Preclinical Eli Lilly 2C Obesity Early Preclinical Eli Lilly Alpha Adrenergic 1a Benign Prostatic Hyperplasia Late Preclinical Merck 2a, 2b or 2c (3) Pain Leads Identified Grunenthal Neuropeptide Y Y5 Obesity Early Preclinical Novartis Y2 Pain Discovery (4) Y2 Anxiety and Depression Leads Identified -- Galanin 1, 2, and 3 Obesity, Diabetes, Cloning and Warner- Alzheimer's Disease, Discovery Lambert Depression and Pain (1) The Company is working on receptor and drug discovery programs in addition to those programs referenced in the above table. In general, the drug discovery and receptor discovery programs that are specifically referenced in the above table are at more advanced stages of development than those that are not specifically referenced in the table. (2) "Cloning" refers to the stage at which the Company is attempting to discover, identify and clone the genes for specific receptor subtypes. "Discovery" refers to the stage at which chemists are attempting to identify receptor subtype-selective compounds through the use of the Company's drug discovery systems. "Leads Identified" refers to the stage at which receptor subtype-selective compounds have been identified through the use of the Company's drug discovery systems. "Early Preclinical" refers to the stage at which one or more leads have been identified and are being tested in in vitro or in vivo model systems for one or more indications. In addition, at this stage lead compounds may have been shown to be active in animal models for one or more indications and preliminary toxicology and pharmacokinetics studies will also have been concluded. "Late Preclinical" refers to the stage preceding the Phase I Clinical stage at which a clinical candidate has been selected, scale-up of such candidate is underway or completed, and toxicology and pharmacokinetics studies are planned or underway or have been concluded. "Phase I Clinical" refers to the stage preceding the Phase II Clinical stage at which a drug candidate is being or has been administered to a small group of healthy human subjects for the purpose of testing for safety (adverse effects), dose tolerance, absorption, bio-distribution, metabolism, excretion and clinical pharmacology. "Phase II Clinical" refers to the stage at which a drug candidate is being or has been administered to a small sample of the actual intended patient population to seek to assess the efficacy of the drug candidate for the specific targeted indication, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. 9 "Phase III Clinical" refers to the stage at which a drug candidate is being or has been administered to a broader sample of the general patient population at geographically dispersed study sites to establish further clinical safety and efficacy of the drug candidates in order to determine its overall risk-benefit ratio and to provide an adequate basis for all physician labeling. (3) The specific receptor subtype that is the focus of this program is confidential to the Company and its collaborative partner. (4) While Synaptic is currently conducting this program independently, Synaptic has agreed to reserve the Y2 receptor as a potential target for drugs for the alleviation of pain exclusively for its collaboration with Grunenthal. 10 Serotonin Programs Serotonin is one of the major neurotransmitters, a type of ligand, of the body. It affects mood, sleep rhythms, sexual functions, appetite, temperature control, gastro-intestinal movement and the cardiovascular, pulmonary and genito-urinary systems. Drugs that inhibit or enhance the actions of serotonin have proven to be effective in the treatment of an array of disorders, such as migraine headache, depression and anxiety. However, none of the limited number of serotonergic drugs currently available was designed with the use of cloned serotonin receptor subtype genes and some of these drugs have undesirable side effect profiles. It is generally believed that the poor side effect profiles stem from the interaction of these drugs with multiple serotonin receptor subtypes. The serotonin family is extremely large, comprising at least 14 receptor subtypes. While each of these receptor subtypes may be implicated in a physiological function distinct from the other subtypes, all of the receptor subtypes respond to the neurotransmitter serotonin--and may be responding to non-subtype-selective drugs. As a consequence, a non-subtype-selective drug intended to exert its effects on one physiological function may in fact have the unintended consequence of exerting its effects on other physiological functions, thereby causing the undesirable side effects. Of the 14 serotonin receptor subtype genes that have been discovered and cloned, the Company believes that it is responsible for the discovery and cloning of seven. The Company has been issued United States patents covering six of these receptor genes and related drug discovery systems. A patent application covering the seventh of these genes and the related drug discovery system and additional patent applications relating to all of these genes have been filed in the United States. In addition, several corresponding patent applications have been filed in other countries. The Company has found, through the use of these cloned receptor genes and related drug discovery systems, that the serotonin system is significantly more complex than had previously been understood and believes that the use of its technology to design serotonin receptor subtype-selective drugs will result in new serotonergic drugs with improved efficacy and side effect profiles, as well as serotonergic drugs for new therapeutic applications. There can be no assurance, however, that the Company will be successful in designing a serotonin receptor subtype-selective drug that will achieve the foregoing desired effect. The Company, in collaboration with Lilly, is currently conducting drug discovery programs focused on a number of serotonin receptor subtypes and therapeutic applications. As part of the collaboration, compounds supplied by Lilly are assayed by the Company in its serotonin receptor subtype drug discovery systems. To date, receptor subtype-selective compounds have been identified for a number of serotonin programs. The program focused on the discovery and development of a drug for the treatment of migraine headache is currently in Phase II clinical trials in Europe and as of March 2, 1998, Lilly confirmed that it expects to complete such trials and to begin analyzing the data from the trials during the second quarter of 1998. In connection with the collaboration, Lilly received an exclusive worldwide license to use all but two of the Company's existing serotonin drug discovery systems for the development and commercialization of serotonergic drugs. Certain of the serotonin programs are described below. Migraine Headache Migraine headaches are periodic throbbing headaches often accompanied by nausea and vomiting. One of the newer drugs available for the treatment of migraine, Imitrex(R), is an agonist of certain serotonin receptor subtypes that was discovered using the traditional approach to drug discovery. Although effective in most patients, the drug has been associated with the tightening of the coronary blood vessels. As a result, the drug is contraindicated both in patients with ischemic heart disease and in patients with symptoms of ischemic heart disease. In addition, because of the cardiovascular risks, it is recommended that, in the case of any patient in 11 whom unrecognized coronary disease is comparatively likely, the first dose of the drug be administered in a physician's office. Finally, the drug is poorly absorbed from the gastrointestinal tract. Therefore, to be most effective, it must be given by injection or by nasal spray. The Company and Lilly are focused on developing anti-migraine compounds with increased efficacy and reduced side effects. Through the use of its serotonin receptor subtype drug discovery systems, Synaptic scientists discovered that Imitrex(R) reacted strongly with three serotonin receptor subtypes, serotonin 1B and 1D, both of which were long thought to be the targets for anti-migraine effects, as well as serotonin 1F. Synaptic scientists proposed that the appropriate serotonin receptor subtype for the treatment of migraine is the serotonin 1F receptor subtype. Together with scientists at Lilly, Synaptic scientists identified compounds that are selective agonists of the serotonin 1F receptor subtype. These compounds were tested in animal models at Lilly and shown to be orally active and to have a long duration of action. The compounds were also shown to be potent in an animal model that is thought by many scientists in the field to be predictive of therapeutic utility for the treatment of migraine. Furthermore, these compounds were inactive in vasoconstriction assays at Lilly, thereby suggesting that the possible adverse events reported for Imitrex(R) would not limit the treatment potential of a 1F-selective agonist for migraine. Lilly is currently conducting Phase II clinical trials with one of these compounds in Europe. Synaptic has been issued a United States patent covering the use of genetically engineered cells expressing the human serotonin 1F receptor subtype to identify compounds that bind to the receptor subtype, as well as a United States patent covering the gene encoding the receptor subtype. In addition, Lilly has been issued a United States patent covering the use of 1F agonists exhibiting minimal vasoconstrictive effects for the treatment of migraine. The Company and Lilly are also focused on the discovery of safer and more efficacious drugs for the prophylactic treatment of migraine. Despite significant progress in the development of therapies for the acute treatment of migraine, much less progress has been made in the development of a prophylactic treatment. Patients who regularly experience two to six migraines per month are, according to criteria established by the International Headache Society, considered to be candidates for such a treatment. Presently, two beta adrenergic blockers, Inderal(R) and Blocadren(R), ergot alkaloids, such as Sansert(R), and an anticonvulsant, Depakote(R), have been approved for the prophylaxis of migraine. These drugs generally have limited efficacy due to their potential for significant deleterious side effects. Inderal(R) and Blocadren(R) must be used with caution in patients with certain pulmonary diseases because they can produce bronchoconstriction and in patients with congestive heart failure because they can cause coronary depression. Ergot alkaloids can cause vasoconstriction leading to myocardial ischemia or gangrene in the extremities and should not be used by pregnant women. Depakote(R) can cause fatal hepatic failure and, like ergot alkaloids, should be avoided by pregnant women. Through the use of Synaptic's serotonin receptor subtype drug discovery systems, scientists at Synaptic and Lilly have discovered compounds that are selective antagonists of the serotonin 2B receptor subtype, which is thought to be a potential target for migraine prophylaxis. These compounds are active in an animal model that is thought by many scientists in the field to be predictive of therapeutic utility for the treatment of migraine and it is believed that such compounds may provide safer and more effective prophylactic therapy for those who suffer frequent migraine. One of these compounds has been selected by Lilly for possible development and is undergoing late preclinical testing. Smoking Cessation There are more than 150 million smokers in major market countries, more than 30 million of whom attempt each year to quit smoking. Chronic use of tobacco is causally linked to a variety of serious diseases, including coronary heart disease, cancer and emphysema. Nicotine patches and nicotine gum have been used as 12 smoking cessation aids, but have met with limited success. Recently, Wellbutrin(R), which has been available for a number of years as an antidepressant, was approved by the United States Food and Drug Administration (the "FDA") for marketing in a sustained release formulation (Zyban(R)) for use as an aid to smoking cessation. Clinical studies show that Zyban(R), either alone or in combination with transdermal nicotine, increases the rate of smoking cessation. However, the long-term response rate to Zyban(R) as an aid in smoking cessation is low (about 20%). In addition, the active ingredient in Zyban(R) has been reported to cause seizures in about 0.4% of patients, along with agitation and insomnia. The Company and Lilly are engaged in a program to identify and develop serotonin 1A antagonists which ameliorate the withdrawal symptoms frequently suffered in connection with smoking cessation. As part of the program, the Company and Lilly have designed novel compounds which are highly selective for and are potent antagonists of the serotonin 1A receptor subtype. These compounds have been shown to be effective in an animal model of nicotine withdrawal and may lead to drugs which are more effective as smoking cessation aids than those currently available. Obesity Drug treatment for obesity has traditionally been used as a short-term adjunct to diet and exercise. Most drugs approved for the treatment of obesity act centrally through catecholaminergic and/or serotonergic pathways. Earlier compounds, such as Benzedrine(R) and Dexedrine(R), were plagued by problems of tolerance, abuse and cardiovascular side effects. More recently, Pondimin(R) and Redux(R), which act by releasing the neurotransmitter serotonin, were widely used, either alone or in combination with phentermine (Phen-Fen). However, both of these drugs have been withdrawn from the market pursuant to a request by the FDA because they appear to cause heart valve defects and pulmonary hypertension. The mechanism by which Pondimin(R) and Redux(R) cause this cardiac and pulmonary toxicity is unknown, but similar toxicity is not seen with other serotonergic drugs, such as Prozac(R) and Zoloft(R), which are widely used as antidepressants. While it has been proven that serotonergic transmission can regulate food intake, it has not been clear which of the serotonin receptor subtypes is responsible for this action. Studies involving genetically altered mice which lack serotonin 2C receptors indicate that this serotonin receptor subtype may play a role. These mice are normal at birth but become obese as they get older, and their obesity is associated with increases in food intake levels and insulin resistance. A possible correlation in humans is provided by the observation that patients treated with drugs such as clozapine, imipramine, and amitriptyline, all of which have, in addition to their principal actions, substantial blockade of the serotonin 2C receptors, are associated with weight gain. The Company and scientists at Lilly are collaborating to identify and develop compounds which are selective for the serotonin 2C receptor over other serotonin receptor subtypes that may be responsible for undesirable side effects. The Company's serotonin receptor subtype drug discovery systems have made it possible to discover subtype-selective compounds that may be effective treatments for obesity through this serotonin 2C mechanism. Subtype-selective compounds which suppress food intake in animal models have been identified and are under evaluation for their suitability as drug candidates. Depression A number of different pharmacologic strategies have been developed to treat depression. The early drugs shown to be effective in the treatment of depression, such as the tricyclic antidepressants, lithium and the 13 monoamine oxidase inhibitors, have side effects associated with their use that limit their effectiveness. Recently, selective serotonin reuptake inhibitors (SSRI), such as Prozac(R), Zoloft(R) and Paxil(R), have been shown to be highly effective in the treatment of many forms of depression. A number of SSRI compounds are now approved for marketing, and these drugs have captured a significant market share. However, all of these currently available drugs have significant deleterious side effects in many patients which may limit their use. In addition, these drugs have a lag time before their beneficial clinical effects can be seen. This lag time can be a serious problem, especially in the depressed suicidal patient. Furthermore, there are a significant number of patients that do not adequately respond to any of the currently available drug therapies. Scientists at Synaptic and Lilly have identified novel serotonin receptor subtype-selective compounds that may have rapid onset of efficacy in the treatment of depression and that may also have better side effect profiles than drugs currently available. One of these compounds has been selected by Lilly for possible development and is undergoing late preclinical testing. Other Serotonin Programs The Company has cloned additional serotonin receptor subtypes that are either not currently being pursued by it and Lilly as drug targets in their collaborative drug discovery programs or are being so pursued but are focused on therapeutic applications which are currently confidential to the Company and Lilly. In addition, there is evidence to suggest that one or more serotonin receptor subtypes that are the targets of the drug discovery programs currently being conducted by the Company and Lilly may be relevant as targets for other therapeutic applications. The Company expects that it and Lilly will establish additional drug discovery programs focused on certain of these other serotonin receptor subtypes or therapeutic applications in the future. There can be no assurance, however, that the Company will establish additional drug discovery programs with Lilly. Alpha Adrenergic Programs Alpha adrenergic receptors are activated by the neurotransmitter norepinephrine (noradrenaline). The alpha adrenergic receptors serve a critical control function in regulating involuntary physiological functions, such as blood pressure, heart rate and smooth muscle tone, and thus may serve as important tools in the management of many disorders, such as BPH. Until 1982, only two alpha adrenergic receptors (alpha-1 and alpha-2) were believed to exist. Since then, scientists have discovered that the alpha adrenergic receptor family contains at least six subtypes (alpha-1a, 1b and 1d and alpha-2a, 2b and 2c). The Company believes it was responsible for the discovery of the genes that code for four of the six alpha adrenergic subtypes in humans. The Company has received United States patents relating to two of these genes and related drug discovery systems. Additional patent applications relating to one of these genes have been filed both in the United States and in other countries. There are a number of adrenergic drugs on the market today which are effective in the treatment of a variety of disorders. However, most of these drugs were discovered in the 1970's prior to the discovery of the six alpha adrenergic subtypes and are not selective for any one of these receptor subtypes. The Company believes that many of the side effects associated with these drugs may be traced to a lack of selectivity for the appropriate receptor subtypes. The Company is using its alpha adrenergic drug discovery systems to discover compounds with increased receptor subtype selectivity and is involved in two programs involving alpha adrenergic receptor subtypes: the Alpha-1a Antagonist Program and the Alpha-2 Adrenergic Program. There can be no assurance 14 that the Company or any collaborative partner will be successful in designing an alpha adrenergic receptor subtype-selective drug with improved efficacy and an improved side effect profile. The Company and Merck are collaborating on the Alpha-1a Antagonist Program to develop drugs for the treatment of BPH. The Company and Grunenthal are collaborating on the Alpha-2 Adrenergic Program to develop drugs for the alleviation of pain. These programs are described below. Benign Prostatic Hyperplasia BPH is a pathology of the prostate, a walnut-sized gland in men that surrounds the urethra as it exits the bladder. As men age, cells in the prostate proliferate, causing growth in the prostatic tissue which in turn results in pressure on the urethra. Common symptoms of BPH include urinary retention, hesitancy or difficulty initiating the stream of urine, urinary frequency, a sense of urgency and a sensation of incomplete emptying of the bladder. The incomplete emptying of the bladder caused by BPH can also lead to urinary tract infections and bladder damage. In severe cases, the flow of urine can become completely blocked and lead to kidney failure. There are several treatment options available for BPH. Transurethral resection of the prostate (TURP) was used in approximately 180,000 men in the United States in 1996. This surgical procedure results in significant benefit. However, surgery is an unattractive alternative for many patients because of its potential adverse consequences, and is not recommended for elderly patients due to the potential for complications. Another surgical procedure, transurethral needle ablation (TUNA), was recently approved by the FDA and may have the advantage of possible use on an out-patient basis under local anesthesia. However, initial results of a recent study comparing TURP to TUNA show a lower level of efficacy in TUNA than in TURP with respect to increasing urinary flow. Two different non-surgical alternatives for the treatment of BPH in patients who either are not candidates for or elect not to have surgery are currently available. The first alternative is a type of drug that acts by inhibiting the enzyme 5 alpha reductase, which is responsible for the conversion of testosterone to dihydrotestosterone in the prostate. By reducing levels of dihydrotestosterone, which plays a role in growth of prostatic tissue, this type of drug is intended to shrink the gland. An example of this type of drug is Proscar(R). Although there is a rapid regression of the enlarged gland in most patients, less than 50% of patients experience an increase in urine flow and improvement of symptoms when treated with Proscar(R) for 12 months. A minimum of six months' treatment may be necessary to determine whether an individual will respond to the drug. The second type of drug for the treatment of BPH involves the use of alpha-1 adrenergic antagonists, such as Hytrin(R) and Cardura(R), that act by blocking alpha adrenergic stimulation of the prostate. This blocking activity causes a relaxation of the musculature of the prostate, thereby improving urinary flow and providing other symptomatic relief of BPH. These drugs were initially developed as antihypertensive agents in the mid-1970's prior to the discovery that there existed three distinct subtypes of the alpha-1 receptor, and are not selective for any particular alpha-1 subtype. While rapid symptomatic improvement in approximately 70% of patients treated with this type of drug has been observed, dose-dependent side effects, including hypotension (which causes dizziness), headache, weakness, nasal congestion and peripheral edema, are commonly associated with the treatment. The side effects limit the recommended dose for these drugs. The most significant side effect, hypotension, is particularly detrimental to elderly patients. Recently, another alpha antagonist, Flomax(R), was approved for use in the treatment of BPH. Flomax(R) is claimed to be "uroselective," but its labeling carries warnings of side effects, such as postural hypotension, dizziness and vertigo, similar to those of Hytrin(R). 15 Through the use of its alpha adrenergic drug discovery systems and by means of in vivo studies, Synaptic discovered that different receptor subtypes are involved in the control of prostate musculature and blood pressure: the alpha-1a receptor subtype is responsible for contraction of prostate musculature and other alpha-1 subtypes are involved in the regulation of blood pressure. This discovery confirmed the Company's hypothesis that many of the side effects caused by alpha-1 adrenergic antagonists currently available for the treatment of BPH stemmed from their lack of selectivity for the receptor subtype involved in relaxation of prostate musculature. The Company has been issued United States patents covering the use of selective alpha-1a antagonists for the treatment of BPH (the "BPH use patents"). In addition, Synaptic has been issued a United States patent covering the use of genetically engineered cells expressing the human alpha-1a adrenergic receptor subtype to identify compounds that bind to the receptor subtype, as well as a United States patent covering the gene encoding the receptor subtype. The Company, in collaboration with Merck, is using the Company's drug discovery systems to design compounds that block the activity of the alpha-1a receptor subtype, thereby producing the desired effects on the prostate, but that have minimal affinity for alpha-1b and alpha-1d receptor subtypes, thereby substantially reducing the cardiovascular effects seen with currently available non-selective alpha-1 adrenergic antagonists. A compound selected by Merck is in the late preclinical stage of testing. Other leads have also been identified and are in the early or late preclinical stage of testing. As part of the collaboration, Synaptic granted Merck a nonexclusive worldwide license under certain of its patent rights, including the Company's alpha adrenergic receptor patents and patent applications, to develop and commercialize alpha-1a antagonists. Synaptic also granted Merck as part of the collaboration an exclusive worldwide license to use Synaptic's alpha-1a selective compounds and know-how, as well as an exclusive worldwide license under certain of the Company's patent rights, including the BPH use patents and related patent applications, for the same purposes. However,in March 1998, Merck granted back to Synaptic such rights as were necessary to enable Synaptic to grant to Glaxo pursuant to the Glaxo Agreement a limited license under the BPH use patents and an option to obtain an additional license under the BPH use patents. Pain Analgesic agents are used to relieve pain (analgesia). Analgesics most commonly used for severe pain are narcotics. Although very effective, narcotic analgesic agents carry the risk of depressing respiration and causing nausea and vomiting, and their repeated use may lead to addiction. It is believed that non-narcotic analgesics would be beneficial to many patient populations suffering from severe pain. Alpha-2 agonists have been broadly used and are highly effective as veterinary analgesics. Animal data indicate that these agents do not cause respiratory depression. In addition, their action can be reversed with appropriate drugs. However, they cause both sedation and hypotension when administered within the analgesic dose range. Alpha-2 agents have not yet been developed as analgesics for human use, in part due to concerns regarding potential deleterious side effects, such as sedation and hypotension. Synaptic believes that its drug discovery systems for the three human alpha-2 adrenergic receptor subtypes can be used to discover alpha-2 analgesics which have significantly fewer deleterious side effects than currently available analgesics and the effects of which may be rapidly reversed. The Company has identified alpha-2 agonists with analgesic activity in laboratory animal models and recently entered into a collaboration with Grunenthal in which this drug discovery program is being pursued. 16 Neuropeptide Y Programs Neuropeptides are neurotransmitters. Unlike neurotransmitters that are small molecules, such as norepinephrine and serotonin, neuropeptides are much larger molecules. The mode of action of neuropeptides, however, resembles that of small molecule neurotransmitters in that they function by means of an interaction with specific families of receptors, including families within the G protein-coupled receptor superfamily. Although current knowledge of neuropeptides and their receptors is significantly less extensive than knowledge of small molecule neurotransmitters and their receptors, subtypes have been shown to exist for several families of neuropeptide receptors. One focus of the Company in its receptor and drug discovery efforts in this area has been on the NPY family of receptors. Although the natural ligand for this family, NPY, is a large molecule, the goal of this drug discovery program is, as is the case in all of the Company's other drug discovery programs, to design a small molecule drug. Large peptide-like molecules would not be stable in the body and thus would have short durations of action and would not be orally available, thus requiring delivery by injection. To date, there is evidence for the existence in humans of at least five NPY receptor subtypes, named Y1, Y2, Y3, Y4 and Y5. However, the discovery and cloning of the genes for only four of these subtypes have been reported. In 1996 and 1997, the Company was awarded United States patents covering the genes that code for the Y2, Y4 and Y5 receptor subtypes and related drug discovery systems. Synaptic has filed additional patent applications relating to these discoveries in the United States and in other countries. The Company is currently conducting one NPY receptor and drug discovery program in collaboration with Novartis focused on obesity. Another NPY drug discovery program currently being conducted by the Company focused on pain is contractually reserved for and may become a joint program as part of the Company's collaboration with Grunenthal. The Company is seeking a collaborative partner to work with the Company on its third NPY drug discovery program involving anxiety and depression. There can be no assurance that the NPY drug discovery program focused on pain will become a joint program as part of the Grunenthal collaboration, that the Company will be successful in consummating a collaborative arrangement with respect to its NPY drug discovery program focused on anxiety and depression with another company or that the Company or any collaborative partner will be successful in designing safe and effective NPY receptor subtype-selective drugs. Obesity Animal studies have shown that NPY is the most potent stimulator of food intake identified to date. As little as one billionth of a gram of NPY injected directly into the hypothalamus, a key brain area that controls appetite, causes well-fed, satiated rats to overeat. Repeated administration of NPY causes continual overeating and obesity. A Y5 receptor was initially isolated by the Company's scientists from rat hypothalamus. In laboratory tests, the activity of NPY and related peptides on the Y5 receptor mirrored the ability of these peptides to stimulate feeding in animals. As part of its collaboration with the Company, Novartis then showed that several peptides that activated the Y5 receptor preferentially over other known NPY receptors increased food intake in rats. Additional studies by Synaptic and Novartis showed that small molecules that selectively block the Y5 receptor significantly reduce food intake in rats. Based upon these studies, Synaptic believes that the Y5 receptor is a "feeding" receptor, and that compounds that are selective for this receptor subtype may lead to new approaches to the treatment of obesity. The Company and Novartis are thus focused on discovering and developing a potent and selective Y5 antagonist for the treatment of obesity. As part of its collaboration with the 17 Company, Novartis has an exclusive license to use the Company's NPY receptor subtype drug discovery systems for the development and commercialization of Y5 antagonists, as well as any other NPY drugs, for the treatment of eating disorders. Pain As part of its efforts to discover non-narcotic drugs for the alleviation of pain, the Company is conducting a program focused on the design and development of analgesics that stimulate the Y2 receptor subtype. Direct injection of NPY into the spinal cord produces a high level of analgesia in laboratory animals. This effect is believed to be related to NPY's ability to stimulate Y2 receptors. These receptors control the release of chemical messengers, such as Substance P, which mediate the transmission of pain responses. Synaptic believes that orally active small molecule agonists which would mimic the effects of NPY at the Y2 receptor may offer a new approach to the alleviation of pain that would not result in the side effects typically associated with narcotic analgesics. Although the Company and Grunenthal have not yet initiated a joint program focused on the design and development of Y2-selective compounds for the alleviation of pain, as part of its collaboration with Grunenthal, Synaptic has agreed to reserve the Y2 receptor subtype as a potential target for such drugs exclusively for the collaboration until the expiration of the collaborative agreement. There can be no assurance, however, that the Company and Grunenthal will establish a joint drug discovery program focused on the Y2 receptor subtype. Anxiety Anxiety is a sense of irrational fear or dread and is one of the most frequent psychiatric diagnoses in the United States. There is a variety of pharmacologic treatments for anxiety, the most commonly used of which belong to the class of compounds called benzodiazepines, an example of which is Valium(R). This class of compounds, however, is associated with significant side effects, including drowsiness, impairment of motor skills, memory loss and the exacerbation of intoxication by alcohol. Another serious side effect associated with the benzodiazepines is their potential to be addictive. Behavioral studies have suggested that NPY can produce anxiety in rats by activating the Y2 receptor subtype, raising the prospect that a small molecule Y2 receptor antagonist may provide a novel treatment for anxiety devoid of the side effects commonly associated with currently available anxiolytics. Thus, the goal of this drug discovery program is to design compounds that selectively block the Y2 receptor subtype. Galanin Program Galanin is a neurotransmitter which, like NPY, is a neuropeptide. Galanin is widely distributed in the gastrointestinal tract and the brain. Pharmacologic studies suggest the existence of multiple receptor subtypes for this neuropeptide. There are a number of possible therapeutic applications for drugs that modulate galanin receptors, including the treatment of obesity, diabetes, Alzheimer's Disease, depression and pain. Most of the research done to date with galanin has focused on its role in the control of food intake. Injection of galanin into the brain has been shown to produce an increase in food intake in satiated rats. As a result, galanin receptor antagonists might result in a reduction of food intake and may thus be useful in the treatment of obesity. 18 The Company has discovered and cloned genes that code for galanin receptor subtypes and has filed patent applications relating to these discoveries. In July 1997, the Company entered into a collaboration with Warner-Lambert to identify and develop galanin receptor subtype-selective compounds for a variety of therapeutic applications. The Company and Warner-Lambert are currently attempting to identify and characterize galanin receptor subtype-selective compounds. There can be no assurance that the Company or Warner-Lambert will be successful in identifying or developing any such compound. Other Programs The Company is pursuing additional receptor discovery programs, the identities of which have not yet been disclosed. These programs involve the use of the Company's molecular biology resources to clone members of selected G protein-coupled receptor families in a focused manner. In addition, the Company is engaged in cloning other G protein-coupled receptors using a genomics approach. This approach involves the sequencing of genes from various types of tissues selected by the Company based upon their potential association with a therapeutic application of interest to the Company. The Company is also developing technology, and exploring in-licensing opportunities, for the purpose of obtaining high throughput functional assays for its receptor discoveries. The Company is also pursuing several drug discovery programs, the applications of which have not yet been disclosed. Collaborative and Licensing Arrangements A key element of the Company's business strategy is to leverage resources and to generate royalty-based revenues through collaborative and licensing arrangements with pharmaceutical companies. The Company is currently collaborating with five pharmaceutical companies pursuant to: (i) the Research, Option and License Agreement dated as of January 25, 1991, as amended, with Lilly (the "Lilly Agreement"); (ii) the Research Collaboration and License Agreement dated as of November 30, 1993, as amended, with Merck (the "Merck Agreement"); (iii) the Research and License Agreement dated as of August 4, 1994, as amended (the "First Novartis Agreement"), and the Research and License Agreement dated as of May 31, 1996 (the "Second Novartis Agreement," and together with the First Novartis Agreement, the "Novartis Agreements"), each with Novartis; (iv) the Collaborative Research and License Agreement dated as of July 28, 1997, with Warner-Lambert (the "Warner-Lambert Agreement"); and (v) the Cooperation Agreement dated as of January 12, 1998, with Grunenthal (the "Grunenthal Agreement," and together with the Lilly Agreement, the Merck Agreement, the Novartis Agreements, and the Warner-Lambert Agreement, the "Collaborative Agreements"). In addition to its collaborative arrangements, in March 1998, the Company granted to Glaxo pursuant to the Glaxo Agreement a license under its patent rights, and an option to obtain an additional license under its patent rights, relating to certain of its technology. While the Company evaluates on an ongoing basis potential collaborative and licensing arrangements with pharmaceutical companies, there can be no assurance that it will be able to enter into acceptable collaborative and licensing arrangements in the future or that any such arrangement, whether existing or future, will be successful. The following summarizes the Company's existing collaborative and licensing arrangements. 19 Lilly Agreement In January 1991, the Company and Lilly entered into the Lilly Agreement to promote the discovery and development of serotonin receptor subtype-selective drugs for the treatment of serotonin-related disorders. The collaboration was extended in January 1995 for an additional four-year period expiring in December 1998. The Company and Lilly agreed to substantially increase the size of their collaboration in October 1996. During the initial four-year term of the collaboration, Lilly provided the Company with an aggregate of approximately $9.3 million of funding to support a specified number of the Company's scientists who conducted research as part of the collaboration. The aggregate amount of research support to be provided by Lilly during the second four-year period is expected to be approximately $13.2 million. All development, manufacturing, marketing and sales of drugs resulting from the collaboration will be conducted by Lilly. The Company is also entitled to receive from Lilly payments upon the achievement of certain drug development milestones and royalties on sales of all drugs developed through the use of the Company's technology. Such royalties will be payable in respect of sales in any country over the period commencing with the date of the first commercial sale of a drug and ending with the expiration of related patent rights in that country. Lilly paid the Company a one-time fee of $2.5 million for an exclusive worldwide license to use all but two of the Company's existing serotonin drug discovery systems for the development and commercialization of drugs that affect serotonergic transmission. The Company retains the unlimited right to use two of its existing serotonin drug discovery systems and a limited right to use all of its other serotonin drug discovery systems in furtherance of its collaboration with Lilly and for cross-reactivity screening in its and its other collaborators' non- serotonin drug discovery programs. As part of the collaboration, Lilly was also granted certain exclusive rights under several of the Company's patents and patent applications. Lilly purchased $2.5 million of equity in Synaptic in June 1991, and in December 1995, Lilly purchased an additional $2.5 million of equity in Synaptic in its initial public offering pursuant to the terms of the 1995 extension. Lilly has since sold all of such shares. Merck Agreement In November 1993, the Company and Merck entered into the Merck Agreement pursuant to which they agreed to collaborate in the identification and development of alpha-1a antagonists, principally for the treatment of BPH. The initial term of the collaboration was three years. In October 1996, the term of the collaboration was extended through November 1997 and in November 1997, the term of the collaboration was again extended for an additional year through November 1998. As part of the collaboration, Synaptic granted Merck a nonexclusive worldwide license under certain other patent rights, including the Company's alpha adrenergic receptor patents and patent applications to develop and commercialize alpha-1a antagonists. Synaptic also granted Merck as part of the collaborationan exclusive worldwide license to use the Company's alpha-1a selective compounds and know-how, as well as an exclusive worldwide license under certain of the Company's patent rights, including its BPH use patents and related patent applications, for the same purposes. However, in March 1998, Merck granted back to Synaptic such rights as were necessary to enable Synaptic to grant to Glaxo pursuant to the Glaxo Agreement a limited license under the BPH use patents and an option to obtain an additional license under the BPH use patents. The Company 20 retained the right to use its alpha adrenergic technology for the development of alpha adrenergic and other agents that are not alpha-1a antagonists. In consideration for the licenses granted to Merck, Merck originally agreed to provide the Company with up to $20.0 million in research funding, license fees and milestone payments, as well as to pay the Company royalties on product sales. This amount was subsequently increased by agreement of the Company and Merck to $22.0 million. Novartis Agreements In August 1994, the Company and Novartis entered into the First Novartis Agreement pursuant to which they agreed to collaborate in the identification and development of NPY drugs for the treatment of obesity and eating disorders, as well as cardiovascular disorders. In May 1996, the Company and Novartis entered into the Second Novartis Agreement and an amendment to the First Novartis Agreement pursuant to which the term of the collaboration was extended by one year and the scope of the collaboration was expanded to provide for research on additional targets for the design of drugs for the treatment of obesity and eating disorders. The term of the collaboration under the two Novartis Agreements expires in August 1998. During the term, Novartis is required to provide the Company with funding to support a specified number of the Company's scientists dedicated to work on the collaboration. Through December 31, 1997, Novartis had provided the Company with an aggregate of approximately $11.2 million in research support. The aggregate amount of research support which the Company is entitled to receive from Novartis for the period from January 1, 1998, through the remainder of the collaboration is $2.0 million. In July 1995, Novartis made a $1.0 million payment to the Company for achieving a research milestone. Novartis is also required to make additional payments to the Company upon the achievement by Novartis of certain drug development milestones and, subject to certain limitations, to pay the Company royalties on the sale of drugs developed through the use of the Company's technology. At the commencement of the Company's collaboration with Novartis, Novartis made a $7.5 million equity investment in the Company. In December 1995, as part of the Company's initial public offering, Novartis made an additional $2.0 million equity investment in the Company. As of December 31, 1997, the 695,715 shares of Common Stock acquired by Novartis as a result of these investments were held by Novartis Produkte AG, an affiliate of Novartis. Such shares represented 6.6% of the outstanding shares of Common Stock of the Company at that date. As part of the collaboration, Synaptic granted Novartis an exclusive worldwide license to use the Company's NPY receptor subtype drug discovery systems for the development and commercialization of NPY receptor subtype-selective drugs for the treatment of obesity and eating disorders, as well as cardiovascular disorders. Synaptic also granted Novartis an exclusive worldwide license to use any proprietary technology of the Company that relates to the subject matter of the Second Novartis Agreement to design drugs for the treatment of obesity and eating disorders. In addition, the Company granted Novartis certain rights under several of the Company's patents and patent applications. The Company retained the right to use its NPY receptor subtype drug discovery systems and other technology for all other therapeutic applications, although Novartis has a right of first negotiation in the event the Company determines to seek a collaborative partner or licensee for any such other indication. Novartis has declined its right of first negotiation with respect to the use of the Company's NPY receptor subtype drug discovery systems and other technology for the discovery and 21 development of Y2 receptor subtype-selective drugs for the treatment of central nervous system disorders and, as a result, the Company has the right to use the technology, independently or with third parties, for such purpose. Warner-Lambert Agreement In July 1997, the Company and Warner-Lambert entered into the Warner-Lambert Agreement pursuant to which they agreed to collaborate in the identification and development of galanin drugs for a variety of therapeutic applications. As part of the collaboration, Warner-Lambert received an exclusive worldwide license to use the Company's galanin receptor subtype drug discovery systems for the development and commercialization of galanin receptor subtype-selective drugs for all therapeutic applications. The collaboration involves two potential stages. During the first stage, which commenced in October 1997 and will last up to 18 months, each partner will fund its own research and use Synaptic's galanin receptor subtype drug discovery systems to attempt to identify and characterize drug candidates. The second stage of the collaboration, which will last for three years, will commence at such time as the partners identify galanin compounds that are active in animal models. During this stage, Warner-Lambert and Synaptic will attempt to develop drug candidates identified during the first stage, as well as attempt to identify additional drug candidates. Upon the commencement of the second stage, Synaptic is entitled to receive research funding from Warner- Lambert, as well as to require Warner-Lambert to purchase equity in Synaptic. In addition, Synaptic is entitled to receive drug development milestones and royalties on sales of all drugs identified through the collaboration. There can be no assurance, however, that any suitable galanin compound will be identified which would trigger commencement of the second stage of the collaboration or that, even assuming the commencement of such stage, a product will result from this collaboration. Grunenthal Agreement In January 1998, the Company and Grunenthal entered into the Grunenthal Agreement pursuant to which they agreed to collaborate in the identification and development of drugs for the alleviation of pain. As part of the collaboration, the companies will jointly select receptors that may play a role in the alleviation of pain and attempt to identify compounds that are active at the selected receptors for further study in Grunenthal's animal model systems. The selected receptors may be receptors known to be implicated in the transmission or inhibition of pain or receptors whose function has not yet been elucidated but which are cloned from tissues known to be so implicated. The companies are responsible for their own expenses incurred during the research stage of any project undertaken as part of the collaboration but will each be responsible for 50% of all development costs incurred as part of the project with respect to any resulting drug candidates up to the commencement of Phase III clinical trials. Synaptic will retain manufacturing and marketing rights in the United States, Canada and Mexico with respect to any drug candidates resulting from the collaboration, while Grunenthal will retain manufacturing and marketing rights in Europe, Central America (other than Mexico) and South America with respect to any such candidates. The two companies will share these rights in all other countries. With respect to each country in its own territories and in the shared territories in which it desires to market a drug candidate, each of Synaptic and Grunenthal will be responsible for conducting Phase III clinical trials, if required, for obtaining any necessary regulatory approval, and for all associated costs. As part of the collaboration, Synaptic agreed to make available to Grunenthal for evaluation all receptors cloned by Synaptic that may be implicated in pain (to the extent not already licensed exclusively to a third party) and not to pursue such receptors, independently or with any third party, as targets of potential drugs for the 22 alleviation of pain during the evaluation period applicable to the receptors or during the period over which activities involving any such receptor are being jointly conducted with Grunenthal. Glaxo Agreement In March 1998, the Company and Glaxo entered into the Glaxo Agreement pursuant to which the Company granted Glaxo (i) a nonexclusive license under the Company's alpha 1 adrenergic receptor patents to develop and sell alpha-1a selective compounds for therapeutic applications other than the treatment of BPH and (ii) until May 22, 1999, a nonexclusive license under its alpha 1 adrenergic receptor patents and its BPH use patents to develop but not to commercialize alpha-1a selective compounds for the treatment of BPH. In addition, the Company granted Glaxo an option to obtain a nonexclusive license under its alpha 1 adrenergic receptor patents and its BPH use patents to develop and commercialize alpha-1a selective compounds for the treatment of BPH. Such option is exercisable by Glaxo only until May 22, 1999, upon the payment to Synaptic of an additional amount. As consideration for the foregoing licenses and option, Glaxo made a $2,000,000 payment to Synaptic. Synaptic is also entitled to receive royalties on sales of all alpha-1a selective drugs sold by Glaxo so long as Synaptic has an issued patent relating to an alpha 1 adrenergic receptor subtype in at least one major market country, as well as royalties on sales of any alpha-1a antagonist for the treatment of BPH in any country in which Synaptic has an issued BPH use patent. Other Agreements The Company's practice is to meet with pharmaceutical and biotechnology companies on an on-going basis to discuss the possibility of collaborating with them on projects of mutual interest, which may include the Company's existing research programs that are not yet the subject of collaborations. In addition, the Company continually evaluates opportunities for out-licensing its technology on a collaborative basis or on a noncollaborative basis, in-licensing third-party technologies and/or cross-licensing technology to maximally leverage resources. At present, the Company is in the early stages of discussing with other companies the possibility of a number of such arrangements. There can be no assurance that the Company will be successful in consummating any such arrangement. In February 1996, the Company and The DuPont Merck Pharmaceutical Company ("DuPont Merck") entered into an agreement pursuant to which the Company granted DuPont Merck a nonexclusive license to use certain of the Company's alpha adrenergic drug discovery systems for the development of alpha adrenergic subtype-selective drugs. The license granted to DuPont Merck expired in February 1998. Patents, Proprietary Technology and Trade Secrets The Company's success depends, in part, on its ability to establish, protect and enforce its proprietary rights relating to its technology. The Company's policy is to seek, when appropriate, protection for its gene discoveries, compound discoveries and other proprietary technology by filing patent applications in the United States and other countries. The Company has filed numerous patent applications both in the United States and in other countries covering its inventions. As of March 2, 1998, the Company had been issued United States patents relating to the genes that code for the human serotonin 1B, serotonin 1D, serotonin 1E, serotonin 1F, serotonin 2A, alpha-1a adrenergic, alpha-2b adrenergic, NPY2, NPY4 and NPY5 receptor subtypes and related drug discovery systems, as well as a United States patent covering the rat serotonin 4a receptor subtype and related drug discovery systems. These patents expire at various times from 2008 to 2015. Several United States 23 patent applications relating to the Company's receptor gene discoveries were pending. In addition, several corresponding patents had been issued in other countries and additional corresponding patent applications had been filed in other countries. In April 1995, the Company was issued its first functional use patent in the United States. This patent covers the use of selective alpha-1a antagonists for the treatment of BPH. In addition, in November 1996, the United States Patent and Trademark Office issued the Company an additional patent relating to the same subject matter. These patents expire in 2012. Additional related patent applications are on file in the United States. In addition, corresponding patents have been issued in other countries and additional corresponding patent applications have been filed in other countries. The Company has also filed patent applications in the United States and in other countries covering its neurotransmitter transporter discoveries. Whereas receptors are protein molecules which bind to and are activated by certain ligands, transporters are protein molecules which serve to terminate the action of certain ligands by carrying them back into the cells from which they are released. As of March 2, 1998, the Company had been issued United States patents covering three of these transporter discoveries. The Company is no longer actively working on its transporter program. However, the transporter technology, insofar as it may be used to design drugs for the alleviation of pain, has been reserved exclusively for evaluation by Grunenthal as the potential focus of a joint program between the Company and Grunenthal pursuant to the Grunenthal Agreement. In addition, the Company is seeking to license its transporter technology for other uses to one or more other companies. Additional patent applications covering the Company's compound discoveries and other inventions have been filed in the United States and in other countries and the Company intends to file additional patent applications in the future. The Company has granted certain rights under several of its patents and patent applications to Lilly, Merck, Novartis, Warner-Lambert, Grunenthal and Glaxo. Patent law as it relates to inventions in the biotechnology field is still evolving, and involves complex legal and factual questions for which legal principles are not firmly established. Accordingly, there can be no assurance that patents will be granted with respect to any of the Company's patent applications currently pending in the United States or in other countries, or with respect to applications filed by the Company in the future. The failure by the Company to receive patents pursuant to the applications referred to herein and any future applications could have a material adverse effect on the Company. There is no clear policy involving the breadth of claims allowed in patents or the degree of protection afforded thereunder. Accordingly, no firm predictions can be made regarding the breadth or enforceability of claims allowed in the patents that have been issued to the Company or in patents that may be issued to the Company in the future and there can be no assurance that claims in the Company's patents, either as initially allowed by the United States Patent and Trademark Office or any of its non-United States counterparts or as subsequently interpreted by courts inside or outside the United States, will be sufficiently broad to protect the Company's proprietary rights. Also, there can be no assurance that the Company's patents or patent applications will not be challenged by way of interference proceedings or opposed by third parties or that the Company will not be required to participate in interference proceedings or oppose the patents or patent applications of third parties in order to protect its rights. Interference and opposition proceedings can be expensive to prosecute and defend. As of March 2, 1998, one of the Company's patent applications on file outside the United States was the subject of an 24 opposition filed by a pharmaceutical company and one of the Company's patent applications on file in the United States was the subject of an interference proceeding involving a patent application of a third party. In addition, the Company is seeking to provoke an interference by the United States Patent and Trademark Office between another of its patent applications and an issued patent of a third party. The Company also believes that the United States Patent and Trademark Office may declare an interference between one of its other patent applications and patent a application of a third party. The Company recently settled an interference proceeding involving an issued United States patent of a third party and one of the Company's patent applications on file in the United States. The third party conceded as part of the settlement that the subject matter of Synaptic's patent application had priority over the subject matter of its patent. As a consequence, Synaptic will be issued a patent covering the subject matter and the third party's patent will be revoked. There can be no assurance that the outcome of the pending opposition proceeding, the other interference proceeding and the anticipated interference proceedings will be favorable to the Company. In the event that the outcome of the opposition proceeding were unfavorable to the Company, the Company would not be issued the patent in the country in which the proceeding is taking place and would not be able to prevent third parties from practicing the subject matter of the opposed application in that country. Moreover, the opponent may, whether or not the outcome of the opposition proceeding is favorable to the Company, seek to file similar oppositions in other countries. In the event that the outcome of the interference proceedings were unfavorable to the Company, the Company might not be able to practice the subject matter of the relevant patent applications in the United States. Accordingly, an unfavorable outcome in any such proceeding would have an adverse effect on the Company. Even if the eventual outcome of the pending opposition and interference proceedings and the anticipated interference proceedings were favorable to the Company, the Company's participation in them could result in substantial cost to the Company. Further, no assurance can be given that patents issued to the Company will not be infringed, invalidated or circumvented by others, or that the rights granted thereunder will be commercially valuable or will provide competitive advantages to the Company and its present or future collaborative partners or licensees. Moreover, because patent applications in the United States are maintained in secrecy until patents issue, because patent applications in certain other countries generally are not published until more than eighteen months after they are filed and because publication of technological developments in the scientific or patent literature often lags behind the date of such developments, the Company cannot be certain that it was the first to invent the subject matter covered by its patents or patent applications or that it was the first to file patent applications for such inventions. The field of gene discovery has become intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have significantly expanded their gene discovery efforts in recent years and have filed patent applications or received patents covering their gene discoveries. Some of these applications or patents may be competitive with the Company's applications or conflict in certain respects with claims made under the Company's applications. There can be no assurance that, in the event of any conflict, the Company will be in a priority position with respect to inventorship on any of these applications. The commercial success of the Company also depends on the Company's ability to operate without infringing patents and proprietary rights of third parties. The Company is aware of a large number of patents and patent applications of third parties that contain claims to genes that code for G protein- coupled receptors and/or compounds that interact with G protein-coupled receptors. Patents issued to others may preclude the Company from using or licensing its technology or may preclude the Company or its collaborative partners and licensees from commercializing drugs developed with the use of the Company's technology. The Company has acquired a license to use certain technologies covered by a patent owned by Columbia University. The Columbia University license is a worldwide non-exclusive license to manufacture, use, sell and sublicense drugs derived from the use of certain recombinant DNA technology. In consideration for such license, the Company has agreed to pay royalties on sales of drugs developed through the use of such license. The term of the license extends until the expiration of the last to expire of the patent rights covered by the license. The Company may be required to 25 obtain additional licenses to patents or other proprietary rights of other parties in order to pursue its own technologies. No assurance can be given that any such additional licenses would be made available on terms acceptable to the Company, if at all. The failure to obtain such licenses could result in delays in the Company's or its collaborative partners' activities, including the development, manufacture or sale of drugs requiring such licenses, or preclude such development, manufacture or sale. In some cases, litigation or other proceedings may be necessary to assert infringement claims against others, to defend against claims of infringement, to enforce patents issued to the Company, to protect trade secrets, know-how or other intellectual property rights owned by the Company, or to determine the scope and validity of the proprietary rights of third parties. Such litigation could result in substantial costs to and diversion of resources by the Company and could have a material adverse effect on the Company. There can be no assurance that any of the Company's patents would ultimately be held valid or that efforts to defend any of its patents, trade secrets, know-how or other intellectual property rights would be successful. An adverse outcome in any such litigation or proceeding could subject the Company to significant liabilities, require the Company to cease using the subject technology or require the Company to license the subject technology from the third party, all of which could have a material adverse effect on the Company's business. In addition to patent protection, the Company relies upon trade secrets, proprietary know-how and continuing technological advances to develop and maintain its competitive position. To maintain the confidentiality of its trade secrets and proprietary information, the Company requires its employees, consultants and collaborative partners to execute confidentiality agreements upon the commencement of their relationships with the Company. In the case of employees, the agreements also provide that all inventions resulting from work performed by them while in the employ of the Company will be the exclusive property of the Company. There can be no assurance, however, that these agreements will not be breached, that the Company would have adequate remedies in the event of any such breach or that the Company's trade secrets or proprietary information will not otherwise become known or developed independently by others. Competition The Company operates in a field in which new developments occur and are expected to continue to occur at a rapid pace. Competition from biotechnology and pharmaceutical companies, joint ventures, academic and other research institutions and others is intense and is expected to increase. Although the Company believes that the elements of its human receptor-targeted drug design technology and the manner in which the Company has integrated these elements are proprietary to the Company, one or more of such elements are currently employed by many other pharmaceutical and biotechnology companies in their drug discovery efforts. Moreover, there are other companies with drug discovery programs at least some of the objectives of which are the same as or similar to those of the Company. The Company is aware of many pharmaceutical and biotechnology companies that are engaged in efforts to develop compounds that interact with G protein-coupled receptors subtypes, including receptor subtypes with which the Company is working. Many of the Company's competitors are large biotechnology companies and multinational pharmaceutical companies who may employ in such activities greater financial and other resources, including larger research and development staffs and more extensive marketing and manufacturing organizations, than the Company or its collaborative partners. The Company also expects to encounter significant competition with respect to the drugs that it and its collaborative partners and licensees plan to develop. Companies that complete clinical trials, obtain required regulatory approvals and commence commercial sales of their drugs before their competitors may achieve a significant competitive advantage. In order to compete successfully, the Company's goal is to obtain patent 26 protection for its gene discoveries and drug discovery systems and to make these systems available to pharmaceutical companies through collaborative and licensing arrangements for use in discovering drugs for major markets which have historically been difficult to address using the traditional approach to drug discovery. There can be no assurance, however, that the Company will obtain patents covering its technology that protect it against competitors. Moreover, there can be no assurance that the Company's competitors will not succeed in developing technologies that circumvent the Company's technology or that such competitors will not succeed in developing technologies and drugs that are more effective than those developed by the Company and its collaborative partners and licensees or that would render technology or drugs of the Company and its collaborators and licensees less competitive or obsolete. In addition, there can be no assurance that competitors of the Company will not obtain regulatory approvals of their drugs more rapidly than the Company and its collaborative partners and licensees, thereby rendering the Company's and its collaborative partners' and licensees' drugs noncompetitive or obsolete. Moreover, there can be no assurance that the Company's competitors will not obtain patent protection or other intellectual property rights that would limit the Company's or its collaborative partners' and licensees' ability to use the Company's technology or commercialize its or their drugs. Government Regulation The development, manufacturing and marketing of drugs developed through the use of the Company's technology are subject to regulation by numerous Federal, state and local governmental authorities in the United States, the principal one of which is the FDA, and by similar agencies in other countries (each of such Federal, state, local and other authorities and agencies, a "Regulatory Agency"). Regulatory Agencies impose mandatory procedures and standards for the conduct of certain preclinical testing and clinical trials and the production and marketing of drugs for human therapeutic use. Product development and approval of a new drug are likely to take many years and involve the expenditure of substantial resources. The steps required by the FDA before new drugs may be marketed in the United States include: (i) preclinical studies; (ii) the submission to the FDA of a request for authorization to conduct clinical trials on an investigational new drug (an "IND"); (iii) adequate and well-controlled clinical trials to establish the safety and efficacy of the drug for its intended use; (iv) submission to the FDA of a new drug application (an "NDA"); and (v) review and approval of the NDA by the FDA. In the United States, preclinical testing includes both in vitro and in vivo laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Laboratories involved in preclinical testing must comply with FDA regulations regarding Good Laboratory Practices. Preclinical testing results are submitted to the FDA as part of the IND and are reviewed by the FDA prior to the commencement of human clinical trials. Unless the FDA objects to an IND, the IND will become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in the commencement of human clinical trials. Clinical trials, which involve the administration of the investigational drug to healthy volunteers or to patients under the supervision of a qualified principal investigator, are typically conducted in three sequential phases, although the phases may overlap with one another. Clinical trials must be conducted in accordance with Good Clinical Practices under protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the auspices of an independent Institutional Review Board (the "IRB") at the institution where the study will be conducted. The IRB will consider, among other 27 things, ethical factors, the safety of human subjects and the possible liability of the institution. Compounds must be formulated according to the FDA's GMP. Phase I clinical trials represent the initial administration of the investigational drug to a small group of healthy human subjects or, more rarely, to a group of selected patients with the targeted disease or disorder. The goal of Phase I clinical trials is typically to test for safety (adverse effects), dose tolerance, absorption, bio- distribution, metabolism, excretion and clinical pharmacology and, if possible, to gain early evidence regarding efficacy. Phase II clinical trials involve a small sample of the actual intended patient population and seek to assess the efficacy of the drug for specific targeted indications, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase III clinical trials are initiated to establish further clinical safety and efficacy of the investigational drug in a broader sample of the general patient population at geographically dispersed study sites in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for all physician labeling. The results of the research and product development, manufacturing, preclinical testing, clinical trials and related information are submitted to the FDA in the form of an NDA for approval of the marketing and shipment of the drug. Timetables for the various phases of clinical trials and NDA approval cannot be predicted with any certainty. The Company, its collaborative partners or licensees or the FDA may suspend clinical trials at any time if it is believed that individuals participating in such trials are being exposed to unacceptable health risks. Even assuming that clinical trials are completed and that an NDA is submitted to the FDA, there can be no assurance that the NDA will be reviewed by the FDA in a timely manner or that once reviewed, the NDA will be approved. The approval process is affected by a number of factors, including the severity of the targeted indications, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. The FDA may deny an NDA if applicable regulatory criteria are not satisfied, or may require additional testing or information with respect to the investigational drug. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could also delay, limit or prevent Regulatory Agency approval. Even if initial FDA approval is obtained, further studies, including post-market studies, may be required in order to provide additional data on safety and will be required in order to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested. The FDA will also require post-market reporting and may require surveillance programs to monitor the side effects of the drug. Results of post-marketing programs may limit or expand the further marketing of the drug. Further, if there are any modifications to the drug, including changes in indication, manufacturing process or labeling, an NDA supplement may be required to be submitted to the FDA. Finally, delays or rejections may be encountered based upon changes in Regulatory Agency policy during the period of drug development and/or the period of review of any application for Regulatory Agency approval for a compound. Moreover, because most of the Company's collaborative partners are generally responsible for preclinical testing, clinical trials, regulatory approvals, manufacturing and commercialization of drugs, the ability to obtain and the timing of regulatory approvals are not within the control of the Company. There can be no assurance that the regulatory framework described above will not change or that additional regulations will not arise that may affect approval of a potential drug. Each manufacturing establishment for new drugs is required to receive some form of approval by the FDA. Among the conditions for such approval is the requirement that the prospective manufacturer's quality control and manufacturing procedures conform to GMP, which must be followed at all times. In complying with 28 standards set forth in these regulations, manufacturers must continue to expend time, monies and effort in the area of production and quality control to ensure full technical compliance. Manufacturing establishments, both foreign and domestic, are also subject to inspections by or under the authority of the FDA and may be subject to inspections by foreign and other Federal, state or local agencies. Prior to the commencement of marketing a product in other countries, approval by the Regulatory Agencies in such countries is required, regardless of whether FDA approval has been obtained for such product. 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 the time required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country has its own procedures and requirements. Delays in obtaining Regulatory Agency approvals could adversely affect the marketing of any drugs developed by the Company or its collaborative partners or licensees, impose costly procedures upon the Company's or its collaborative partners' or licensees' activities, diminish any competitive advantages that the Company or its collaborative partners or licensees may attain and adversely affect the Company's ability to receive revenues or royalties. There can be no assurance that, even after such time and expenditures, Regulatory Agency approvals will be obtained for any compounds developed by, in collaboration with or pursuant to licenses from the Company. Moreover, even if Regulatory Agency approval for a compound is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Further, approved drugs and their manufacturers are subject to continual review, and discovery of previously unknown problems with a drug or its manufacturer may result in restrictions on such drug or manufacturer, including withdrawal of the drug from the market. Regulatory Agency approval of prices is required in many countries and may be required for the marketing of any drug developed by the Company or its collaborative partners or licensees. As with many biotechnology and pharmaceutical companies, the Company's activities involve the use of radioactive compounds and hazardous materials. The Company is subject to local, state and Federal laws and regulations relating to occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control. Although the Company believes that its safety procedures for handling and disposing of radioactive compounds and other hazardous materials used in its research and development activities comply with the standards prescribed by Federal, state and local regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of any such accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. Employees As of March 2, 1998, the Company had 125 full-time employees, 42 of whom hold Ph.D. or M.D. degrees. Of the Company's full-time employees, 108 were engaged directly in scientific research and 17 were engaged in general and administrative functions. The Company's scientific staff members have diversified experience and expertise in molecular and cell biology, biochemistry, molecular pharmacology, medicinal, structural, combinatorial and computer-assisted chemistry and information systems. All employees have entered into agreements with the Company pursuant to which they are prohibited from disclosing to third parties the Company's proprietary information and assign to the Company all rights to inventions made by them during their employment with the Company. 29 The Company's employees are not covered by a collective bargaining agreement, and the Company believes that its relationship with its employees is good. Item 2. Properties The Company leases laboratory and office space in a facility at 215 College Road in Paramus, New Jersey. The Company recently entered into an amendment to its lease which extended the term through the year 2015 and increased its leased space to up to 74,000 square feet. The Company is currently converting a portion of its space into additional research laboratories and may renovate other portions of its space in 1998 for additional laboratories and offices. The Company believes that the space it currently leases is adequate to accommodate the anticipated administrative and research needs of the Company for the foreseeable future. Item 3. Legal Proceedings Other than as described in Item 1 above under the caption "Patents, Proprietary Technology and Trade Secrets," the Company is not a party to any legal proceedings. Item 4. Submission of Matters to a Vote of Securityholders None. 30 Part II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters The Common Stock of Synaptic Pharmaceutical Corporation has traded on the National Market tier of The Nasdaq Stock Market under the symbol SNAP since its initial public offering on December 13, 1995. As of March 2, 1998, there were approximately 2,300 holders of record of the Company's Common Stock. No dividends have been paid on the Common Stock to date, and the Company does not currently intend to declare or pay dividends for the foreseeable future. The following tables set forth the high and low last trade prices for the Common Stock as reported by The Nasdaq Stock Market for the period from January 1, 1996, through December 31, 1997. 1997 Fiscal Year High Low ---- ---- 1st Quarter 1997 15 1/2 12 1/4 2nd Quarter 1997 14 10 3/8 3rd Quarter 1997 15 5/8 12 3/8 4th Quarter 1997 16 3/4 10 1996 Fiscal Year High Low ---- ---- 1st Quarter 1996 20 12 1/2 2nd Quarter 1996 17 3/4 12 1/4 3rd Quarter 1996 14 9 1/2 4th Quarter 1996 13 10 1/2 During the quarter ended December 31, 1997, the Company did not make any sales of its securities, other than sales that were registered under the Securities Act of 1933, as amended (the "Securities Act"). Securities Act Rule 229.463 ("Rule 463") required issuers to report on Form SR their use of proceeds, following an initial public offering, within ten days of the first three months following the effective date of the registration statement, and every six months thereafter, until the application of all such proceeds was complete. Effective September 2, 1997, pursuant to Release No. 34-38850, the Securities and Exchange Commission 31 ("SEC") amended Rule 463 to eliminate Form SR and now requires a first-time registrant to report the application of proceeds in each of its periodic reports filed pursuant to the requirements under the Exchange Act until the application of such proceeds is complete. Prior to September 2, 1997, the Company utilized Form SR to report the application of proceeds received by the Company following its initial public offering. The information provided below represents a reasonable estimate of the cumulative application, through December 31, 1997, of the net proceeds of $25,194,000 which were received following the Company's initial public offering on December 13, 1995: Construction of plant, building and facilities $ 282,000 Purchase and installation of machinery and equipment $ 3,252,000 Working capital used to fund operations $ 13,262,000 Except for payments described in the following sentence, the cumulative application of the net offering proceeds listed above represents direct payments to others. No payments were made to directors or officers or to their associates except for payments made in the ordinary course of business which include, but may not be limited to, the payment of officer salaries, fringe benefits, and expense reimbursements or compensation paid to directors for their attendance at board meetings or for their services provided to the Company under consulting arrangements, if any. At December 31, 1997, the status of proceeds pending final application are as follows: Temporary investment of proceeds in marketable securities $ 8,398,000 32 Item 6. Selected Financial Data The following table presents selected information relating to the financial condition and results of operations of the Company for the past five years. The following data should be read in conjunction with the Company's financial statements. (In thousands, except per share information) 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Total revenues $ 10,307 $ 9,481 $ 7,977 $ 5,043 $ 8,794 Total expenses $ 17,853 $ 14,319 $ 12,078 $ 11,221 $ 10,753 Other income, net $ 2,200 $ 2,205 $ 734 $ 651 $ 409 Net loss $ (5,346) $ (2,633) $ (3,367) $ (5,527) $ (1,550) Basic and diluted net loss per share $ (0.66) $ (0.35) $ (4.76) -- -- Total assets $ 69,402 $ 40,355 $ 40,913 $ 20,024 $ 19,754 Long term debt -- -- $ 107 $ 259 $ 383 Convertible redeemable preferred stock -- -- -- $ 36,199 $ 28,906 Accumulated deficit $(29,316) $(23,970) $(21,337) $(17,970) $(12,443) Stockholders' equity (deficiency) $ 67,704 $ 39,040 $ 38,669 $(17,592) $(11,929) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Synaptic Pharmaceutical Corporation is a biotechnology company engaged in the development of a broad platform of enabling technology which it calls "human receptor-targeted drug design technology." It is utilizing this technology both to discover and clone the genes that code for human receptor subtypes associated with specific disorders and to design compounds that can potentially be developed as drugs for treating these disorders. During 1997, the Company was engaged in collaborations with four pharmaceutical companies: Eli Lilly and Company, Merck & Co., Inc., Novartis Pharma AG and the Warner-Lambert Company. Since inception, the Company has financed its operations primarily through the sale of stock and through funds provided by its collaborative partners Lilly, Merck and Novartis under collaborative agreements. The Company also granted a nonexclusive license to use certain of its technology to DuPont Merck which license expired on February 5, 1998. Under its collaborative agreements, the Company may receive one or two types of revenue from its collaborative partners: contract revenue and license revenue. Contract revenue includes research funding to support a specified number of the Company's scientists and payments upon the achievement of specified research and development milestones. Research funding revenue is recognized ratably over the period of the agreement to which it relates and is based upon predetermined funding requirements. Research milestone payment revenue is recognized when the related research milestone is achieved. License revenue represents non-refundable 33 payments for licenses to the Company's technology and drug discovery systems. Non-refundable payments for licenses are recognized at such time as they are received or, if earlier, become guaranteed. In addition to contract revenue and license revenue, if a drug is developed as a result of any of the collaborative agreements between the Company and its collaborative partners, the Company is entitled to receive royalty payments based upon the sale of such drugs. The Company also receives revenues from government grants under the Small Business Innovative Research ("SBIR") program of the National Institutes of Health. To date, the Company's expenditures have been for research and development related expenses, general and administrative related expenses, fixed asset purchases and various patent related expenditures incurred in protecting the Company's technologies. The Company has been historically unprofitable and had an accumulated deficit of $29,316,000 at December 31, 1997. The Company expects to continue to incur operating losses for a significant number of years and may not become profitable, if at all, until it begins to receive royalty revenue. To date, the Company has not received any royalty revenue and does not expect to receive such revenue for a significant number of years, if at all. Results of Operations Comparison of Fiscal Years Ended December 31, 1997, 1996 and 1995 Revenues. The Company recognized revenue of $10,307,000, $9,481,000 and $7,977,000 for the fiscal years of 1997, 1996 and 1995, respectively. The increase of $826,000 from 1996 to 1997 was attributable primarily to: an increase in contract revenue of $2,842,000 resulting from the expansion of the Company's collaborative arrangement with Lilly and increases in rates charged per full-time equivalent scientist under collaborative arrangements from which the Company receives research funding partially offset by a decrease of $2,000,000 of non-recurring license revenue under the terms of one of the Company's license and collaboration agreements during the third quarter of 1996. The increase of $1,504,000 from 1995 to 1996 was attributable primarily to the recognition of the $2,000,000 of license revenue from one of the Company's collaborative partners and an increase of $231,000 of grant revenue over the comparable period in 1995, both of which were partially offset by a decrease of contract revenue of $727,000. This decrease in contract revenue was attributable primarily to the receipt in 1995 of a one-time $1,000,000 payment from one of the Company's collaborative partners for the achievement of a specific milestone that was partially offset by increases in 1996 in the rates charged to the Company's collaborative partners per full-time equivalent scientist. Research and Development Expenses. The Company incurred research and development expenses of $13,781,000, $11,337,000 and $9,863,000 for the fiscal years of 1997, 1996 and 1995, respectively. The increase of $2,444,000, or 22%, from 1996 to 1997 was attributable primarily to: an increase of $1,274,000 in compensation expense resulting from an increase in average headcount year-to-year, annual salary and bonus increases and an associated increase in fringe benefit expenses; an increase of $726,000 in research supply costs; and an increase of $397,000 in facility related costs. The increase of $1,474,000, or 15%, from 1995 to 1996 was attributable primarily to: an increase of $656,000 in compensation expense resulting from an increase in average headcount year-to-year, annual salary and bonus increases and an associated increase in fringe benefit expense, as well as an increase in amortization of deferred compensation; an increase of $482,000 in research supply costs; an increase of $112,000 in research 34 equipment costs related to research funded by government grants; $92,000 in increased depreciation expense; and an increase of $53,000 in software license fees. General and Administrative Expenses. The Company incurred general and administrative expenses of $4,072,000, $2,982,000 and $2,215,000 for the fiscal years of 1997, 1996 and 1995, respectively. The increase of $1,090,000, or 37%, from 1996 to 1997 was attributable primarily to an increase in patent and patent related expenses resulting from increased patent related activities and the expensing of all patent and patent application costs as incurred, effective October 1, 1996. The increase of $767,000, or 35%, from 1995 to 1996 was attributable primarily to: an increase of $292,000 in expenses associated with being a public company; an increase of $193,000 in compensation expense resulting from an increase in average headcount and annual salary and bonus increases and an associated increase in fringe benefit expense; an increase of $171,000 in patent and patent related costs; and an increase of $64,000 in certain supply and computer related expenses. Other Income, Net. The Company received other income, net of interest expense, of $2,200,000, $2,205,000 and $734,000 for the fiscal years of 1997, 1996 and 1995, respectively. The increase of $1,471,000 from 1995 to 1996 in other income, net of interest expense, was primarily attributable to an increase in interest income as a result of an increase in the average cash, cash equivalent and marketable security balance resulting from the Company's initial public offering in December 1995. Net Loss and Net Loss Per Share. The net loss incurred by the Company was $5,346,000 ($0.66 per share), $2,633,000 ($0.35 per share) and $3,367,000 ($4.76 per share) for the fiscal years of 1997, 1996 and 1995, respectively. The increase of $2,713,000 in net loss from 1996 to 1997 was primarily attributable to the recognition during 1996 of $2,000,000 of non-recurring license revenue offset by higher total expenses. The decrease of $734,000 in net loss from 1995 to 1996 was attributable primarily to: the increase of $2,000,000 of non-recurring license revenue and other income, offset by higher total expenses. Operating Trends. It is expected that research funding from existing collaborations will decrease from $9,785,000 in 1997 to $7,100,000 in 1998. It is also expected that operating expenses will increase in order to further support existing collaborations and internal research efforts. Operating expenses are expected to continue to grow, at a minimum, consistent with historical trends. Patent related expenditures are expected to grow at a rate that is faster than the historical operating expense growth rate. Other income, net is expected to decline in 1998 and 1999 as existing funds are utilized to support the Company's operations. Property and equipment costs are expected to continue to increase as the Company's currently underutilized space is converted into laboratory space. Management has performed a review of the computer hardware and software components that the Company currently utilizes in order to determine the impact that the year 2000 issue will have on the Company's future operating results, future financial condition and on the future operations of its business. Based on the results of the review, management has concluded that the impact the year 2000 issue will have on the aforementioned will be immaterial. 35 The Company does not believe that inflation has had a material impact on its results of operations. Liquidity and Capital Resources At December 31, 1997 and 1996, cash, cash equivalents and marketable securities aggregated $62,100,000 and $34,684,000, respectively. The increase of $27,416,000 was attributable primarily to the receipt of $33,822,000 in net proceeds raised in a public offering offset by cash used in operations of $4,310,000 and capital expenditures of $2,888,000. To date, the Company has met its cash requirements through the sale of its stock, through licensing fees, research funding and milestone payments received under the collaborative agreements with Lilly, Merck and Novartis, through SBIR grants and through interest earned on its investments. As of December 31, 1997, the Company had received: $96,300,000 from the sale of its stock; $47,200,000 in licensing fees, research funding and milestone payments under its collaborative agreements; $3,400,000 in SBIR grants; and $6,600,000 in other income, net. To date, the portion of these funds that has been expended by the Company has been used principally to fund research and development, to purchase fixed assets used primarily in its research activities, to create its patent estate and to pay general and administrative support costs. At December 31, 1997, the Company was involved in collaborative arrangements with Lilly, Merck, Novartis and Warner-Lambert. Lilly, Merck and Novartis provided research funding to the Company during 1997 and are expected to provide research funding to the Company during 1998. The aggregate amount of research funding under these arrangements which the Company expects to receive during 1998 is $7,100,000. Warner- Lambert does not currently provide research funding to the Company and the Company does not expect that such funding will be provided, if at all, until 1999. Research funding under the Lilly agreement is scheduled to expire on December 31, 1998. Research funding under the Merck agreement is scheduled to expire on November 30, 1998. Research funding under the Novartis agreement is scheduled to expire on August 3, 1998. At December 31, 1997, the Company had invested an aggregate of $8,447,000 in property and equipment. The Company continues to convert currently underutilized space into laboratory facilities beyond the level which existed at December 31, 1997. In November 1997, the Company extended its lease agreement, which was due to expire on December 31, 1999, until December 31, 2015. The minimum annual payment under the lease is currently $644,000. A standby letter of credit for $580,000 has been issued to the Company's landlord as a security deposit and is secured by investment securities of the Company which are, to the extent of $600,000, recorded in the balance sheet as "Restricted Cash." This standby letter of credit must be renewed annually during the life of the lease. At December 31, 1997, the Company had $62,100,000 in cash, cash equivalents and marketable securities. The Company intends to utilize these funds primarily to conduct its current and future research programs, for general corporate purposes and to make leasehold improvements to its facilities beyond the level which existed on December 31, 1997. It is anticipated that the Company will continue to incur significant operating losses for a number of years and will require the use of cash to finance its capital programs. The Company believes that its cash on hand, together with the funds that it expects to receive from its collaborative partners, interest income and funds received under SBIR grants, will be sufficient to fund an increased operating expense level and an increased level of capital spending through the year 2000. The Company expects to continue to incur operating losses for a number of years. 36 As of December 31, 1997, the Company had net operating loss carryforwards of approximately $25,000,000 for Federal income tax purposes that will expire principally in the years 2002 through 2012. In addition, the Company had research and development credit carryforwards which will expire principally in 2002 through 2009. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to these carryforwards. Due to limitations imposed by the Tax Reform Act of 1986, and as a result of a significant change in the Company's ownership in 1993 and 1997, the utilization of $25,000,000 of net operating loss carryforwards is subject to annual limitation. The utilization of the research and development credits is similarly limited. Disclosure Regarding Forward-Looking Statements This Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements include, but are not limited to, those relating to future cash and spending plans, amounts of future research funding, patent-related plans, additional drug discovery programs, the effectiveness, efficacy, or other results of any of the Company's technology or drugs, any other statements regarding future growth, future cash needs, future operations, business plans and financial results, and any other statements which are not historical facts. When used in this document, the words "anticipate," "estimate," "expect," "may," "project," and similar expressions are intended to be among the statements that identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, those risks and uncertainties relating to those described below, as well as other factors detailed elsewhere in this Report, including in Item 1 of this Report under the captions "Patents, Proprietary Technology and Trade Secrets," "Competition" and "Government Regulation" ("Cautionary Statements"). Such Cautionary Statements qualify the forward-looking statements included in this Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Early Stage of Product Development; Technological Uncertainty Since its inception in January 1987, the Company has focused its activities on the discovery and cloning of receptor genes and the use of such genes as tools in the design of precisely targeted compounds for a broad range of therapeutic applications. To date, the Company has not completed development of any drugs alone or in collaboration with its partners and does not expect that any drugs resulting from its or its collaborative partners' or licensees' research and development efforts will be commercially available for a significant number of years, if at all. All compounds discovered by the Company and its collaborative partners and licensees will require extensive preclinical and clinical testing prior to submission of any regulatory application for commercial use. Extensive preclinical and clinical testing required to establish safety and efficacy will take several years, and the time required to commercialize new drugs cannot be predicted with accuracy. Moreover, potential products that appear to be promising at early stages of development may never reach the market for a number of reasons. Such reasons include the possibilities that potential products are found during preclinical testing or clinical trials to be ineffective or to cause harmful side effects, that they fail to receive necessary regulatory approvals, that they are difficult or uneconomical to manufacture on a large scale, that they fail to achieve market acceptance or that they are precluded from commercialization by proprietary rights of third parties. There can be no assurance that the Company's approach to drug discovery, its research and development efforts or the efforts of Lilly, Merck, Novartis, Warner-Lambert, Grunenthal or Glaxo, or any future collaborative partner or licensee of the Company, will result in the development of any drugs, or that any drugs, if successfully developed, will be proven to be safe 37 and effective in clinical trials, receive required regulatory approvals, be capable of being manufactured in commercial quantities at reasonable costs or be successfully commercialized. Product development of new pharmaceuticals is highly uncertain, and unanticipated developments, including clinical or regulatory delays, unexpected adverse effects and inadequate therapeutic efficacy, would slow or prevent product development efforts of the Company and its collaborative partners and licensees and have a material adverse effect on the Company's operations. Dependence on Collaborative Partners and Licensees for Development, Regulatory Approvals, Manufacturing, Marketing and Other Resources A key element of the Company's business strategy is to leverage resources by entering into collaborative and licensing arrangements with pharmaceutical companies. Under the Collaborative Agreements with Lilly, Merck, Novartis and Warner-Lambert, the Company's collaborative partners are each responsible for conducting preclinical testing and clinical trials of compounds developed through the use of the Company's technology, obtaining regulatory approvals and manufacturing and commercializing any resulting drugs. Under the Grunenthal Agreement, Grunenthal is responsible for conducting certain preclinical testing and clinical trials of compounds developed through the use of the Company's technology. The Company has no involvement in the research and development activities of Glaxo under the Glaxo Agreement. As a result, the Company's receipt of revenues (whether in the form of drug development milestones, royalties on sales or net sales proceeds) in respect of drugs resulting from its collaborative and licensing arrangements is dependent upon the activities of its collaborative partners and licensees. The amount and timing of resources dedicated by the Company's collaborative partners to their respective collaborations with the Company and by the Company's licensee to the development of drugs that would be subject to royalties payable to the Company are not within the Company's control. Moreover, there can be no assurance that the interests of the Company will continue to coincide with those of its collaborative partners or licensee, that some of the Company's collaborative partners or the Company's licensee will not develop independently or with third parties drugs that could compete with drugs of the types covered by their arrangements with the Company, or that disagreements over rights or technology or other proprietary interests will not occur. If any of the Company's collaborative partners or the Company's licensee breaches its agreement with the Company, or fails to devote adequate resources to or conduct in a timely manner its collaborative or licensed activities, the research programs under the applicable Collaborative Agreement or the development and commercialization of drug candidates subject to such arrangement could be materially adversely affected. There can be no assurance that the Company's collaborative or licensing arrangements will be successful. Further, there can be no assurance that the Company will be able to enter into acceptable collaborative or licensing arrangements with other pharmaceutical companies in the future, or that, if negotiated, such arrangements will be successful. History of Operating Losses and Accumulated Deficit The Company has incurred significant operating losses since its inception in January 1987. At December 31, 1997, the Company's accumulated deficit was $29,316,000. Losses have resulted principally from costs incurred in connection with the Company's research and development activities and from general and administrative costs associated with the Company's operations. The Company expects to continue to incur substantial operating losses at least over the next several years and expects losses to increase as the Company's research and development efforts expand and its current collaborative arrangements expire. As of December 31, 38 1997, the only revenues generated by the Company had resulted from payments under the Collaborative Agreements, and government grants under the SBIR program of the National Institutes of Health. The Company's revenues, expenses and losses may fluctuate from quarter to quarter and year to year. Research payments under the Lilly Agreement, the Merck Agreement and the Novartis Agreements are scheduled to expire in December 1998, November 1998 and August 1998, respectively, unless the research programs under such agreements are extended by mutual agreement of the Company and Lilly, Merck or Novartis. The Company does not expect to achieve revenues or royalties from sales of drugs for a number of years, if at all. The Company will not achieve revenues or royalties from drug sales unless it or one of its collaborative partners or licensees successfully completes clinical trials with respect to a drug candidate, obtains regulatory approvals for that drug candidate and commercializes the resulting drug. Failure to achieve significant revenue or profitable operations could impair the Company's ability to sustain operations and there can be no assurance that the Company will ever achieve significant revenues or profitable operations. Future Capital Needs; Uncertainty of Additional Funding The operation of the Company's business requires substantial capital resources and such requirements are likely to increase in the future. The Company's future financial requirements will depend on many factors, including the continued progress of its research and development programs, the timing and results of preclinical testing and clinical trials, if any, of its drug candidates, the timing of regulatory approvals, if any, technological advances, determinations as to the commercial potential of its or its collaborative partners' proposed products and the status of competitive products. The Company's capital requirements will also depend on the Company's ability to establish and maintain collaborative arrangements with others and whether its future collaborative partners provide research funding to the Company and are responsible for all development activities, preclinical testing and regulatory approvals and, if such approvals are obtained, the manufacturing and marketing of products. In addition, such capital requirements will depend on the time and expense associated with filing and, if necessary, prosecuting and enforcing patent claims. The Company entered into the Grunenthal Agreement in January 1998. Under this agreement, the Company will retain certain ownership rights to any products that result from the collaboration. In addition, the Company will be significantly involved in the development of any such potential products but may also be required to contribute substantial financial resources towards such development. Accordingly, the cost to the Company of this arrangement may be significantly greater than the cost to it of participating in a royalty-based collaboration. The Company intends to explore the possibility of entering into additional collaborative arrangements similar in nature to its collaboration with Grunenthal. No assurance can be given that the Company's existing cash on hand and marketable securities and funds it will receive under the Collaborative Agreements and under the Glaxo Agreement and government grants, together with interest income, will be sufficient. The Company expects that it will, in the future, seek to raise additional funding from other sources, including other collaborative partners and licensees, and through public or private financings, including sales of equity or debt securities. Any such collaborative or licensing arrangement could result in limitations on the Company's ability to control the research and development of potential drugs and the commercialization of resulting drugs, if any, as well as its profits therefrom. Any such equity financing could result in dilution to the Company's then existing stockholders. There can be no assurance that additional funds will be available on favorable terms or at all, or that such funds, if raised, would be sufficient to permit the Company to continue to conduct its operations. If adequate funds are not available, the Company may be required to curtail significantly or eliminate one or more of its receptor or drug discovery programs. 39 Uncertainties Related to Clinical Trials Before obtaining required regulatory approvals for the commercial sale of each product under development, the Company or its collaborators and licensees must demonstrate through preclinical studies and clinical trials that such product is safe and efficacious for use. The results of preclinical studies and initial clinical trials are not necessarily predictive of results that will be obtained from large-scale clinical trials, and there can be no assurance that clinical trials of any product under development will demonstrate the safety and efficacy of such product or will result in a marketable product. The safety and efficacy of a therapeutic product under development by the Company or its collaborative partners and licensees must be supported by extensive data from clinical trials. A number of companies have suffered significant setbacks in advanced clinical trials, despite promising results in earlier trials. The failure to demonstrate adequately the safety and efficacy of a therapeutic drug under development would delay or prevent regulatory approval of the product and could have a material adverse effect on the Company. In addition, the FDA or other Regulatory Agency may require additional clinical trials, which could result in increased costs and significant development delays. The rate of completion of clinical trials of the Company's or its collaborative partners' and licensees' products is dependent upon, among other factors, obtaining adequate clinical supplies and the rate of patient accrual. Patient accrual is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites and the eligibility criteria for the trial. Delays in planned patient enrollment in clinical trials may result in increased costs, program delays or both, which could have a material adverse effect on the Company. In addition, the Company's collaborative partners and licensees generally have the right to control the planning and execution of product development and clinical programs, and there can be no assurance that such partners and licensees will conduct such programs in accordance with schedules that are satisfactory to the Company. There can be no assurance that, if clinical trials are completed, the Company or its collaborative partners and licensees will submit NDAs with respect to any potential products or that any such application will be reviewed and approved by the FDA in a timely manner, if at all. Lack of Manufacturing Experience; Reliance on Contract Manufacturers The Company currently has no manufacturing facilities and relies on its collaborative partners or other manufacturers to produce its compounds for research and development, preclinical and clinical purposes. The products under development by the Company and its collaborative partners have never been manufactured on a commercial scale and there can be no assurance that such products can be manufactured at a cost or in quantities necessary to make them commercially viable. If the Company were unable to contract for a sufficient supply of its compounds on acceptable terms, or if it should encounter delays or difficulties in its relationships with manufacturers, the Company's preclinical and clinical testing schedule would be delayed, resulting in delay in the submission of products for regulatory approval or the market introduction and subsequent sales of such products, which could have a material adverse effect on the Company. Moreover, manufacturers that the Company may use must adhere to current GMP regulations enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval plant inspection, the FDA pre-market approval of the products will not be granted. 40 Lack of Sales and Marketing Capability The creation of infrastructure to commercialize pharmaceutical products is a difficult, expensive and time-consuming process. Synaptic currently has no sales or marketing capability. To market directly any product it may develop, the Company will need to establish a marketing and sales force with technical expertise and distribution capability or contract with other pharmaceutical and/or health care companies with distribution systems and direct sales forces. There can be no assurance that the Company will be able to establish direct or indirect sales and distribution capabilities or be successful in gaining market acceptance for licensing arrangements. To the extent that the Company enters into co-promotion or licensing arrangements, any revenues received by the Company will be dependent on the efforts of third parties, and there can be no assurance that any such efforts will be successful. Dependence on Key Personnel The Company is highly dependent on its management and scientific staff. Loss of the services of any key individual could have an adverse effect on the Company. The Company believes that its future success will depend, in part, on its ability to attract and retain highly talented managerial and scientific personnel and consultants. The Company faces intense competition for such personnel from, among others, biotechnology and pharmaceutical companies, as well as academic and other research institutions. There can be no assurance that it will be able to attract and retain the personnel it requires on acceptable terms. 41 (This page intentionally left blank.) 42 Item 8. Financial Statements SYNAPTIC PHARMACEUTICAL CORPORATION INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Auditors..............................................44 Balance Sheets at December 31, 1997 and 1996................................45 Statements of Operations for the years ended December 31, 1997, 1996 and 1995.................................................................. 46 Statements of Stockholders' Equity (Deficiency) for the years ended December 31, 1997, 1996 and 1995....................................47 Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.......................................................49 Notes to Financial Statements...............................................50 43 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders SYNAPTIC PHARMACEUTICAL CORPORATION We have audited the accompanying balance sheets of Synaptic Pharmaceutical Corporation as of December 31, 1997 and 1996, and the related statements of operations, stockholders' equity (deficiency) and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Synaptic Pharmaceutical Corporation at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Hackensack, New Jersey January 30, 1998, except for the second paragraph of Note 11 as to which the date is March 2, 1998 44 SYNAPTIC PHARMACEUTICAL CORPORATION BALANCE SHEETS (in thousands, except share information) December 31, 1997 and 1996 Assets 1997 1996 -------- -------- Current assets: Cash and cash equivalents $23,113 $ 4,589 Restricted cash 600 -- Marketable securities--current maturities 10,010 21,418 Revenue receivable under license agreement 40 192 Restricted securities -- 712 Other current assets 674 458 -------- -------- Total current assets 34,437 27,369 Property and equipment, net 4,682 2,664 Marketable securities 28,977 8,677 Patent and patent application costs, net of accumulated amortization (1997--$1,069; 1996--$730) 1,306 1,645 -------- -------- $69,402 $40,355 ======== ======== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 811 $ 639 Accrued liabilities 547 189 Accrued compensation 340 380 Current portion of capital lease obligations -- 107 -------- -------- Total current liabilities 1,698 1,315 Commitments and contingencies Stockholders' equity: Preferred Stock, $.01 par value; authorized-- 1,000,000 shares -- -- Common Stock, $.01 par value; authorized-- 25,000,000 shares; issued and outstanding-- 10,526,585 shares in 1997 and 7,633,543 shares in 1996 105 76 Additional paid-in capital 97,049 63,231 Net unrealized gains (losses) on securities 26 (1) Deferred compensation (160) (296) Accumulated deficit (29,316) (23,970) -------- -------- Total stockholders' equity 67,704 39,040 -------- -------- $69,402 $40,355 ======== ======== See notes to financial statements. 45 SYNAPTIC PHARMACEUTICAL CORPORATION STATEMENTS OF OPERATIONS (in thousands, except share and per share information) For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 -------- -------- -------- Revenues: Contract revenue $ 9,785 $ 6,943 $ 7,670 License revenue -- 2,000 -- Grant revenue 522 538 307 ------- ------- ------- Total revenues 10,307 9,481 7,977 Expenses: Research and development 13,781 11,337 9,863 General and administrative 4,072 2,982 2,215 ------- ------- ------- Total expenses 17,853 14,319 12,078 ------- ------- ------- Loss from operations (7,546) (4,838) (4,101) Other income, net: Interest income 2,205 2,013 748 Interest expense (5) (20) (33) Gain on sale of securities -- 212 19 ------- ------- ------- Other income, net 2,200 2,205 734 ------- ------- ------- Net loss $(5,346) $(2,633) $(3,367) ======= ======= ======= Basic and diluted net loss per share $ (0.66) $ (0.35) $ (4.76) ======= ======= ======= Shares used in computation of net loss per share 8,129,260 7,577,610 707,094 ========= ========= ======= See notes to financial statements. 46 SYNAPTIC PHARMACEUTICAL CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) (in thousands, except share information) Net Unrealized Notes Total Gains Receivable Stock- Additional (Losses) Deferred From Accumu- holders' Common Stock Paid-In on Compen- Stock- lated Treasury Equity Shares Amount Capital Securities sation holders Deficit Stock (Deficiency) ------ ------ ------- ---------- ------ ------- ------- ----- ------------ Balance at January 1, 1995 340,193 $ 3 $ 661 $(171) $(103) $(11) $(17,970) $(1) $(17,592) Purchase of 1,893 shares of treasury stock at cost -- -- -- -- -- -- -- (3) (3) Payments received on notes receivable from stockholders -- -- -- -- -- 5 -- -- 5 Deferred compensation related to stock incentive plan -- -- 191 -- (191) -- -- -- -- Forfeiture of deferred compensation related to stock incentive plan -- -- (1) -- 1 -- -- -- -- Amortization of deferred compensation -- -- -- -- 85 -- -- -- 85 Issuance of 1,646 shares of treasury stock -- -- 1 -- -- -- -- 2 3 Issuance of 57,769 shares of common stock to employees and consultants 57,769 1 258 -- -- -- -- -- 259 Issuance of 2,000,000 shares of common stock in initial public offering 2,000,000 20 22,692 -- -- -- -- -- 22,712 Conversion of preferred stock 4,928,382 49 36,150 -- -- -- -- -- 36,199 Adjustment to reflect net unrealized holding gain on securities -- -- -- 367 -- -- -- -- 367 Net loss for the year ended December 31, 1995 -- -- -- -- -- -- (3,367) -- (3,367) Fractional shares issued in reverse stock split 24 -- -- -- -- -- -- -- -- ------ ------ ------- ---------- ------ ------- ------- ----- ----------- Balance at December 31, 1995 7,326,368 73 59,952 196 (208) (6) (21,337) (2) 38,668 Purchase of 1,190 shares of treasury stock at cost -- -- -- -- -- -- -- (1) (1) Payments received on notes receivable from stockholders -- -- -- -- -- 6 -- -- 6 Deferred compensation related to stock incentive plan -- -- 388 -- (388) -- -- -- -- Forfeiture of deferred compensation related to stock incentive plan -- -- (121) -- 121 -- -- -- -- Amortization of deferred compensation -- -- -- -- 179 -- -- -- 179 Issuance of 48,126, shares of common stock pursuant to exercise of stock options 46,061 1 81 -- -- -- -- 3 85 Issuance of 48,114 shares of common stock pursuant to exercise of stock warants 48,114 -- 457 -- -- -- -- -- 457 Issuance of 213,000 shares of common stock pursuant to overallotment option 213,000 2 2,474 -- -- -- -- -- 2,476 Adjustment to reflect net unrealized holding loss on securities -- -- -- (197) -- -- -- -- (197) Net loss for the year ended December 31, 1996 -- -- -- -- -- -- (2,633) -- (2,633) --------- ------- -------- ---------- --------- ------- ------------ ----- ------------ Balance at December 31, 1996 7,633,543 $ 76 $63,231 $ (1) $ (296) $ -- $ (23,970) $ -- $ 39,040 ========= ======= ======== ========== ========= ======= ============ ===== ============
See notes to financial statements. 47 SYNAPTIC PHARMACEUTICAL CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) -- (Continued) (in thousands, except share information) Net Unrealized Notes Total Gains Receivable Stock- Additional (Losses) Deferred From Accumu- holders' Common Stock Paid-In on Compen- Stock- lated Treasury Equity Shares Amount Capital Securities sation holders Deficit Stock (Deficiency) ------ ------ ------- ---------- ------ ------- ------- ----- ------------ Balance at December 31, 1996 7,633,543 $ 76 $63,231 $ (1) $ (296) $ -- $ (23,970) $ -- $ 39,040 Purchase of 438 shares of Treasury Stock at cost -- -- -- -- -- -- -- (1) (1) Forfeiture of Deferred Compensation related to Stock Incentive Plan -- -- (12) -- 12 -- -- -- -- Amortization of Deferred Compensation -- -- -- -- 124 -- -- -- 124 Issuance of 18,480, shares of common stock pursuant 18,042 1 36 -- -- -- -- 1 38 to exercise of stock options Issuance of 2,875,000 share of common stock in public offering 2,875,000 28 33,794 -- -- -- -- -- 33,822 Adjustment to reflect net unrealized holding loss on securities -- -- -- 27 -- -- -- -- 27 Net loss for the year ended December 31, 1997 -- -- -- -- -- -- (5,346) -- (5,346) ---------- ------- -------- ---------- --------- ------- ------------ ----- ------------ Balance at December 31, 1997 10,526,585 $ 105 $ 97,049 $ 26 $ (160) $ -- $ (29,316) $ -- $ 67,704 ========== ======= ======== ========== ========= ======= ============= ===== ============
See notes to financial statements. 48 SYNAPTIC PHARMACEUTICAL CORPORATION STATEMENTS OF CASH FLOWS (in thousands) For the Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 -------- -------- ------- Operating activities: Net loss $(5,346) $(2,633) $(3,367) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and patent amortization 1,209 960 792 Amortization of (discounts)/premiums on securities (123) (158) 42 Amortization of deferred compensation 124 179 86 Gain on sale of securities -- (212) (19) Changes in operating assets and liabilities: (Increase) decrease in other assets (816) (107) 356 Increase in accounts payable, accrued liabilities and accrued compensation 490 44 131 Decrease (increase) in license agreement revenue receivable 152 (62) 1,904 (Decrease) increase in deferred revenue -- (821) 821 -------- -------- ------ Net cash (used in) provided by operating activities (4,310) (2,810) 746 Investing activities: Proceeds from sale or maturity of investments 27,666 10,710 6,318 Purchases of investments (35,696) (32,238) (3,669) Purchases of property and equipment (2,888) (1,106) (529) Increase in patent and patent application costs -- (518) (602) Principal payments made by employee/stockholders -- -- 1 -------- -------- ------- Net cash (used in) provided by investing activities (10,918) (23,152) 1,519 Financing activities: Issuance of common stock, net of repurchases 33,859 3,016 22,971 Payments on capital lease (107) (152) (125) Payments on notes receivable from stockholders -- 6 6 -------- -------- ------- Net cash provided by financing activities 33,752 2,870 22,852 -------- -------- ------- Net increase (decrease) in cash and cash equivalents 18,524 (23,092) 25,117 Cash and cash equivalents at beginning of period 4,589 27,681 2,564 -------- -------- ------- Cash and cash equivalents at end of period $23,113 $ 4,589 $27,681 ======== ======== ======= Supplemental cash flow disclosure: Cash paid for interest $ 5 $ 20 $ 33 ======== ======== ======= See notes to financial statements. 49 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 1997 Note 1 -- Summary of Significant Accounting Policies Organization. Synaptic Pharmaceutical Corporation (the "Company") is engaged in the development of a broad platform of enabling technology which it calls "human receptor-targeted drug design technology". The Company is utilizing this technology both to discover and clone the genes that code for human receptor subtypes associated with specific disorders and to design compounds that can potentially be developed as drugs for treating these disorders. The Company makes available this technology to its pharmaceutical partners through licensing and research agreements from which the Company derives the principal portion of its revenue. Basic and Diluted Net Loss Per Share. Net loss per share is computed using the weighted average number of shares of common stock outstanding. In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Since the Company has a history of operating losses, the adoption of the new standard had no effect on the current and prior year net loss per share amounts. Also, as a result of the Company's operating losses and the anti-dilutive effect from stock options and warrants, such instruments are excluded from the computation of basic and diluted net loss per share. Revenue Recognition. Research funding revenue is recognized ratably over the period of the contract to which it relates. Payments received in advance under such contracts is recorded as deferred revenue until the research is performed. Research milestone payment revenue is recognized at the time the related research milestone is achieved. License revenue represents non-refundable payments for licenses to the Company's technology and drug discovery systems. Non-refundable payments for licenses are recognized at such time as they are received or, if earlier, become guaranteed. Government grant receipts are recorded as revenue in the period in which the related research is performed. Cash Equivalents. Cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased. Included in cash equivalents at December 31, 1997, is approximately $23,109,000 related to investments in money market funds. At December 31, 1996, this amount totaled $4,383,000. Available-for-Sale Securities. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported as a separate component of stockholders' equity. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value judged to be other than temporary, if any, are included in other income. The cost of securities sold is based on the specific identification method. Investments held as of December 31, 1997 consist primarily of U.S. Government and Federal Agency obligations, U.S. corporate debt securities and mortgage-backed securities. The maturities range from January 31, 1998, through November 26, 2001. The Company has established guidelines relative to diversification, credit ratings and maturities to maintain safety and liquidity. The guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. Property and Equipment. Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Scientific equipment, office equipment and 50 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 furniture and fixtures are depreciated over a life of 7 years. Leasehold improvements are depreciated principally over the life of the facility lease, which is currently 18 years (see Note 9). Software is depreciated over a life of 3 years. Assets acquired under capital lease arrangements were depreciated over the life of the related leases. Patents. Prior to October 1, 1996, patent and patent application costs were capitalized and amortized over 7 years or the estimated life of the patent, if less, using the straight-line method. Capitalized costs through October 1, 1996 will continue to be amortized over the remaining portions of their seven-year lives. Effective October 1, 1996, patent and patent application costs are expensed as incurred. The effect in 1996 of this change in accounting estimate was to increase expenses and net loss by $171,000, or $0.02 per share. The Company continually reviews capitalized costs to assess ongoing recoverability. Accrued Liabilities. Included in accrued liabilities at December 31,1997 and 1996 are accrued professional fees totaling $345,000 and $68,000, respectively. Stock-Based Compensation. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), in accounting for its employee stock options. Under APB No. 25, compensation expense is recognized only when the exercise price of options is below the market price of the underlying stock on the date of grant. Such expense is recognized ratably over the vesting period. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. New Accounting Standard. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This pronouncement, which is required to be adopted effective January 1, 1998, requires the presentation of a statement of comprehensive income. Comprehensive income is defined as the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from nonowner sources. Comprehensive income for the Company, in addition to net loss, will include unrealized gains and losses on marketable securities held for sale, currently recorded in stockholders' equity. Reclassifications. Certain prior year amounts have been reclassified to conform with the current year presentation. 51 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 Note 2 -- Investments The following is a summary of all of the Company's securities. All of the Company's securities are classified as available-for-sale securities. Determination of estimated fair value is based on quoted market prices: Gross Gross Unrealized Unrealized Estimated Cost Gains (Losses) Fair Value ---- ----- -------- ---------- December 31, 1997: U.S. Treasury obligations and obligations of U.S. government agencies $21,299,000 $ -- $(22,000) $21,277,000 U.S. corporate debt securities 15,966,000 57,000 (11,000) 16,012,000 Mortgage-backed securities 1,696,000 2,000 -- 1,698,000 ----------- ------- -------- ----------- $38,961,000 $59,000 $(33,000) $38,987,000 =========== ======= ======== =========== December 31, 1996: U.S. Treasury obligations and obligations of U.S. government agencies $20,846,000 $ 1,000 $ (4,000) $20,843,000 U.S. corporate debt securities 6,991,000 5,000 (8,000) 6,988,000 Mortgage-backed securities 2,971,000 5,000 -- 2,976,000 ----------- ------- -------- ----------- $30,808,000 $11,000 $(12,000) $30,807,000 =========== ======= ======== =========== The gross realized gains on sale of available-for-sale securities for the years ending December 31, 1997, 1996 and 1995 totaled $0, $212,000 and $24,000, respectively, and the gross realized losses totaled $0, $0 and $6,000, respectively. The net adjustment to unrealized gains (losses) on available-for-sale securities included as a separate component of stockholders' equity totaled $27,000 in 1997, $(197,000) in 1996 and $367,000 in 1995. 52 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 Note 3 -- Collaborative Research Agreements At December 31, 1997, the Company was engaged in collaborations with four pharmaceutical companies, three of which account for all of its contract and license revenues. In addition, the Company has licensed certain technology to The DuPont Merck Pharmaceutical Company. Details of these arrangements are set forth below: Eli Lilly and Company. In January 1991, the Company and Eli Lilly and Company ("Lilly") entered into an agreement to promote the discovery and development of serotonin receptor subtype-selective drugs for the treatment of serotonin-related disorders. The original term of the collaboration was four years, but was extended in January 1995 for an additional four-year period. In October 1996, the size of the collaboration was increased. As part of this agreement, Lilly is providing funding to the Company to support a specified number of the Company's scientists who conduct research as part of the collaboration. Revenue recognized in the accompanying financial statements is not subject to repayment. Lilly will also provide the Company with milestone payments and royalties on sales of any products resulting from the collaboration for a period of time based upon the term of the related patents. During 1997, 1996 and 1995, the Company recognized $4,748,000, $2,011,000, and $1,960,000, respectively, in revenue under this agreement. Merck & Co., Inc. In November 1993, the Company and Merck & Co., Inc. ("Merck") entered into an agreement pursuant to which they agreed to collaborate in the identification and development of alpha-1a antagonists, principally for the treatment of BPH. The initial term of the collaboration was three years. In October 1996, the term of the collaboration was extended for an additional one-year period and in November 1997, the term was again extended for an additional one-year period. Under the terms of the agreement, Merck is providing funding to the Company to support a specified number of the Company's scientists who conduct research as part of the collaboration. In addition, Merck is required to pay royalties on sales of any products resulting from the collaboration and is required to make payments upon the achievement of certain milestones. As part of the collaboration, Merck received an exclusive worldwide license to use the Company's alpha adrenergic drug discovery systems for the development and commercialization of alpha-1a antagonists, as well as an exclusive worldwide license under several of the Company's related patents and patent applications. The Company retained the right to use its alpha adrenergic technology for the development of alpha adrenergic and other agents that are not alpha-1a antagonists. Merck has the right to terminate the Merck Agreement at any time upon 90 days' prior written notice. In the event of any such termination, Merck will not be required to provide the Company with any research funding that has not come due prior to such termination or make certain other payments to the Company that have not come due prior to such termination. During 1997, 1996 and 1995, the Company recognized $1,631,000, $3,613,000 and $1,477,000, respectively, in revenue under this agreement. 53 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 At December 31, 1997 and 1996, the Company had a receivable amounting to approximately $40,000 and $192,000, respectively, for certain reimbursable expenditures. Novartis Pharma AG (a subsidiary of the successor-in-interest of Ciba-Geigy Limited). In August 1994, the Company and Ciba-Geigy Limited ("Ciba-Geigy") entered into an agreement pursuant to which they agreed to collaborate in the identification and development of neuropeptide Y drugs for the treatment of obesity and eating disorders, as well as cardiovascular disorders. In May 1996, the Company and Ciba-Geigy entered into a second agreement and an amendment to the first agreement pursuant to which the term of the collaboration was extended by one year and the scope of the collaboration was expanded to provide for research on additional targets for the design of drugs for the treatment of obesity and eating disorders. In December 1996, Ciba-Geigy and Sandoz Limited consolidated to form a new company, Novartis AG, the pharmaceutical subsidiary of which is Novartis Pharma AG ("Novartis"). Novartis assumed Ciba-Geigy's rights and obligations relating to the collaboration. The term of the collaboration will expire on August 4, 1998, but may be further extended by mutual agreement of the parties. As part of the agreements, Novartis is providing funding to the Company to support a specified number of the Company's scientists who conduct research as part of the collaboration. In return for this research support, the Company granted Novartis an exclusive worldwide license to use the Company's neuropeptide Y technology to develop, manufacture and sell compounds that work through neuropeptide Y receptor subtypes for the treatment of obesity and eating disorders. Novartis is also required to provide the Company with milestone payments and royalties on sales of any products resulting from the collaboration. During August 1994, Novartis made a $7,500,000 equity investment in the Company. During December 1995, Novartis made an additional $2,000,000 equity investment in the Company. During 1997, 1996 and 1995, the Company recognized $3,406,000, $3,319,000 and $4,234,000, respectively, in revenue under this agreement. Warner-Lambert Company. In July 1997, the Company and Warner-Lambert Company ("Warner- Lambert") entered into a collaborative research and license agreement pursuant to which they agreed to collaborate in the identification and development of galanin drugs for a variety of therapeutic applications. As part of the collaboration, Warner-Lambert received an exclusive worldwide license to use the Company's galanin receptor subtype drug discovery systems for the development and commercialization of galanin receptor subtype- selective drugs for all therapeutic applications. To date, the Company has not recognized any revenue under this agreement. The DuPont Merck Pharmaceutical Company. In February 1996, the Company and The DuPont Merck Pharmaceutical Company ("DuPont Merck") entered into an agreement pursuant to which the Company granted DuPont Merck a nonexclusive license to use certain of the Company's alpha adrenergic drug discovery systems for the development of alpha adrenergic subtype-selective drugs. The license granted to DuPont Merck expired on February 5, 1998. 54 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 Note 4 -- Property and Equipment Property and equipment consists of the following as of December 31, 1997 and 1996: 1997 1996 Scientific equipment $ 4,921,000 $ 2,960,000 Furniture and fixtures 188,000 184,000 Office equipment 454,000 433,000 Leasehold improvements 1,557,000 1,225,000 Software 669,000 99,000 Equipment under capitalized leases 658,000 658,000 ----------- ----------- 8,447,000 5,559,000 Accumulated depreciation and amortization (3,765,000) (2,895,000) ----------- ----------- $ 4,682,000 $ 2,664,000 =========== =========== Note 5 -- Capital Leases The Company and a bank were parties to a master lease agreement under which the Company leased laboratory and computer equipment with a cost basis of $658,000. The effective interest rate on the leases approximated 10.5%. The assets were depreciated over the related lease terms. Under the terms of the master lease agreement, $112,000 in securities held in an investment account maintained by the bank was restricted as to use at December 31, 1996. Accumulated amortization on leased equipment as of December 31, 1997 and 1996 was $658,000 and $623,000, respectively. 55 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 Note 6 -- Stockholders' Equity Common Stock. In December 1995, the Company completed an initial public offering of 2,000,000 shares of its common stock. In January 1996, the underwriters of the initial public offering exercised their over-allotment option to purchase an additional 213,000 shares of common stock. As part of the initial public offering, the then existing convertible redeemable preferred stock automatically converted into 4,928,382 shares of common stock. In October 1997, the Company completed a public offering of 2,500,000 shares of its common stock. In November 1997, the underwriters of the public offering exercised their over-allotment option to purchase an additional 375,000 shares of common stock. In connection with the sale of certain convertible redeemable preferred stock which was converted into common stock upon completion of the Company's initial public offering, the placement agents of certain convertible redeemable preferred stock received warrants to purchase 192,458 shares of the Company's common stock at an exercise price of $9.50 per share. In May 1996, 48,114 of these warrants were exercised. At December 31, 1997, 144,344 shares of common stock were reserved for issuance. In January 1998, 137,648 warrants were exercised and the remaining warrants expired . Stockholders' Rights Plan. In November 1995, the Company's Board of Directors approved the adoption of a stockholders' rights plan (the "Rights Plan"). The Rights Plan provides for the distribution of one right (a "Right") with respect to each share of outstanding common stock and any new issuances of common stock. Upon completion of the initial public offering in December 1995, the Board of Directors designated Series A Junior Participating Preferred Stock and declared a dividend of one Right with respect to each share of common stock outstanding. Each Right will become exercisable to purchase from the Company, at an exercise price of $160.00, 1/1000th of a share of Series A Junior Participating Preferred Stock or that number of shares of common stock having a market value equal to two times the exercise price of the Right. The Rights generally become exercisable for the Series A Junior Participating Preferred Stock ten days following the announcement by any person or group of an intention to make a tender offer or exchange offer, the consummation of which would cause any person or group to become the owner of 15% or more of the outstanding common stock, and generally become exercisable for common stock ten days following the acquisition by any person or group of more than 15% of the outstanding common stock. The Rights will expire in the year 2005. The Rights Plan may discourage certain types of transactions involving an actual or potential change in control of the Company. Each 1/1000th of a share of Series A Junior Participating Preferred Stock will have one vote. Each share of Series A Junior Participating Preferred Stock will be entitled to a preferential quarterly dividend per share equal to the larger of (i) an amount equal to any dividend declared on the common stock and (ii) $.00025. Additionally, in the event of a liquidation, each 1/1000th of a share of the Series A Junior Participating Preferred Stock would be entitled to a preferential liquidation payment equal to $0.01 plus an amount equal to the amount that would be distributed with respect to each share of common stock. Preferred Stock. The Company is authorized to issue up to 1,000,000 shares of preferred stock, 200,000 of which is designated as Series A Junior Participating and 800,000 of which is undesignated. The Board of Directors is authorized to provide for the issuance of preferred stock in one or more classes or series and to fix 56 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 the number of shares constituting any such class or series, and the voting powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including the dividend rights, dividend rate, terms of redemption, redemption price or prices, conversion rights and liquidation preferences of the shares constituting any class or series, without any further vote or action by the shareholders of the Company. Note 7 -- Incentive/Stock Plans The Company currently has three stock incentive plans: the 1996 Incentive Plan (the "1996 Plan"), the 1988 Amended and Restated Incentive Plan (the "1988 Plan" and, together with the 1996 Plan, the "Incentive Plans") and the 1996 Nonemployee Director Stock Option Plan (the "Director Plan"). The Company has elected to follow APB No. 25 in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Financial Accounting Standards Board Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, compensation expense is required to be recognized when the exercise price of the Company's employee stock options is at a price below the market price of the underlying stock on the date of grant. Incentive Plans. The 1996 Plan and the 1988 Plan were adopted in October 1995 and June 1988, respectively. Under both plans, a committee of the Company's Board of Directors (the "Committee") approves the sale of shares and the granting of nonstatutory or incentive stock options. In addition, under the 1996 Plan, the committee may grant stock appreciation rights to employees and consultants of the Company. The purchase price for shares and the exercise price of options are determined by the Committee (although, the exercise price of incentive stock options may be no less than the fair market value of the common stock on the date of grant). The 1996 Plan replaced the 1988 Plan, effective as of January 1, 1996, with respect to all future stock and option awards by the Company to its employees and consultants. In general, options granted under the Incentive Plans vest over a four-year period. Unvested options are forfeited upon termination of the employee or consulting relationship. Vested options, if not exercised within a specified period of time following the termination of the employment or consulting relationship, are also forfeited. Options generally expire 10 years from the date of grant. Shares of common stock sold under the Incentive Plans are also generally subject to vesting. Unvested shares of common stock which are sold under the Incentive Plans may be repurchased by the Company, at its option, at the original sale price upon termination of the employment or consulting relationship of the holder with the Company. Options granted and shares sold to employees under the Incentive Plans generally become fully vested upon the occurrence of a change in control of the Company (as defined) if the holders thereof are terminated in connection with such change in control other than for cause (as defined). The maximum number of shares subject to the 1996 Plan is 1,100,000. At December 31, 1997, 245,812 shares remain available for future awards under the 1996 Plan. As of December 31, 1997, no stock appreciation rights had been awarded under the 1996 Plan. Director Plan. The Director Plan was adopted by the Board of Directors in March 1996 and approved by the stockholders in June 1996. In general, under the Director Plan, each nonemployee director of the Company 57 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 is automatically granted an option on the date that he or she first becomes a member of the Board of Directors. In addition, on June 1 of each year, commencing in 1997, each nonemployee director is granted an additional option to purchase 2,500 shares of common stock at an exercise price equal to the fair market value on the date of grant. The maximum number of shares subject to the Director Plan is 250,000. In general, options granted under the Director Plan become exercisable as to 1/24th of the total number of shares subject to the option for each calendar month elapsed after the date of the option grant. In the event of a change in control of the Company (as defined) or the death or disability of the optionee, any unvested portion of the options will become exercisable in full. Options granted under the Director Plan will expire upon the earliest to occur of the following: (a) the expiration of ten years from the date of grant of the option, (b) one year after the optionee ceases to be a director of the Company by reason of death or disability of the optionee, or (c) three months after the date the optionee ceases to be a director of the Company for any reason other than death or disability. Option activities under the Incentive Plans and the Director Plan are detailed in the following table: Weighted Average 1996 1988 Director Option Price Plan Plan Plan Per Share --------- -------- --------- ----------- Outstanding at January 1, 1995 -- 327,345 -- $ 1.77 Granted -- 36,328 -- $ 2.00 Exercised -- (11,125) -- $ 1.76 Forfeited -- (12,773) -- $ 1.77 --------- -------- --------- ----------- Outstanding at December 31, 1995 -- 339,775 -- $ 1.79 Granted 443,762 -- 17,500 $13.24 Exercised (2,500) (45,626) -- $ 1.77 Forfeited (25,500) (2,638) -- $11.26 --------- -------- --------- ----------- Outstanding at December 31, 1996 415,762 291,511 17,500 $ 8.55 Granted 503,751 -- 15,000 $12.99 Exercised (625) (17,855) -- $ 2.01 Forfeited (67,825) (8,354) (2,500) $12.88 --------- -------- --------- ----------- Outstanding at December 31, 1997 851,063 265,302 30,000 $10.47 ======== ======== ========= =========== Exercisable at December 31, 1997 71,511 221,212 15,000 $ 5.27 ======== ======== ========= =========== Exercisable at December 31, 1996 8,375 189,549 5,034 $ 2.72 ======== ======== ========= =========== Exercisable at December 31, 1995 -- 184,125 -- $ 1.76 ======== ======== ========= =========== 58 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 The following table discloses at December 31, 1997, for each of the following classes of options as determined by range of exercise price, the information regarding weighted-average exercise price and weighted-average remaining contractual life of each said class: Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Contractual Number Of Price of Number Of Price of Life Of Options Options Options Outstanding Outstanding Currently Currently Option Class Outstanding Options Options Exercisable Exercisable ------------ ----------- ------- ------- ----------- ----------- Prices ranging from $1.76 - $2.00 280,302 $ 1.81 5.0 years 224,962 $ 1.79 Prices ranging from $10.125 - $14.25 700,363 $12.53 9.5 years 29,486 $11.36 Prices ranging from $15.25 - $16.75 165,700 $16.44 8.4 years 53,275 $16.62 The following table discloses for each of the years ending December 31, 1997, 1996 and 1995, the number of options granted, the weighted-average fair values and the weighted-average exercise prices for those options with exercise prices that equaled or were less than the market price of the common stock on the date of grant. There were no options granted with an exercise price above the market price of the common stock on the date of grant. 1997 1996 1995 ----------------------------------- -------------------------------------- ---------------------------------- Number Number Number of Fair Exercise of Fair Exercise of Fair Exercise Options Value Price Options Value Price Options Value Price - --------------- ----------- ---------- ----------- ------------ ----------- ------------ ----------- ---------- ---------- Exercise price equals market price 518,751 $7.59 $12.99 433,262 $ 5.75 $13.92 -- -- -- Exercise price less than market price -- -- -- 28,000 $14.44 $2.98 36,328 $5.12 $2.00
During 1995, the Company sold shares of common stock under the 1988 Plan totaling 8,810 at $2.00 per share. At December 31, 1997, 1,442 of the shares sold under the 1988 Plan remain subject to repurchase at an aggregate price of approximately $3,000. Other Disclosures.Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had been accounting for its employee stock options under the fair value method of SFAS No. 123. The fair value for these options was estimated at the date of grant 59 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 using a Black-Scholes option pricing model with the following assumptions for 1997, 1996 and 1995, respectively: weighted average risk-free interest rates of 5.92%, 6.34% and 6.50%; no dividends; and a weighted-average expected life of the options of 5 years. Weighted average volatility factors of the expected market price of the Company's common stock of .623, .352 and .352, were used for 1997, 1996 and 1995, respectively. Options granted in 1995 were issued prior to the initial public offering. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma net loss disclosures, the estimated fair value of options granted subsequent to 1994 is amortized to expense over the options' vesting period. The Company's pro forma net loss information is as follows: 1997 1996 1995 ------------ ------------ ------------ Pro forma net loss $(6,113,000) $(2,847,000) $(3,381,000) Pro forma net loss per share $ (0.75) $ (0.38) $ (4.78) The pro forma information above is not likely to be representative of the effects on reported net loss for future years as options are generally granted each year and vest over several years and only include grants subsequent to 1994. For certain options granted during 1996, the Company has recorded pursuant to APB No. 25 approximately $388,000 of deferred compensation expense representing the difference between the exercise price thereof and the market value of the common stock as of the date of grant. This compensation expense is amortized over the vesting period of each option granted. Amortization of deferred compensation under the Incentive Plans amounted to approximately $124,000, $179,000 and $86,000 during 1997, 1996 and 1995, respectively. In addition, approximately $12,000, $121,000 and $1,000 of deferred compensation as it relates to the Incentive Plans was reversed during 1997, 1996 and 1995, respectively, due to the forfeiture of the unvested options. Note 8 -- Income Taxes The liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 60 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 At December 31, 1997 and 1996, the Company had net operating loss ("NOL") carryforwards of approximately $25,000,000 and $21,000,000, respectively, for Federal income tax purposes that will expire principally in the years 2002 through 2012. In addition, the Company had research and development credit carryforwards which will expire principally in 2002 through 2009. For financial reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to these carryforwards. Due to the limitations imposed by the Tax Reform Act of 1986, and as a result of significant changes in the Company's ownership in 1993 and 1997, the utilization of approximately $25,000,000 of net operating loss carryforwards is subject to annual limitation. The utilization of the research and development credits is similarly limited. A reconciliation of the Company's income tax expense (benefit) at U.S. federal statutory tax rates to recorded income tax expense (benefit) is as follows: 1997 1996 1995 ------------ ----------- ------------ Tax at U.S. statutory rates $(1,818,000) $ (895,000) $(1,145,000) State income taxes (318,000) (156,000) (200,000) Expiration of state NOL's 356,000 -- -- Other 108,000 8,000 37,000 Valuation allowance recorded 1,672,000 1,043,000 1,308,000 ------------ ----------- ------------ Recorded tax provision -- -- -- ============ =========== ============ Significant components of the Company's deferred tax assets as of December 31, 1997 and 1996, are as follows: 1997 1996 Deferred tax assets: ------------- ------------ Net operating loss carryforwards $ 9,752,000 $ 8,579,000 Research and development credit carryforwards 1,500,000 1,500,000 Book over tax amortization 770,000 271,000 ------------- ------------ Total deferred tax assets 12,022,000 10,350,000 Valuation allowance (12,022,000) (10,350,000) Deferred tax assets: ------------- ------------ Net deferred tax assets -- -- ============= ============ Note 9 -- Commitments The Company leases facilities under an agreement expiring on December 31, 2015. Rent expense for the years ended December 31, 1997, 1996 and 1995 approximated $703,000, $674,000, and $654,000, respectively, and included executory costs of $120,000, $93,000 and $80,000, respectively. In November 1996, a standby letter of credit for $580,000 was issued to the landlord as a security deposit (expires November 1998). The Company is to renew the letter of credit annually during the duration of the lease. As of December 31, 1997, a bank imposed restriction has been placed on $600,000 in cash held in the Company's investment account to secure the letter of credit. 61 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 As of December 31, 1997, future minimum annual payments under the lease are as follows: 1998 $ 644,000 1999 644,000 2000 1,155,000 2001 1,155,000 2002 1,155,000 Thereafter 19,225,000 ------------ Total $ 23,978,000 ============ The Company is party to two license agreements with major research universities. Under the terms of the agreements, the Company received worldwide nonexclusive licenses under patents issued in December 1980 and January 1991, which patents expire in 1997 through 2008. One of these agreements requires a $10,000 annual payment. The Company is also committed under these agreements to pay royalties on future net sales of products employing the technology or falling under claims of the patents covered by these agreements. The Company has an employment agreement with its Chairman, President and Chief Executive Officer which provides for severance payments of up to one year of base salary upon the occurrence of certain events, including early termination and termination upon a change in control, as defined. In addition to severance payments, under certain circumstances, the agreement calls for immediate vesting of any unvested shares of common stock and stock options. At December 31, 1997, the Company had entered into agreements with each of its Senior Vice President and Chief Financial Officer, Senior Vice President for Research and Development, Vice President and General Counsel and Vice President of Business Development which provide for severance payments in amounts equal to 50% of annual base salary, on substantially the same terms as stated above. In addition to severance, under certain circumstances, the agreements call for immediate vesting of any unvested shares of common stock and stock options. Note 10 -- Employee Benefit Plans The Company established a defined contribution employee retirement plan (the "Plan") effective January 1, 1990, conforming to Section 401(k) of the Internal Revenue Code ("IRC"). All eligible employees with six months service may elect to have a portion of their salary deducted and contributed to the Plan up to the maximum allowable limitations of the IRC. The Company matches 50% of each participant's contribution up to the first 5% of annual compensation (as defined) with a maximum employer contribution of 2.5% of a participant's compensation. The Company's matching portion, which amounted to approximately $107,000, 62 SYNAPTIC PHARMACEUTICAL CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1997 $103,000 and $42,300 for the years ended December 31, 1997, 1996 and 1995, respectively, vests over a six-year period. The Company currently provides medical, dental, long-term disability and life insurance benefits for its full-time employees. The Company does not presently provide any post-retirement health benefits. Note 11 -- Subsequent Events On January 12, 1998, the Company entered into a cooperation agreement with Grunenthal GmbH ("Grunenthal"). Under this agreement the parties agreed to work together in discovering and developing drugs for the treatment of pain. Synaptic will use its receptor-targeted drug design technology to identify compounds of interest and Grunenthal will use its expertise to evaluate the compounds in pain model systems and to conduct preclinical and clinical studies with promising compounds. The companies will each be responsible for their own research costs and equally share the development costs through Phase IIa clinical trials. Synaptic will retain manufacturing and marketing rights in the U.S., Canada and Mexico and share these rights in countries outside of Europe, South and Central America. On March 2,1998, the Company and Glaxo entered into the Glaxo Agreement pursuant to which the Company granted Glaxo (i) a nonexclusive license under the Company's alpha 1 adrenergic receptor patents to develop and sell alpha-1a selective compounds for therapeutic applications other than the treatment of BPH and (ii) until May 22, 1999, a nonexclusive license under its alpha 1 adrenergic receptor patents and its BPH use patents to develop but not to commercialize alpha-1a selective compounds for the treatment of BPH. In addition, the Company granted Glaxo an option to obtain a nonexclusive license under its alpha 1 adrenergic receptor patents and its BPH use patents to develop and commercialize alpha-1a selective compounds for the treatment of BPH. Such option is exercisable by Glaxo only until May 22, 1999, upon the payment to Synaptic of an additional amount. As consideration for the foregoing licenses and option, Glaxo made a $2,000,000 payment to Synaptic. Synaptic is also entitled to receive royalties on sales of all alpha-1a selective drugs sold by Glaxo so long as Synaptic has an issued patent relating to an alpha 1 adrenergic receptor subtype in at least one major market country, as well as royalties on sales of any alpha-1a antagonist for the treatment of BPH in any country in which Synaptic has an issued BPH use patent. 63 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 64 Part III Item 10. Directors and Executive Officers of the Registrant The information required by this item is incorporated herein by reference from the information under the captions "ELECTION OF DIRECTORS" and "COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained in the Proxy Statement. Item 11. Executive Compensation The information required by this item is incorporated herein by reference from the information under the caption "COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item is incorporated herein by reference from the information under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" contained in the Proxy Statement. Item 13. Certain Relationships and Related Transactions The information required by this item is incorporated herein by reference from the information under the caption "COMPENSATION AND OTHER INFORMATION CONCERNING OFFICERS, DIRECTORS AND CERTAIN STOCKHOLDERS" contained in the Proxy Statement. 65 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements Reference is made to the Index to Financial Statements under Item 8, Part II hereof. (2) Financial Statement Schedules The Financial Statement Schedules have been intentionally omitted either because they are not required or because the information has been included in the notes to the Financial Statements included in this Report on Form 10-K. (3) Exhibits Exhibit No. Description - ----------- -------------------------------------------------------------- 3.1(a) Amended and Restated Certificate of Incorporation of the Company, filed December 19, 1995 (incorporated by reference to Exhibit 3.1(a) to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1996, Commission File Number 0-27324) 3.1(b) Certificate of Designations of Series A Junior Participating Preferred Stock filed December 19, 1995 (incorporated by reference to Exhibit 3.1(b) to the Company's Quarterly Report on Form 10-Q filed for the quarter ended December 31, 1995, Commission File Number 0-27324) 3.1(c) Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 5, 1996 (incorporated by reference to Exhibit 3.1(c) to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1996, Commission File Number 0-27324) 3.2 Amended and Restated By-Laws of the Company, as amended on February 6, 1998 (filed herewith) 4.1 Specimen of Certificate of Common Stock of the Company (incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 4.2 Rights Agreement dated as of December 11, 1995, between the Company and Chase Mellon Shareholder Services, as Rights Agent (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1995, Commission File Number 0-27324) 66 *10.1 Research, Option and License Agreement dated as of January 25, 1991, between the Company and Eli Lilly and Company, as amended by Addendum dated as of January 1, 1995 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) *10.2 Research Collaboration and License Agreement dated as of November 30, 1993, between the Company and Merck & Co., Inc., as amended by Amendment No. 1 dated as of February 15, 1995, and as modified by the Letter Agreement dated August 25, 1995 (incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) *10.3 Research and License Agreement dated as of August 4, 1994, between the Company and Ciba-Geigy Limited (predecessor-in-interest of Novartis AG, the parent of Novartis Pharma AG) (incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.4 1988 Amended and Restated Incentive Plan of the Company (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.5 Form of Restricted Stock Purchase Agreement under the 1988 Amended and Restated Incentive Plan of the Company (incorporated by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.6 Form of Incentive Stock Option Agreement under the 1988 Amended and Restated Incentive Plan of the Company (incorporated by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.7 Form of Non-Qualified Stock Option Agreement under the 1988 Amended and Restated Incentive Plan of the Company (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 10.8 Third Amended and Restated Registration Rights Agreement dated as of January 19, 1993, as amended by Amendment No. 1 dated as of August 4, 1994 (incorporated by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 10.9 Form of Common Stock Purchase Warrant dated as of January 1993 (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 67 10.10 License Agreement dated June 3, 1991, between the Company and the Trustees of Columbia University in the City of New York (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) 10.11 Sublease Agreement dated October 31, 1991, between the Company and Playtex, Inc., as amended by the First Sublease Amendment effective as of August 15, 1994 (incorporated by reference to Exhibit 10.18 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.12 Employment Agreement dated as of February 14, 1994, between the Company and Robert I. Taber (incorporated by reference to Exhibit 10.21 to the Company's Registration Statement on Form S-1, as amended (File Number 33- 98366), which became effective on December 13, 1995) +10.13 Employment Agreement dated as of April 6, 1995, between the Company and Richard L. Weinshank (incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1, as amended (File Number 33- 98366), which became effective on December 13, 1995) 10.14 Form of Indemnification Agreement between the Company and each of its executive officers and directors (incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.15 1996 Incentive Plan of the Company (incorporated by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1995, Commission File No. 0-27324) +10.16 Incentive Stock Option Agreement dated October 1, 1993, between the Company and Kathleen P. Mullinix (incorporated by reference to Exhibit 10.28 to the Company's Registration Statement on Form S-1, as amended (File Number 33-98366), which became effective on December 13, 1995) +10.17 Incentive Stock Option Agreement dated February 14, 1994, between the Company and Robert I. Taber (incorporated by reference to Exhibit 10.29 to the Company's Registration Statement on Form S-1, as amended (File Number 33- 98366), which became effective on December 13, 1995) +10.18 Incentive Stock Option Agreement dated February 7, 1994, between the Company and Lisa L. Reiter (incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-1, as amended (File Number 33- 98366), which became effective on December 13, 1995) +10.19 Incentive Stock Option Agreement dated as of March 21, 1996, between the Company and Kathleen P. Mullinix (incorporated by reference to Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) 68 +10.20 Incentive Stock Option Agreement dated as of March 21, 1996, between the Company and Robert L. Spence (incorporated by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) +10.21 Incentive Stock Option Agreement dated as of March 21, 1996, between the Company and Lisa L. Reiter (incorporated by reference to Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) +10.22 Nonqualified Stock Option Agreement dated as of March 21, 1996, between the Company and Richard L. Weinshank (incorporated by reference to Exhibit 10.28 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) +10.23 Form of Incentive Stock Option Agreement under the 1996 Incentive Plan (incorporated by reference to Exhibit 10.29 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) +10.24 Form of Nonqualified Stock Option Agreement under the 1996 Incentive Plan (incorporated by reference to Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 1996, Commission File Number 0-27324) ***10.25 Research and License Agreement dated as of May 31, 1996, between the Company and Ciba-Geigy Limited (predecessor-in-interest of Novartis AG, parent of Novartis Pharma AG) (incorporated by reference to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q/A filed for the quarter ended June 30, 1996, Commission File Number 0-27324) ***10.26 Supplement No. 1 to Research and License Agreement dated as of August 4, 1994, between the Company and Ciba-Geigy Limited (predecessor-in-interest of Novartis AG, parent of Novartis Pharma AG) (incorporated by reference to Exhibit 10.32 to the Company's Quarterly Report on Form 10-Q/A filed for the quarter ended June 30, 1996, Commission File Number 0-27324) 10.27 1996 Nonemployee Director Stock Option Plan of the Company (incorporated by reference to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1996, Commission File Number 0-27324) 10.28 Form of Stock Option Agreement under the 1996 Nonemployee Director Stock Option Plan of the Company (incorporated by reference to Exhibit A attached to Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1996, Commission File Number 0-27324) **10.29 Addendum No. 2 to Research, Option and License Agreement dated as of October 31, 1996, between the Company and Eli Lilly and Company (incorporated by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1996, Commission File No. 0-27324) 69 **10.30 Amendment No.2 to Research Collaboration and License Agreement dated as of October 9, 1996, between the Company and Merck & Co., Inc. (incorporated by reference to Exhibit 10.36 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1996, Commission File No. 0-27324) +10.31 Incentive Stock Option Agreement dated as of December 13, 1996, between the Company and Kathleen P. Mullinix (incorporated by reference to Exhibit 10.37 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1996, Commission File No. 0-27324) +10.32 Form of Incentive Stock Option Agreement dated as of December 13, 1996, entered into between the Company and each of Robert L. Spence, Robert I. Taber, Lisa L. Reiter and Richard L. Weinshank (incorporated by reference to Exhibit 10.38 to the Company's Annual Report on Form 10-K filed for the fiscal year ended December 31, 1996, Commission File No. 0-27324) ***10.33 Collaborative Research and License Agreement dated as of July 28, 1997, between the Company and the Warner-Lambert Company (incorporated by reference to Exhibit 10.39 to the Company's Quarterly Report on Form 10-Q filed for the quarter ended September 30, 1997, Commission File Number 0- 27324) +10.34 Executive Employment Agreement effective as of October 1,1997, between the Company and Dr.Kathleen P.Mullinix(filed herewith) 10.35 Lease Agreement dated November 19, 1997, between the Company and Century Associates, which becomes effective January 1, 1998 (filed herewith) 10.36 Amendment No.3 to Research Collaboration and License Agreement dated as of December 1, 1997, between the Company and Merck & Co., Inc. (filed herewith) +10.37 Amended and Restated Employment Agreement dated as of January 1, 1998, between the Company and Robert L. Spence (filed herewith) **10.38 Cooperation Agreement dated as of January 12,1998, between the Company and Grunenthal GmbH (filed herewith) +10.39 Amended and Restated Employment Agreement dated as of February 7, 1998, between the Company and Lisa L. Reiter (filed herewith) 10.40 Amendment No.4 to Research Collaboration and License Agreement dated as of March 2,1998, between the Company and Merck & Co., Inc. (filed herewith) **10.41 Option and License Agreement dated as of March 2,1998, between the Company and Glaxo Group Limited (filed herewith) 23.1 Consent of Independent Auditors, Ernst & Young LLP 24 Powers of Attorney 70 27 Financial Data Schedule - ----------------- * Portions of this Exhibit were omitted and confidential treatment thereof has been granted by the Secretary of the Securities and Exchange Commission in response to the Registrant's Application Requesting Confidential Treatment under Rule 406 under the Securities Act of 1933, as amended. ** Portions of this Exhibit have been omitted and filed separately with the Secretary of the Securities and Exchange Commission pursuant to the Registrant's Application Requesting Confidential Treatment under Rule 24b-2 under the Securities Exchange Act of 1934, as amended. *** Portions of this Exhibit were omitted and confidential treatment thereof has been granted by the Secretary of the Securities and Exchange Commission in response to the Registrant's Application Requesting Confidential Treatment under Rule 246-2 under the Securities Act of 1933, as amended. + Management contracts and compensatory plans or arrangements (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Registrant during the fourth quarter of the fiscal year ended December 31, 1997. Supplemental Information Copies of the Registrant's Proxy Statement and copies of the form of proxy to be used at the Annual Meeting of Stockholders to be held on May 12, 1998, will be furnished to the Securities and Exchange Commission at the time they are distributed to the Registrant's stockholders. 71 SIGNATURE PAGE 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. SYNAPTIC PHARMACEUTICAL CORPORATION Date: March 27, 1998 By:/s/ Kathleen P. Mullinix ----------------------------------- Name: Kathleen P. Mullinix Title: Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated. Signature Title Date /s/ Kathleen P. Mullinix, Ph.D. Chairman, President and Chief Executive Officer March 27, 1998 - ------------------------------- Kathleen P. Mullinix /s/ Robert L. Spence Senior Vice President and - ------------------------------- Chief Financial Officer March 27, 1998 Robert L. Spence * Director March 27, 1998 - ------------------------------- Jonathan J. Fleming * Director March 27, 1998 - ------------------------------- Zola P. Horovitz, Ph.D. * Director March 27, 1998 - ------------------------------- Eric R. Kandel, M.D. * Director March 27, 1998 - ------------------------------- John E. Lyons * Director March 27, 1998 - ------------------------------- Sandra Panem * Director March 27, 1998 - ------------------------------- Alison Taunton-Rigby, Ph.D. * By:/s/ Kathleen P. Mullinix ----------------------------------- Name: Kathleen P. Mullinix, Ph.D. Title: Attorney-in-Fact 72 EX-3.2 2 EXHIBIT 3.2 ----------- Adopted March 1992 as Amended Through February 6, 1998 SYNAPTIC PHARMACEUTICAL CORPORATION (the "Corporation") Amended and Restated By-laws ARTICLE I OFFICES Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The Corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. All meetings of the stockholders for the election of directors shall be held in the City of New York, State of New York, at such place as may be fixed from time to time by the board of directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 1987, shall be held on the first Thursday of May if not a legal holiday, and if a legal holiday, then on the next secular day following, at 11:00 A.M., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which they shall elect by a plurality vote a board of directors, and transact such other business as may properly be brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the -1- stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the chairman of the board or the president and shall be called by the chairman of the board or the president or secretary at the request in writing of a majority of the members of the board of directors. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given, not less than ten nor more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the shares of capital stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of law or of the certificate of incorporation, a different vote is required, in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy -2- for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on or after three years from its date, unless the proxy provides for a longer period. Section 11. Written notice of the intent by any stockholder to make a nomination of any person for election as a director at a meeting of stockholders must be received by the secretary of the Corporation not later than (i) with respect to an election to be held at an annual meeting of stockholders, ninety days in advance of the annual meeting and (ii) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the seventh day following the day on which notice of such meeting is first given to stockholders. The notice shall contain: (A) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (B) a representation that the stockholder is a holder of record of shares of stock having power to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice: (C) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (D) the citizenship of each nominee proposed by such stockholder; (E) the information that would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the board of directors of the Corporation; and (F) the written consent of each nominee to serve as a director of the Corporation if so elected. ARTICLE III DIRECTORS GENERAL Section 1. The number of directors constituting the whole board shall be seven. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article or as otherwise provided in the Corporation's certificate of incorporation, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders.* Section 2. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by law. Section 3. The business of the Corporation shall be managed by or under the direction of its board of directors which may exercise all such powers of the Corporation and do all such lawful - -------- * This Section was amended by the Board of Directors on February 6, 1998, to read as set forth herein. -3- acts and things as are not by law or by the certificate of incorporation or by these By-laws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 4. The board of directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 5. The first meeting of each newly elected board of directors may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. Section 6. Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board of directors. Section 7. Special meetings of the board may be called by the president on twenty-four hours' notice to each director, either personally, by mail, by telegram or by telecopier. Special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors. Section 8. At all meetings of the board of directors a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by law or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 9. Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. Section 10. Unless otherwise restricted by the certificate of incorporation or these By-laws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. -4- COMMITTEES OF DIRECTORS Section 11. The board of directors may, be resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The board of directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the Corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the By-laws of the Corporation; and, unless the resolution or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. COMPENSATION OF DIRECTORS Section 12. Unless otherwise restricted by the certificate of incorporation or these By-laws, the board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS Section 13. Unless otherwise restricted by the certificate of incorporation or By-laws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. ARTICLE IV NOTICES Section 1. Whenever, under the provisions of law or of the certificate of incorporation or of these By-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, -5- addressed to such director or stockholder, at his address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by hand, by telegram or by telecopy. Section 2. Whenever any notice is required to be given under the provisions of law or of the certificate of incorporation or of these By-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS Section 1. The principal officers of the Corporation shall be chosen by the board of directors and shall be a president, a vice-president, a secretary and a treasurer. The board of directors may also choose additional vice-presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these By-laws otherwise provide. Section 2. The board of directors at its first meeting after each annual meeting of stockholders shall choose a president, one or more vice-presidents, a secretary and a treasurer. Section 3. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 4. The salaries of all principal officers of the Corporation shall be fixed by the board of directors. Section 5. The officers of the Corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the Corporation shall be filled by the board of directors. THE PRESIDENT Section 6. The president shall be the chief executive officer of the Corporation, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the board of directors are carried into effect. The president shall preside at the meetings of the stockholders and the board of directors. He shall have such other powers and perform such other duties as are provided in these By-laws and, in addition thereto, as the board of directors may from time to time determine. -6- Section 7. The president shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the Corporation. THE VICE-PRESIDENTS Section 8. In the absence of the president or in the event of his inability or refusal to act, the vice-president (or in the event there be more than one vice-president, the vice-presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting shall have all the powers of and be subject to all the restrictions upon the president. The vice-presidents shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARY Section 9. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the Corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his signature. Section 10. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURERS Section 11. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the board of directors. Section 12. The treasurer shall disburse the funds of the Corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so -7- requires, an account of all his transactions as treasurer and of the financial condition of the Corporation. Section 13. If required by the board of directors, the treasurer shall give the Corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the Corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the Corporation. Section 14. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI CERTIFICATE OF STOCK Section 1. Every holder of shares of stock of the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the chairman of the board of directors, or the president or a vice-president and the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Section 2. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The board of directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. -8- TRANSFERS OF STOCK Section 4. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall be not more than sixty nor less than ten days before the date of such meetings, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE VII GENERAL PROVISIONS DIVIDENDS Section 1. Dividends upon the capital stock of the Corporation subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, deem proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such -9- other purpose as the directors shall deem conducive to the interests of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. ANNUAL STATEMENT Section 3. The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the Corporation. CHECKS Section 4. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. FISCAL YEAR Section 5. The fiscal year of the Corporation shall be fixed by resolution of the board of directors. SEAL Section 6. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII AMENDMENTS Section 1. Except as otherwise provided in the certificate of incorporation, these Bylaws, or any of them, may be altered, amended or repealed, or new By-laws may be made, at any annual or special meeting, by the stockholders having at least 67% of the total voting power of the Corporation, or at any regular or special meeting of the Board of Directors, by vote of a majority of the whole Board. By-laws made, altered or amended by the Board shall be subject to alteration, amendment or repeal by the stockholders having at least 67% of the total voting power of the Corporation. ARTICLE IX INDEMNIFICATION Section 1. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was or has agreed to become a director, officer, -10- employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against costs, charges, expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was or has agreed to become a director, officer, employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or committed in such capacity, against costs, charges and expenses (including attorney's fees) actually and reasonably incurred by him or on his behalf in connection with the defense or settlement of such action or suit and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper. Section 3. Expenses incurred in connection with a civil, criminal, administrative or investigative action, suit or proceeding, or threat thereof, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article. Section 4. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article IX shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any By-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. -11- EX-10.34 3 EXHIBIT 10.34 ------------- EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement (the "Agreement") is entered into effective as of October 1, 1997 (the "Effective Date"), between Synaptic Pharmaceutical Corporation (the "Company"), a Delaware corporation, and Dr. Kathleen P. Mullinix (the "Executive"). ARTICLE I EMPLOYMENT OF EXECUTIVE 1.1. Employment. Subject to the terms and conditions of this Agreement, the Company agrees to employ Executive in a full time capacity to serve as the President and Chief Executive Officer of the Company and to perform such specific duties as may reasonably be assigned to Executive from time to time by the Board of Directors of the Company for the period commencing on the Effective Date, and terminating four years from such date, unless earlier terminated as herein provided. Executive hereby accepts such employment for the term hereof. 1.2. No Conflicting Commitments. During the period of Executive's full time employment with the Company, Executive will not undertake any commitments which might impair Executive's performance of her duties as a full time employee of the Company. ARTICLE II COMPENSATION For all services to be rendered by Executive to the Company pursuant to this Agreement, the Company shall pay to Executive the compensation and provide for Executive the benefits set forth below: 2.1. Base Salary. Until January 1, 1998, the Company shall pay to Executive a base salary of $250,000 per annum, prorated and payable in substantially equal bi-monthly installments. Executive's base salary may be increased from time to time thereafter by the Board of Directors of the Company, in its discretion. -1- 2.2. Bonuses. Executive shall be eligible for a cash bonus in an amount of $100,000 for the calendar year ending December 31, 1997, subject to the assessment by the Compensation Committee of the Board of Directors of the achievement of the previously agreed to criteria. Such cash bonus, if earned, will be payable to Executive within forty-five (45) days after the end of such calendar year. Additional bonuses may be approved by the Board of Directors of the Company, in its discretion. 2.3. Fringe Benefits. In addition to Executive's base salary and bonuses, the Company shall provide Executive and Executive's dependents medical insurance and such other benefits as are generally made available by the Company to its other full time executive employees. 2.4. Participation in Future Equity Incentive Plans. Executive shall be entitled to participate, to the extent and in the manner determined by the Board of Directors of the Company or the Compensation Committee thereof, as appropriate, in its absolute discretion, in any stock option, stock purchase or the equity incentive plans established by the Company. 2.5. Reimbursement of Expenses. The Company shall reimburse Executive for reasonable business expenses incurred in the performance of her duties hereunder. ARTICLE III EARLY TERMINATION 3.1. Early Termination. Executive's employment hereunder shall terminate prior to the expiration of the term of this Agreement upon the occurrence of any of the following events: 3.1.1. Executive's death or legal incapacity; or 3.1.2. The termination of Executive's employment hereunder by the Board of Directors of the Company, at its option, to be exercised by written notice to Executive, upon Executive's other incapacity or inability to further perform services as contemplated herein for a period aggregating 90 days or more within any six-month period because Executive's physical or mental health shall have become impaired so as to make it impossible or impractical to perform the duties and responsibilities contemplated hereunder; or 3.1.3. The termination of Executive's employment with Cause (as defined below) by the Board of Directors of the Company, at its option, to be exercised by written notice to Executive. As used in this Article III, termination by the Company of Executive's employment for "Cause" shall mean termination upon (i) the willful and continued failure by Executive to substantially perform Executive's duties with the Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is -2- delivered to Executive by the Board of Directors of the Company, which specifically and in reasonable detail identifies the manner in which the Board of Directors believes that Executive has not substantially performed Executive's duties, (ii) the willful engaging by Executive in misconduct which is materially injurious to the Company, monetarily or otherwise or (iii) Executive's conviction of a felony; or 3.1.4. The termination of Executive's employment hereunder by the Board of Directors of the Company, at its option, without Cause, to be exercised by delivery of 90 days prior written notice from the Company to Executive; or 3.1.5. The termination of Executive's employment hereunder by Executive other than for Good Reason (as defined below), to be exercised by delivery of 90 days prior written notice from Executive to the Company; or 3.1.6. The termination of Executive's employment hereunder by Executive for Good Reason, to be exercised by delivery of 90 days prior written notice from Executive to the Company. As used in this Article III, termination by Executive of Executive's employment for "Good Reason" shall mean (a) termination by Executive within 180 days following and based on any of the following events if any such event occurs without Executive's prior written consent: (i) the assignment to Executive of any duties inconsistent with Executive's position, duties, responsibilities and status within the Company or any change in Executive's reporting responsibilities, titles or offices which constitutes a demotion; (ii) any reduction by the Company in Executive's base salary or any termination of Executive's participation in any bonus plan as in effect on the Effective Date or as the same may be increased or in effect from time to time; (iii) the Company's requiring Executive to be based anywhere other than within 30 miles of Executive's present office location, except for required travel on the Company's business to an extent substantially consistent with Executive's present business travel obligations; and (iv) any material breach of the provisions of this Agreement by the Company (including those outlined above), which is not cured within 30 days after written notice from Executive to the Company identifying such breach and stating that it constitutes "Good Reason" under this Article III or which is not commenced to be cured by reasonable measures within such period if a full cure is not possible within 30 days; or -3- (b) termination by Executive with the express prior written consent of the Board of Directors of the Company. 3.2. Adjustments Upon Early Termination. Subject to Section 3.3, notwithstanding any other provision in this Agreement or in any stock option agreement or restricted stock purchase agreement between Executive and the Company to the contrary: 3.2.1. If Executive's employment with the Company terminates pursuant to Section 3.1.1 or 3.1.2., (a) all payments and benefits provided to Executive under this Agreement shall cease as of the date of termination of employment and (b) all stock options and restricted stock in the Company held by Executive on that date shall become immediately exercisable or vest, as the case may be, on that date, and all stock options shall continue to be exercisable for 120 days from such date or for such longer period as their terms may provide. 3.2.2. If Executive's employment with the Company terminates pursuant to Section 3.1.3, (a) all payments and benefits provided to Executive under this Agreement shall immediately cease to accrue as of the date of termination of employment and (b) all further vesting of all stock options and restricted stock in the Company held by Executive on that date shall immediately cease as of the date of termination of employment and thereafter such stock options shall be exercisable and such restricted stock shall be subject to repurchase by the Company in accordance with their respective terms. 3.2.3. If Executive's employment with the Company terminates pursuant to Section 3.1.4 or 3.1.6, (a) all payments and benefits provided to Executive under this Agreement shall continue for 12 months after the date of termination of employment and (b) all stock options and restricted stock in the Company held by Executive on the date of termination of employment shall become immediately exercisable or vest, as the case may be, on that date, and all stock options shall continue to be exercisable for 120 days from such date or for such longer period as their terms may provide. 3.2.4. If Executive's employment with the Company terminates pursuant to Section 3.1.5., (a) all payments and benefits provided to Executive under this Agreement shall continue for 9 months after the date of termination of employment and (b) all further vesting on all stock options and restricted stock in the Company held by Executive on that date shall immediately cease as of the date of termination of employment and thereafter such stock options shall be exercisable and such restricted stock shall be subject to repurchase by the Company in accordance with their respective terms. This Section 3.2 is intended to override inconsistent provisions of any other option or stock purchase agreement entered into prior to the date of actual execution of this Agreement. -4- 3.3. Special Rules Regarding Continuation of Benefits. Notwithstanding anything contained in Section 3.2 to the contrary, the Company shall not be required upon Executive's termination of employment to continue any benefits under any plan, program or arrangement of the Company unless Executive's continued participation therein is possible under the general terms and provisions of such plan, program or arrangement. In the event that Executive's participation in any such plan, program or arrangement is barred or in the event any medical condition covered by any plan, program or arrangement of the Company is not covered by a plan, program or arrangement of a new employer, the Company shall arrange to provide Executive with benefits substantially similar to those which Executive would have been entitled to receive under such plan, program or arrangement pursuant to the provisions of Section 3.2, upon Executive's request and at Executive's expense. 3.4. No Duty to Mitigate. Executive shall be required to mitigate the amount of any payment provided for in Section 3.2.4 by seeking other employment, and any payment or benefit provided for in Section 3.2.4 shall be reduced by compensation earned by Executive as the result of employment by another employer after the date of termination. Executive shall not be required to mitigate the amount of any payment provided for in Section 3.2.3 by seeking other employment or otherwise, and no payment or benefit provided for in Section 3.2.3 shall be reduced by compensation earned by Executive as the result of employment by another employer after the date of termination; provided, however, that in the event Executive commences employment with a new employer at any time during which she is entitled to receive payments and/or benefits pursuant to Section 3.2.3, then (a) the aggregate amount of any remaining payments which Executive would otherwise be entitled to receive pursuant to any such provision shall be paid to Executive in a single lump sum within two weeks following the Company's receipt of notice from Executive of her commencement of such employment and (b) all benefits which Executive would otherwise be entitled to receive pursuant to any such provision shall cease as of the date of her commencement of such employment or, in the case of life insurance, medical, health and accident insurance, and disability plans, programs or arrangements, as soon thereafter as Executive becomes eligible to participate in such plans, programs or arrangements of her new employer. ARTICLE IV CHANGE OF CONTROL OF THE COMPANY 4.1. Change in Control Defined. For purposes of this Agreement, a "change in control of the Company" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act") if the Company were at that time subject to such reporting requirements of the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities; or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of -5- Directors of the Company cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors at the beginning of the period. 4.2. Termination of Employment Following Change in Control. If any of the events defined in Section 4.1. to constitute a change in control of the Company shall have occurred, Executive shall be entitled to the benefits provided in Section 4.3. hereof upon the subsequent termination of Executive's employment unless such termination is (a) because of Executive's death or Retirement, (b) by the Company for Cause or (c) by Executive other than for Good Reason. 4.2.1. Retirement. Termination by the Company of Executive's employment based on "Retirement" shall mean termination in accordance with the Company's retirement policy, including early retirement, generally applicable to its salaried employees. 4.2.2. Cause. As used in this Article IV, termination by the Company of Executive's employment for "Cause" shall mean termination upon (i) the willful and continued failure by Executive to substantially perform Executive's duties with the Company (other than any such failure resulting from Executive's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to Executive by the Board of Directors of the Company, which specifically and in reasonable detail identifies the manner in which the Board of Directors believes that Executive has not substantially performed Executive's duties, (ii) the willful engaging by Executive in misconduct which is materially injurious to the Company, monetarily or otherwise or (iii) Executive's conviction of a felony. 4.2.3. Good Reason. As used in this Article IV, termination by Executive of Executive's employment for "Good Reason" shall mean termination based on: (i) subsequent to a change in control of the Company, and without Executive's express written consent, the assignment to Executive of any duties inconsistent with Executive's position, duties, responsibilities and status within the Company immediately prior to a change in control, or a change in Executive's reporting responsibilities, titles or offices as in effect immediately prior to a change in control, or any removal of Executive from or any failure to re-elect Executive to any of such positions or to the Board of Directors of the Company except in connection with the termination of Executive's employment for Cause or Retirement or as a result of Executive's death or by Executive other than for Good Reason; (ii) subsequent to a change in control of the Company, a reduction by the Company in Executive's base salary or a termination of Executive's participation in any bonus plan as in effect on the date hereof or as the same may be increased or in effect from time to time; -6- (iii) subsequent to a change in control of the Company, and without Executive's express written consent, the Company's requiring Executive to be based anywhere other than within 30 miles of Executive's present office location, except for required travel on the Company's business to an extent substantially consistent with Executive's present business travel obligations; (iv) subsequent to a change in control of the Company, the failure by the Company to continue in effect, or to continue Executive's participation in, any benefit or compensation plan, life insurance plan, health-and-accident plan or disability plan in which Executive is participating at the time of a change in control of the Company (or plans providing Executive with substantially similar benefits), the taking of any action by the Company which would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such plans or deprive Executive of any material fringe benefit enjoyed by Executive at the time of the change in control, or the failure by the Company to provide Executive with the number of paid vacation days to which Executive is then entitled in accordance with the Company's normal vacation policy in effect on the date hereof; (v) subsequent to a change in control of the Company, the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated in Section 8.4 hereof; or (vi) subsequent to a change in control of the Company, any material breach of this Agreement by the Company (including those outlined above), which is not cured within 30 days after written notice from Executive to the Company identifying such breach and stating that it constitutes "Good Reason" hereunder or is not commenced to be cured by reasonable measures within such period if a full cure is not possible within 30 days. 4.2.4. Notice of Termination. Any purported termination by the Company pursuant to Section 4.2.1. or 4.2.2. or by Executive pursuant to Section 4.2.1. or 4.2.3. shall be communicated by written Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. 4.2.5. Date of Termination. "Date of Termination" shall mean (i) if Executive's employment is terminated for Cause, the date specified in the Notice of Termination, and (ii) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given; provided that if within 30 days after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of -7- Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction entered upon such arbitration award (the time for appeal therefrom having expired and no appeal having been perfected). 4.3. Certain Benefits Upon Termination. If, after a change in control of the Company shall have occurred, as defined in Section 4.1. above, Executive's employment by the Company shall be terminated (a) by the Company other than for Cause or Retirement or (b) by Executive for Good Reason, then Executive shall be entitled to the benefits provided below: 4.3.1. Payment of Back Salary. The Company shall pay Executive Executive's full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given plus credit for any vacation earned but not taken and the amount, if any, of any bonus for a past fiscal year which has not yet been awarded or paid to Executive under the Company's bonus plans; 4.3.2. Payment of Future Salary. Until the end of the 12th calendar month following the Date of Termination, the Company shall continue to pay Executive monthly Executive's base salary in effect on the Date of Termination; 4.3.3. Continuation of Benefits. The Company shall maintain in full force and effect, for Executive's continued benefit until the earlier of (a) the end of the 12th calendar month following the Date of Termination or (b) Executive's commencement of full time employment with a new employer, all life insurance, medical, health and accident insurance, and disability plans, programs or arrangements in which Executive was entitled to participate immediately prior to the Date of Termination, provided that Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that Executive's participation in any such plan or program is barred or in the event any medical condition covered by any plan or program of the Company is not covered by the plan or program of a new employer, the Company shall arrange to provide Executive with benefits substantially similar to those which Executive was entitled to receive under such plans and programs, at Executive's expense; 4.3.4. Vesting of Stock Options, Etc. All stock options, stock bonus awards and restricted stock grants relating to securities of the Company held by Executive on the Date of Termination shall vest or become exercisable, as the case may be, on the Date of Termination, notwithstanding any provisions in any such stock options, stock bonus awards or restricted stock grants to the contrary, and all rights to exercise stock options shall remain exercisable by Executive for a period of not less than 120 days after the Date of Termination. If the benefits payable hereunder, together with other payments in the nature of compensation to or with respect to Executive, would otherwise be subject to the excise taxes imposed under Section 280G of the Internal Revenue Code of 1986, as amended ("Code"), and if the net value -8- of such benefits and payments in the nature of compensation, after reduction for such taxes, is less than the aggregate value of the benefits and payments in the nature of compensation determined as if such amounts had been $1.00 less than a maximum amount which could be paid without imposition of excise taxes, then the benefits payable hereunder shall be reduced to highest amount such that such excise taxes shall not be imposed with respect to the benefits or the other payments in the nature of compensation. It is the intention of this provision to reduce benefits payable hereunder only if the Executive would be in a superior position taking into account such excise taxes than if such payments were made, and such reduction shall, in any event, be the least amount in order that the Executive be better off with the reduction than before such reduction. The calculation of the value of benefits payable hereunder and other payments in the nature of compensation, and the implications of the excise tax rules of Section 280G of the Code, shall be determined by the Company in good faith based on written advice of a national accounting firm. 4.4. No Duty to Mitigate. Executive shall not be required to mitigate the amount of any payment provided for in Section 4.3 by seeking other employment or otherwise, and no payment or benefit provided for in Section 4.3. shall be reduced by compensation earned by Executive as the result of employment by another employer after the Date of Termination, or otherwise. ARTICLE V COVENANTS AGAINST COMPETITION WITH THE COMPANY 5.1. Non-solicitation of Employees. Executive agrees that during the term of Executive's employment with the Company and for a period of two years after the termination of Executive's employment with the Company for any reason, Executive shall not directly or indirectly recruit, solicit or otherwise induce or attempt to induce any employees of the Company to leave the employment of the Company. 5.2. Non-competition. Executive agrees that during the term of Executive's employment with the Company and for a period of two years after the termination of Executive's employment with the Company for any reason, Executive shall not directly or indirectly, except as a passive investor in publicly held companies and except for investments held at the date hereof, engage in competition with the Company or any of its subsidiaries, or own or control any interest in, or act as director, officer or employee of, or consultant to, any firm, corporation or institution directly or indirectly engaged in competition with the Company or any of its subsidiaries; provided, however, that such period shall be reduced to six months if the Executive was terminated without Cause by the Company or by the Executive for Good Reason after a change of control. -9- ARTICLE VI CONFIDENTIAL INFORMATION 6.1. Maintenance of Confidentiality. Executive agrees that Executive will not (except as required in the course of employment with the Company), both during the term of Executive's employment with the Company and thereafter, communicate or divulge to, or use for Executive's own benefit or the benefit of any other person, firm or organization, any confidential and proprietary information of the Company and its subsidiaries. 6.2. Ownership of Confidential Information. Records, files, memoranda, reports, price lists, customer lists, drawings, plans, sketches and documents and the like, relating to the business of the Company, which Executive shall use or prepare or come into contact within the course of, in connection with, or as a result of employment with the Company, shall remain the Company's sole and exclusive property. ARTICLE VII OWNERSHIP OF INVENTIONS 7.1. "Invention" Defined. As used in this Agreement, "Invention" means any invention, discovery or innovation with regard to chemistry, enzymology, biotechnology, genetic engineering or recombinant DNA technology, whether or not patentable, made, conceived, or first actually reduced to practice by Executive, alone or jointly with others, in the course of, in connection with, or as a result of service as an executive of the Company, including any art, method, process, machine, manufacture, design or composition of matter, or any improvement thereof, or any variety of plant or microorganism. 7.2. Disclosure of Inventions. Each Invention made, conceived or first actually reduced to practice by Executive, whether alone or jointly with others, during the term of Executive's employment with the Company and each Invention made, conceived or first actually reduced to practice by Executive, whether alone or jointly with others, within one year after the termination of Executive's employment with the Company which relates in any way to work performed for the Company during the term of Executive's employment, shall be promptly disclosed in writing to the President of the Company (or such officer of the Company as the President or Board of Directors may designate). Such report shall be sufficiently complete in technical detail and appropriately illustrated by sketch or diagram to convey to one skilled in the art of which the invention pertains, a clear understanding of the nature, purpose, operations, and, to the extent known, the physical, chemical, biological or electrical characteristics of the Invention. 7.3. Ownership of Inventions. Each Invention, as herein defined, shall be the sole and exclusive property of the Company. -10- 7.4. Assignment of Title. Executive agrees to execute an assignment to the Company or its nominee of Executive's entire right, title and interest in and to any Invention, without compensation beyond that provided in this Agreement. Executive further agrees, upon the request of the Company and at its expense, that Executive will execute any other instrument and document necessary or desirable in applying for and obtaining patents in the United States and in any foreign country with respect to any Invention. Executive further agrees, whether or not Executive is then an employee of the Company, to cooperate to the extent and in the manner reasonably requested by the Company in the prosecution or defense of any claim involving a patent covering any Invention or any litigation or other claim or proceeding involving any Invention covered by this Agreement, but all expenses thereof shall be paid by the Company. ARTICLE VIII MISCELLANEOUS 8.1. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 8.2. Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective lawful successors and assigns and upon Executive's heirs and personal representatives. 8.3. Assignment. Except as otherwise provided in Section 8.4, neither this Agreement nor any rights or obligations hereunder shall be assignable by either party hereto without the prior written consent of the other party. 8.4. Obligation of the Company's Successors. Any successor to substantially all of the Company's assets and business, whether by merger, consolidation, purchase of assets or otherwise, shall succeed to the rights and obligations of the Company hereunder. The Company will require any such successor, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to compensation from the Company or its successor in the same amount and on the same terms as Executive would be entitled hereunder if Executive had terminated Executive's employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 8.5. Notices. All notices, requests, demands and other communications to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given if -11- delivered by hand or mailed by registered or certified mail, return receipt requested, postage prepaid, as follows: If to the Company, to: Synaptic Pharmaceutical Corporation 215 College Road Paramus, New Jersey 07652 Attention: President If to Executive, to: Dr. Kathleen P. Mullinix 975 Park Avenue, Apt. 2D New York, New York 10028 or such other address as either party hereto shall have designated by notice in writing to the other party. 8.6. Amendments. This Agreement may be amended, supplemented or otherwise modified at any time, but only by an instrument in writing signed by the parties hereto. 8.7. Governing Law. This Agreement and the legal relations among the parties hereto shall be governed by and construed in accordance with the laws of New Jersey. 8.8. Severability. In case any provision hereof shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision had not been included herein. If any provision hereof shall, for any reason, be held by a court to be excessively broad as to duration, geographical scope, activity or subject matter, it shall be construed by limiting and reducing it to make it enforceable to the extent compatible with applicable law as then in effect. 8.9. Equitable Relief. Articles 5, 6, and 7 constitute independent covenants, which shall be enforceable notwithstanding any right or remedy that the Corporation may have under any other provision of this Agreement or otherwise. The parties agree that the remedy at law for any breach of any such section will be inadequate and the Company, in addition to all other remedies, shall be entitled to a preliminary injunction to restrain such breach prior to the trial of any issue and to temporary and permanent injunction relief without the necessity of proving damages. 8.10. Survival. Articles 5, 6 and 7 shall survive the termination of this Agreement for the periods of time indicated therein or indefinitely if no period is indicated. -12- IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as of the date first above written. SYNAPTIC PHARMACEUTICAL CORPORATION By: /s/ Lisa L. Reiter ----------------------- Name: Lisa L. Reiter Title: VP, General Counsel & Secretary EXECUTIVE /s/ Kathleen P. Mullinix ------------------------ Kathleen P. Mullinix -13- EX-10.35 4 EXHIBIT 10.35 ------------- AGREEMENT BETWEEN CENTURY ASSOCIATE ("CENTURY") AND SYNAPTIC PHARMACEUTICAL CORPORATION THIS AGREEMENT is made and entered into this 19th day of November, 1997 (but shall be effective as of the Effective Date, as herein defined, for all purposes), by and between Century Associates, a New Jersey partnership, having an address c/o Sun Chemical, 222 Bridge Plaza South, Fort Lee, New Jersey 07024 (hereinafter sometimes referred to as "Century" and sometimes referred to as "Sublessor") and Synaptic Pharmaceutical Corporation, a Delaware corporation, having an address at 215 College Road, Paramus, New Jersey (hereinafter sometimes referred to as "Synaptic" and sometimes referred to as "Sublessee"). WITNESSETH: WHEREAS, Century is the fee simple owner of the real property located at 215 College Road, Paramus, New Jersey 07652, and more particularly described in Schedule A attached hereto and made a part hereof ("Land"), together with the buildings and other improvements located thereon ("Improvements") (such Land and Improvements, collectively, "Paramus Facility"); WHEREAS, Century is also the Landlord under certain lease agreements and amendments thereto listed on Schedule B attached hereto and made a part hereof (collectively, "Overlease"); WHEREAS, International Playtex Corporation and International Playtex Company, as successor to International Playtex Corporation (collectively, "Playtex") was the tenant under the Overlease; WHEREAS, Playtex Apparel, Inc. ("Apparel"), as assignee of Playtex, was the sublessor under a certain Sublease with Neurogenetic Corporation, the sublessee thereunder, dated October 31, l991, as amended by that certain First Sublease Amendment, dated August, 1994 ("Sublease Amendment") (said Sublease and Sublease Amendment, collectively, the "Sublease") pursuant to which Neurogenetic Corporation leased space in the Improvements, more particularly described in the Sublease ("Demised Premises"); WHEREAS, Synaptic is successor in interest to Neurogenetic Corporation as sublessee under the Sublease; 1 WHEREAS, the Term of the Overlease expires December 31, 1999 ("Expiration Date") and it is anticipated that the Overlease will not be extended and, accordingly, Century is negotiating with Apparel to terminate the Overlease prior to the Expiration Date and to have Apparel assign to Century Apparel's interest in the Sublease; WHEREAS, upon such assignment, Century and Synaptic desire to amend the Sublease for the Premises in certain respects as well as to provide for the lease of certain additional space in the Improvements as such additional space becomes available for lease; WHEREAS, Synaptic has operated pursuant to the terms and provisions of the Sublease since October 1991 and is desirous of continuing to do so to the extent such terms and provisions may continue to apply to its respective rights and obligations, as same may be amended by the terms and provisions of this Agreement and, accordingly Century and Synaptic each agree and acknowledge that it is their respective intent and desire that, notwithstanding the earlier termination of the Overlease, the Sublease will remain in full force and effect, as hereby amended, as a direct lease between Century and Synaptic, the terms and provisions of the Sublease, as amended by this Agreement, shall constitute the terms and provisions of a direct lease between Century and Synaptic (such Sublease, as amended by this Agreement, "Lease"); Century will become the successor to Apparel as Sublessor under the Sublease and Synaptic will continue to be the Sublessee and, notwithstanding such designation as Sublessor and Sublessee, Century will be the Landlord and Synaptic will be the Tenant under the direct Lease; WHEREAS, it is also the intent of the parties hereto that, if Century acquires the interest of Playtex under the Overlease, no merger of Century's positions as Landlord and Tenant thereunder shall be deemed to have occurred and, while the Overlease shall terminate as of the Effective Date, as such term is hereinafter defined, it will nevertheless remain in full force and effect as between Sublessor and Sublessee for the sole purpose of interpreting the rights and obligations of the parties under the Lease as necessary; NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. The recital clauses are hereby incorporated herein in full as though set forth verbatim and at length herein. A capitalized term used herein but not defined herein shall have the meaning given such term in the Sublease. 2. This Agreement shall be effective on January l, 2000, or such earlier date, as designated by Sublessor by notice to Sublessee, upon which Century succeeds to the interests of Apparel as sublessee under the Overlease and sublessor under the Sublease ("Effective Date"). If the Effective Date occurs before January 1, 2000, the period commencing on the Effective Date and 2 ending on December 31, 1999 (such period, the "Add-on Period") shall be added to the Term. The parties hereto acknowledge and agree that, if Apparel extends the term of the Overlease, this Agreement shall be deemed null and void ab initio. 3. This Agreement modifies, amends and supplements the Sublease. Any conflict between the terms and provisions of this Agreement and the terms and provisions of the Sublease shall be controlled by the terms of this Agreement. In all other respects, the Sublease shall remain in full force and effect. 4. All of the obligations contained in the Overlease conferred and imposed upon Sublessor (as successor of the lessee therein), except as modified and amended by the Lease, are hereby conferred and imposed upon Sublessee with respect to the Demised Premises. Any rights granted to Sublessor (as successor of the lessee therein) are not hereby granted to Sublessee and Sublessee shall have only those rights as are specifically set forth in the Lease. Sublessee covenants and agrees to fully and faithfully perform the terms and conditions of the Overlease and the Lease on its part to perform with respect to the Demised Premises. Sublessee agrees as an express inducement for Sublessor's executing this Agreement that, if there is any conflict between the provisions of the Lease and the provisions of the Overlease which would permit Sublessee to do or cause to be done or suffer or permit any act or thing to be done which is prohibited by the Overlease, then the provisions of the Overlease shall prevail, provided that, notwithstanding the foregoing, Paragraph 9 D of the Sublease shall in no way be amended by the foregoing. At the request of Sublessee, Sublessor agrees that it will use reasonable efforts to incorporate the terms and provisions of the Overlease as well as the terms and provisions of the Lease into one document. 5. (a) Paragraph 1 A of the Sublease, as amended by the Sublease Amendment, is hereby deleted and restated in its entirety as follows: "A. "Sublessor does hereby lease to Sublessee and Sublessee does hereby take from Sublessor the Demised Premises "AS IS WHERE IS" at the rent and upon the terms and conditions herein stated, for the Term, as hereinafter defined. When the Effective Date occurs, the term of the Sublease will expire and the Term of this Lease will commence and such term will expire, unless sooner terminated in accordance with the terms of this Lease, at midnight on December 31, 2015 ("Expiration Date") (such period from the Effective Date to the Expiration Date, inclusive, herein referred to as the "Term"). If the Effective Date occurs on a day that is not the first day of the month, Annual Base Rent for the initial fractional month of the Term, if any, shall be prorated and paid, together with the 3 first monthly installment of Annual Base Rent due for the Term. As used herein, the term "Demised Premises" shall include (i) a minimum of 41,274 rentable square feet on the Effective Date, exclusive of Sublessee's pro-rata share of the rentable square feet of the Cafeteria (such 41,274 rentable square feet and its pro-rata share of the Cafeteria, collectively, the "Current Space"); (ii) the additional space more particularly described on Schedule C attached hereto and made a part hereof currently occupied by Playtex Products Inc., which space shall be added to the Current Space as of the day ("Expansion Date") after the day on which Playtex Products Inc. vacates its space, with the result that the Current Space will be increased as of the Expansion Date to 73,918 rentable square feet (such 73,918 rentable square feet, the "Minimum Rentable Square Feet"); and (iii) the additional space more particularly described on Schedule D attached hereto and made a part hereof as same shall be added in accordance with the terms of Paragraphs 35 hereof to the space theretofore leased by Sublessee. (b) Paragraphs 1 B and 1 C are deleted in their entirety. 6. (a) Paragraph 4 A, as modified by the Sublease Amendment, is hereby further modified as follows: "From the Expansion Date, Sublessee shall pay to Sublessor during the Term a fixed basic rent per annum, absolutely net ("Annual Base Rent") as follows: (i) for Lease Years 1-5, calculated at the annual rate of $13.00 per rentable square foot [based on the Minimum Rentable Square Feet, $960,934 per Lease Year ($80,077.83 per month)]; (ii) for Lease Years 6-10, calculated at the rate of $16.00 per rentable square foot [based on the Minimum Rentable Square Feet, $1,182,688 per Lease Year ($98,557.33 per month)]; and (iii) for Lease Years 11-15, calculated at the rate of $20.00 per rentable square foot [based on the Minimum Rentable Square Feet, $1,478,360 per Lease Year ($123,196.67 per month)]; . "Lease Year" shall mean the period commencing on the Effective Date (or the first day of the month immediately following the Effective Date if the Effective Date is not the first day of the month), or any anniversary thereof occurring during the Term, and ending on the last day of the 4 12 month period immediately following the date on which the Lease Year commenced, or the anniversary thereof, as the case may be. Sublessor and Sublessee agree that (i) the aforesaid Annual Base Rent shall apply to the Add-on Period and that the term "Lease Years 1-5" shall be deemed to be increased by the Add-on Period if the Expansion Date occurs prior to January 1, 2000; and (ii) notwithstanding anything herein to the contrary, from the Effective Date until the day prior to the Expansion Date, Annual Base Rent and Sublessee's percentage share of Operating Costs, but not the components of such Operating Costs, shall be as stated in the Sublease." (b) Paragraphs 4 B and 4 C are hereby deleted and Paragraph 4 B is restated in its entirety as follows: "The Annual Base Rent shall be adjusted, as of the date such space becomes available to Sublessor for lease, by the number of rentable square feet of space in excess of the Minimum Rentable Square Feet added to the Demised Premises during the Term, calculated at the annual rate then in effect pursuant to Paragraph 4 A per rentable square foot. [In no event will the total rentable square feet of the Demised Premises during the Term be less than the Minimum Rentable Square Feet, it being understood by the parties hereto that Sublessor is entering into this Lease on the condition that Sublessee be deemed to have leased the Minimum Rentable Square Feet on the Expansion Date.] The parties shall execute and deliver a supplemental agreement which shall be attached hereto and made a part hereof as Schedule D specifying the total rentable square feet of such added space. The Annual Base Rent and Sublessee's share of Operating Costs shall be appropriately adjusted, provided, however, that, if Sublessee leases space in excess of the Minimum Rentable Square Feet prior to January 1, 2000, the Annual Base Rent with respect to such rentable square feet in excess of the Minimum Rentable Square Feet shall be appropriately adjusted as of January 1, 2000." 7. (a) Paragraph 5 is hereby modified to add the following in line 3 before the words "Real Estate Taxes": "other operating expenses,if any, incurred by Sublessor in maintaining, repairing, and replacing the Building systems, roof, structural components, public halls and stairways, smoke detectors and alarm systems, and the exterior portions of the Paramus Facility," 5 (b) Paragraph 5(a) is deleted and restated in its entirety as follows: "Sublessee's share of Operating Costs shall be the ratio of the total rentable square feet of the Demised Premises from time to time to 110,666 (which is the total rentable square feet of the Paramus Facility), provided, however, that no adjustment shall be made which would result in a reduction of Sublessee's share of Operating Costs. Based upon the Demised Premises having the Minimum Rentable Square Feet, Sublessee's share of Operating Costs is 66.8%. Operating Costs shall mean the actual costs, without duplication, paid or accrued, incurred by the Sublessor during each calendar year. Sublessee acknowledges and agrees that this Lease is triple net and that Operating Costs shall include, without limitation, all expenses incurred by Sublessor in maintaining the Paramus Facility, including, the Cafeteria, in accordance with Paragraph 13 B, as well as the cost to Sublessor of hiring and retaining a Building maintenance person." (c) Paragraph 5 A (b) is hereby modified to delete the last two sentences thereof. 8. Paragraph 6 A is hereby modified to add to following as the first subparagraph thereof: "(a) Sublessee shall be responsible for, and shall perform, at its own cost and expense, using licensed and insured contractors and subcontractors, all alterations within the Demised Premises, including the construction of all demising walls. Not later than 30 days prior to commencing any such alterations, Sublessee shall obtain from its contractors and subcontractors performing construction activities at the Paramus Facility and deliver to Sublessor evidence of insurance coverages, which shall be primary to the insurance maintained by Sublessee and shall name Sublessor as an additional insured, in amounts and forms reasonably satisfactory to Sublessor." and to renumber the following paragraph as "6 A(b)". 9. Paragraph 8 C (d)(i) is hereby modified to add "to be" prior to "paid" in line 4 thereof. 10. Paragraphs 9E and 9F are hereby deleted in their entirety. 11. (a) Paragraph 10 B (2) is hereby modified to replace "$4,000,000" with "$5,000,000" in lines 3 and 5 thereof; 6 (b) Paragraph 10 is hereby further modified to add the following as new subparagraph E: "E. To the maximum extent permitted by law, Sublessee agrees that Sublessor shall not be responsible or liable to Sublessee or to those claiming by, through or under Sublessee, for any loss or damage to property of Sublessee or of others that may be placed or contained within the Demised Premises." 12. Paragraph 11 is hereby modified to replace "ten (10)" with "twelve (12)" in line 24, and to add the following in line 27 after "Section 11A": "which right shall be exercised by Sublessee's delivery to Sublessor within 30 days of the expiration of such 12 month period of written notice of Sublessee's irrevocable election to terminate as of the date specified in such notice, provided however that Sublessor may negate such termination by Sublessee by completing such restoration of the Demised Premises within 30 days of Sublessor's receipt of Sublessee's termination notice." 13. (a) Paragraph 12 A is hereby modified as follows: In line 3 after the word "expense", insert the following, "maintain the Demised Premises in compliance with and shall". (b) Paragraph 12 B is hereby modified as follows: In line 6, after the word "ECRA", add the following to the end of the sentence: "as amended by the Industrial Site Recovery Act of 1993; the regulations promulgated thereunder and any successor or amended legislation or regulations ("ISRA")." and the term "ECRA" is replaced with the term "ISRA" throughout Paragraph 12. (c) Paragraph 12 B (ii) is hereby modified as follows: In line 3, replace the word "achieve" with the word "obtain"; in that same line, after the word "Declaration" insert the word "Approval"; in that same line, after the word "ECRA" add a comma; in line 4, delete the words "completion of a cleanup plan as defined in ECRA" and replace it with the words "shall obtain an unconditional no further action letter from the New Jersey Department of Environmental Protection"; 7 and at the end of this paragraph (ii), add the following sentence: "In no event shall any cleanup by the Sublessee involve the use of engineering or institutional controls, or a groundwater classification exception area." (d) Paragraph 12 B (iii) is hereby modified as follows: In line 3, after the word "materials", add the words "issued or received by the Sublessee." (e) Paragraph 12 G is hereby modified as follows: In line 1, replace the word "premises" with the words "Demised Premises" and in line 3, replace the word "Sublessor" with the word "Sublessee". 14. (a) Paragraph 13 A is hereby modified as follows: In line 3, add the words: "including, without limitation, the roof and structural components of the Demised Premises, the building plumbing and electrical systems and equipment located within the Demises Premises for general supply of water, heat, air conditioning, gas and electricity, the existing HVAC system, alarm system and smoke detectors within the Demised Premises" after the words "Demised Premises"; and in line 6, delete "(other than structural and other repairs which are the responsibility of Sublessor pursuant to subsection B), subject to latent defects which Sublessor shall be required to correct" and replace such phrase with the phrase: "(other than repairs which are the responsibility of the building maintenance person pursuant to Paragraph 13 B below)". (b) Paragraph 13 B is hereby deleted and replaced in its entirety as follows: "Sublessor will provide a building maintenance person. Sublessee shall be responsible for payment of its pro-rata share, determined as provided in Paragraph 5 (a) above, of the costs and expenses incurred by Sublessor in performing this service, including the cost of hiring and maintaining a Building maintenance person (such costs and expenses, collectively, "Janitorial Costs") as Additional Rent." (c) Paragraph 13 C is hereby modified to delete the following: 8 "Except as otherwise specified herein (including, without limitation, Sublessor's obligations with respect to Casualty Damage," in lines 1-3; and "(except for latent defects which are not readily apparent by inspection, which Sublessor shall repair)" in lines 11- 13; and to add the following as the last sentence thereof: "Sublessee accepts the existing HVAC system and other building systems, the roof and structure of the Demised Premises, and the exterior portions of the Paramus Facility "AS IS" and hereby assumes the full and sole responsibility, at its own cost, for the condition, operation, repair, replacement, maintenance and modification of the Demised Premises." 15. Paragraph 16 E (2) is hereby modified to add the following prior to the period in the last sentence thereof: "except as otherwise specifically provided in this Lease with respect to any obligation of Sublessee to indemnify Sublessor that survives termination of this Lease" 16. Paragraph 20 is hereby deleted and restated in its entirety as follows: "Subject to compliance by Sublessee with the terms and conditions of the operating agreement to be entered into between Sublessor and Sublessee and other tenants of the Paramus Facility which shall provide for the operation by such tenants, including Sublessee, of the Cafeteria in the Paramus Facility at their own cost and expense, allocated on a pro-rata basis which, as to Sublessee, shall be based upon the total rentable square feet of the Demised Premises determined in accordance with Paragraph 4 B above, Sublessee shall have a non-exclusive license to use such Cafeteria for its employees and business invitees at Sublessee's risk and expense on the same terms as other tenants of the Paramus Facility are permitted to use such Cafeteria and subject to compliance with such reasonable rules and regulations as may be promulgated by Sublessor from time to time regarding the use of the Cafeteria which shall be applied uniformly to all such tenants and enforced without discrimination. Nothing herein shall obligate Sublessor, its successors or assigns, to continue to operate or maintain the Cafeteria, or any cafeteria, in the Paramus Facility and, if Sublessee shall fail to comply with its obligations hereunder or under the operating agreement, the license herein granted to Sublessee to use, operate, and maintain the 9 Cafeteria shall be discontinued or suspended, at the election of Sublessor. In such event, there shall be no adjustment to Rent as a result thereof, except that no further pro-rata allocation with respect to the Cafeteria shall be payable by Sublessee in the event and from and after the date that the license is suspended or discontinued, and Sublessor reserves the right to lease the Cafeteria space to a third party for use as a cafeteria or for any other use." 17. Paragraph 26 H is hereby modified to replace the addressees therein specified with the following: "As to Sublessor: Mr. Eugene Jacobson Century Associates c/o Sun Chemical 222 Bridge Plaza South Fort Lee, New Jersey 07024 As to Sublessee: Mr. Robert Spence Chief Financial Officer Synaptic Pharmaceutical Corporation 215 College Road Paramus, New Jersey 07652" and to replace the telephone numbers therein specified as follows: "Sublessor: (201) 224-4600 Sublessee: (201) 261-1331" 18. Paragraph 26 G is hereby modified as follows: In line 1, delete the word "NO"; in line 3, delete the word "Sublease" and add the words "Lease, other than Cushman & Wakefield of New Jersey, Inc. (the "Broker") immediately prior to the period; in line 7, add the word "other" immediately prior to the word "realtors"; in lines 9 and 13, replace the word "Sublease" with "Lease"; and add the following as the last sentence of the Paragraph: "Sublessor shall pay the brokerage commission due Broker pursuant to the terms of a separate agreement with Broker." 19. The following provisions shall be added to the Existing Lease as indicated: 10 (a) Add as new Paragraph 27: "27. SUBLESSOR'S EXCULPATION. Notwithstanding anything contained in this Lease to the contrary, it is specifically agreed that there shall be no personal liability on the part of the Sublessor, or Overlandlord, and/or their respective employees, agents, directors, officers, shareholders, partners, constituent members, successors or assigns, with respect to any of the terms, provisions, covenants and conditions of this Lease and Sublessee agrees to look solely to Sublessor's interest in the Paramus Facility for the recovery of any judgment against Sublessor. The foregoing is not intended to and shall not limit any right that Sublessee may have to pursue a suit for injunctive relief or specific performance of the obligation that is the subject of any breach or default on the part of Sublessor under this Lease. The within exculpation of personal liability shall be absolute and without exception. The term "Sublessor" as used in this sublease shall mean the owner of the Sublessor's interest, whether fee or leasehold, in the Paramus Facility, or any portion thereof, and if any such interest be sold or transferred, the seller shall be entirely relieved of all covenants and obligations under this Lease." (b) Add as new Paragraph 28: "28. LEASE MODIFICATION. If in connection with obtaining financing for the Paramus Facility, or any part thereof, or interest therein, a bank, insurance company or other recognized institutional lender shall request reasonable modifications in the Lease as a condition to such financing, Sublessee will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Sublessee hereunder or materially decrease the obligations of Sublessor hereunder. In addition thereto, Sublessee shall furnish to any such mortgagee or proposed mortgagee copies of Sublessee's latest financial statements duly certified by an independent certified public accountant, or if no such certified statement is available, then such statements shall be certified by the chief financial officer of Sublessee." (c) Add as new Paragraph 29: "29. LIENS. 11 Sublessee shall not do any act, or make any contract, which may create or be the foundation for any lien or other encumbrance upon any interest of Sublessor or any ground or underlying lessor, in any portion of the Paramus Facility. If any construction lien claim or other lien (collectively, "Lien"), charge or order for the payment of money or other encumbrance shall be filed against Sublessor and/or any such ground or underlying lessor and/or any portion of the Paramus Facility (whether or not such Lien, charge, order, or encumbrance is valid or enforceable as such) which names Sublessee as the debtor or obligor or alleges that Sublessee is the debtor or obligor, Sublessee shall, at its own cost and expense, cause same to be discharged of record or bonded within 15 days after Sublessee's receipt of notice of the filing thereof, and Sublessee shall indemnify and save harmless Sublessor and all such ground and underlying lessor(s) against and from all costs, liabilities, suits, penalties, claims, and demands, including reasonable attorney fees, resulting from Sublessee's failure to discharge same within such period. If Sublessee fails to comply with the foregoing provisions, Sublessor shall have the option of discharging or bonding any such Lien, charge, order, or encumbrance, and Sublessee agrees to reimburse Sublessor for all costs, expenses and other sums of money in connection therewith as Additional Rent with interest at the maximum rate permitted by law, which shall accrue from the date due until paid, promptly upon demand. All materialmen, contractors, artisans, mechanics, laborers, and any other persons now or hereafter contracting with Sublessee or any contractor or subcontractor of Sublessee for the furnishing of any labor, services, materials, supplies, or equipment with respect to any portion of the Demised Premises, at any time from the date hereof until the end of the Term, are hereby charged with notice that they look exclusively to Sublessee to obtain payment for same." (d) Add as new Paragraph 30: "30. SUBLESSOR'S RESERVED RIGHTS. Sublessee acknowledges that the Paramus Facility is not open to the general public. Access to the Paramus Facility is restricted to Sublessor, Sublessee, their agents, employees, and their invited visitors. In the event of a labor dispute including a strike, picketing, informational or associational activities directed at Sublessee or any other tenant, Sublessor reserves the right, on such notice to Sublessee as is reasonably practicable, unilaterally to alter Sublessee's 12 ingress and egress to the Demised Premises or make any other change in operating conditions to restrict pedestrian, vehicular or delivery ingress and egress to a particular location. Additionally, Sublessor reserves unto itself all rights not granted to Sublessee in this Lease, including, by way of example, the right to change the name by which the Paramus Facility is commonly known." (e) Add as new Paragraph 31: "31. SUBLESSOR'S RIGHT TO MORTGAGE/ASSIGN. Notwithstanding any other provision of this Lease to the contrary, Sublessor, and any successor or assignee of Sublessor, may convey all or any portion of its interest in Sublessor, this Lease, the Paramus Facility or the Demises Premises. Sublessor shall also have the right from time to time to pledge, mortgage or encumber its Interests in the Demised Premises and the Paramus Facility. Any provision of this Lease to the contrary notwithstanding, the provisions of any such mortgage shall govern in the event of Casualty Damage or a Taking of the Demised Premises, including, without limitation, the disposition of any insurance proceeds payable in the case of Casualty Damage and of awards payable in connection with such Taking. Sublessor shall provide Sublessee with notice of such mortgage." (f) Add as new Paragraph 32: "32. ASBESTOS REMEDIATION. Sublessee agrees that it shall have the obligation to promptly remove or encapsulate asbestos present within the Demised Premises (which term, for purposes of this Paragraph 32, shall include the space attributable to Sublessee plus Sublessee's pro-rata share of the common areas of the Building), at its costs and expense, in compliance with Laws. Sublessee acknowledges that prior to the date of this Lease, Sublessee will inspect the Demised Premises for the purpose of determining the presence, if any, of asbestos, and the costs of removing or encapsulating same in compliance with Laws ("Asbestos Remediation Costs"). As a result of such inspection, Sublessee has determined that asbestos is present within the Demised Premises. Sublessee represents to Sublessor that, pursuant to its agreement with Sublessor respecting same, the Asbestos Remediation Costs for remediation of VAT tile located in areas of the Demised Premises that are not utilized as laboratory space (such space, "Non-Laboratory Space") will be determined on the basis of 13 encapsulation of such VAT tile rather than removal of same. If the Asbestos Remediation Costs actually incurred by Sublessee exceed $100,000, Sublessor hereby agrees that, upon submission of evidence reasonably satisfactory to it of such expenditures, it will reimburse Sublessee in the form of a rental credit applied in equal monthly installments to the Annual Base Rent due hereunder during Lease Years 1 and 2, for the amount of such Asbestos Remediation Costs in excess of $100,000; provided, however, that Sublessor's obligations under this Paragraph 32 shall not exceed $133,600 in the aggregate and Sublessor shall have no obligation to pay for the cost of removal of VAT tile from the Non-Laboratory Space. Sublessee shall be responsible for payment of all of the costs of removal of asbestos from the Demised Premises in excess of $233,600. Notwithstanding the foregoing, Sublessor reserves the right to have its contractor determine the cost of removal of the asbestos and, if such contractor's estimate is lower than that provided by Sublessee, Sublessee agrees that, at the election of Sublessor, such removal will be performed by Sublessor's contractor. The provisions of this Paragraph 32 shall survive expiration or earlier termination of this Lease." (g) Add as new Paragraph 33: "33. REPRESENTATIONS AND WARRANTIES. Sublessee hereby reaffirms all of its representations in the Sublease including, without limitation, those set forth in Paragraph 9 of the Sublease and in Paragraph 6(a) of the Sublease Amendment." (h) Add as new Paragraph 34: "34. LOADING DOCKS. Sublessee shall have control of the loading docks at the Paramus Facility provided that Sublessor and other tenants of the Paramus Facility shall not at any time during the Term be precluded from using such loading docks. Sublessee agrees to cooperate with Sublessor and such other tenants in their respective use of the loading docks." (i) Add as new Paragraph 35: "35. RIGHT OF FIRST OFFER A. Subject to and in accordance with the provisions of this Paragraph 35 and provided that Sublessee is not 14 then in default of the provisions of this Lease, Sublessor agrees that if, as and when space in the Paramus Facility not then included in the Demised Premises becomes available (such space, the "Available Space"), Sublessor will notify Sublessee thereof and of the terms and conditions pursuant to which Sublessor will lease such Available Space (such notice, "Availability Notice"). If Sublessee elects to add the Available Space to the Demised Premises on the terms and conditions set forth in the Availability Notice, Sublessee shall deliver notice of its election ("Expansion Election Notice") to Sublessor within fifteen (15) days of the date of Sublessee's receipt of the Availability Notice. Sublessee agrees that, if it fails to deliver the Expansion Election Notice as and when aforesaid, it shall be deemed to have elected not to lease the Available Space and to have forever waived its right to exercise its option to add the Available Space to the Demised Premises and Sublessor shall have the right to lease the Available Space to a third party free and clear of any claim of Sublessee thereto. Notwithstanding such waiver, however, Sublessor agrees that if the Available Space is offered to a third party at an annual base rent less than ten percent (10%) of the annual base rent set forth in the Availability Notice, Sublessor will notify Sublessee of such reduction (such notice, "Reduction Notice") and Sublessee shall have five (5) days from its receipt of such Reduction Notice to deliver its Expansion Election Notice to Sublessor. If Sublessee elects to add the Available Space to the Demised Premises, such Available Space shall be added to the Demised Premises for all purposes under this Lease and on the terms and conditions as are then in effect as modified by the terms and conditions of the Availability Notice, and/or the Reduction Notice, as applicable, as of the earlier of the date listed in the Expansion Election Notice or the date that is thirty (30) days from the date of the Availability Notice or Reduction Notice, if applicable. Any termination, expiration, cancellation or surrender of this Lease shall terminate any right or option to expand provided for in this Paragraph 35 not yet exercised. Said right or option may not be separately sold, assigned or otherwise transferred. 20. Paragraphs 6 (a), 8, 9 and 10 of the Sublease Amendment are hereby deleted in their entirety. 21. Schedule C, Subparagraph (a) is hereby modified as follows: (a) replace the word: "Building" with the words: "Paramus Facility" throughout; 15 (b) add the following at the end of the subparagraph: "If at any time during the Term of this Lease the methods of taxation shall be altered so that, in addition to or in lieu of or as a substitute for the whole or any part of real estate taxes there shall be levied, assessed or imposed (i) a tax, license, fee or other charge on the rents received, or (ii) any other type of tax or other imposition in lieu of, or as a substitute for, or in addition to the whole or any portion of any real estate taxes, then the same shall be included as Real Estate Taxes under this Lease." The submission of this Agreement does not constitute an offer, and this Agreement shall become effective only upon execution and delivery thereof by Sublessor and Sublessee. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. WITNESS: CENTURY ASSOCIATES By: J&E of Paterson, Inc. - -------------------- /s/ Eugene Jacobson ------------------- President ATTEST: SYNAPTIC PHARMACEUTICAL CORPORATION - -------------------- By:/s/Robert L. Spence ------------------- Its: 16 STATE OF NEW JERSEY COUNTY OF BERGEN ) ) ) SS.: I CERTIFY that on November 19, 1997, Eugene Jacobson personally came before me and acknowledged under oath, to my satisfaction, that this person (a) is named in and personally signed the attached document; and (b) signed, sealed and delivered this document on behalf of the Partnership. /s/ Virginia Edwards ----------------------------- Attorney at Law State of New Jersey STATE OF NEW JERSEY COUNTY OF BERGEN ) ) ) SS.: I CERTIFY that on October 17, 1997, Robert L. Spence personally came before me and this person acknowledged under oath, to my satisfaction, that: (a) this person signed, sealed, and delivered the attached document as (b) the proper corporate seal was affixed; and (c) this document was signed and made by the corporation as its voluntary act and deed by virtue of authority from its Board of Directors. /s/ Elinor Bernstein ------------------------------ Notary Public 17 SCHEDULE A DESCRIPTION OF THE LAND 18 SCHEDULE B INSTRUMENTS COMPRISING OVERLEASE 1. Lease Agreement dated February 4, 1969 Century Associates (Landlord) International Playtex Corporation (Tenant) 2. Land Lease Agreement dated June 21, 1973 Century Associates (Landlord) International Playtex Corporation (Tenant) 3. Lease Agreement dated October 7, 1974 Century Associates Landlord) International Playtex Company, Division of Rapid- America Corporation (Tenant) 4. Amendment to Lease dated August 7, 1973 Century Associates (Landlord) International Playtex Corporation (Tenant) 5. Amendment to Lease dated August 30, 1973 Century Associates (Landlord) International Playtex Corporation (Tenant) 6. Amendment to Lease Agreement dated October 7, 1974 Century Associates (Landlord) International Playtex Company, Division of Rapid- American Corporation (Tenant) 7. Letter Agreement dated May 30, 1974 Century Associates (Landlord) International Playtex Company, Division of Rapid - American Corporation (Tenant) 19 SCHEDULE C DEMISED PREMISES Space A: approximately 42,000 square feet, 28,474 square feet of which is located in the northwest part of the Paramus Facility and 12,800 square feet of which is located in the northeast part of the single story center section of the Paramus Facility, each as shown stripped on Schedule A attached hereto and made a part hereof; Space B: approximately 15,000 square feet on the second floor of the east wing of the Paramus Facility; Space C: approximately 3,000 square feet of space adjacent to Space A; Space D: approximately 8,000 square feet of laboratory space, adjacent to Space A; Space E: approximately 5,000 square feet adjacent to Space A; Space F: approximately 37,000 square feet now or formerly occupied by Playtex Apparel Inc. or AOE if, as and when same, or any portion thereof, shall become available for lease ("Playtex Space"); each as identified as such on Schedule C-l attached hereto and made a part hereof, plus, in each case, Sublessee's pro-rata share of the total rentable square feet of the Cafeteria. 20 SCHEDULE D [GRAPHIC OMITTED] 21 EX-10.36 5 EXHIBIT 10.36 ------------- AMENDMENT NO. 3 AND SUPPLEMENT TO RESEARCH COLLABORATION AND LICENSE AGREEMENT Amendment No. 3 and Supplement dated and effective December 1, 1997, between SYNAPTIC PHARMACEUTICAL CORPORATION, a Delaware corporation ("Synaptic"), and MERCK & CO., INC., a New Jersey corporation ("Merck"). Recitals WHEREAS, Merck and Synaptic are parties to a Research Collaboration and License Agreement dated as of November 30, 1993, as amended (the "Agreement"); and WHEREAS, Merck and Synaptic desire to extend the term of the Research Program (capitalized terms used and not defined herein having the meanings set forth in the Agreement) under the Agreement as set forth herein in order to continue to work towards the identification of back-up safety assessment candidates; NOW THEREFORE, in consideration of the premises and covenants set forth herein, the parties agree as follows: 1. The term of the Research Program is hereby extended for an additional one-year period expiring on November 30, 1998 (the "Second Extension Period"). The term may be further extended only upon the mutual agreement of the parties in writing. 2. During the Second Extension Period, as part of the Research Program, Synaptic shall devote the efforts of two man years in support of the continuing pharmacological characterization of Merck compounds. 3. Merck shall pay to Synaptic, within 30 days following the end of each three-month period of the Second Extension Period, an amount equal to $120,000 (one hundred twenty thousand dollars) in consideration of the support set forth in Article 2. In the event that Merck terminates the Research Program pursuant to Article 4 hereof, Merck will pay Synaptic a pro rata portion of the $120,000 based on that number of days which precede the Termination Date in the three-month period in which the Termination Date occurs. 1 4. At any time following written notification from Merck to Synaptic that the Merck Research Management Committee has accepted a second back-up safety assessment candidate, Merck may terminate the Research Program by providing at least 90 days prior written notice to Synaptic. As of the ninetieth day following such notice (the "Termination Date"), Synaptic shall discontinue the support set forth in Article 2 hereof. Upon any termination of the Research Program pursuant to this Article 4, no sums shall be payable by Merck under Article 3 except for amounts due or earned but not yet paid as of the Termination Date. 5. From and after the date first written above, all references in the Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of similar import, shall be a reference to the Agreement, as amended by this Amendment No. 3 and Supplement. 6. From and after the date first written above, all references in the Agreement to "the Research Program" shall be a reference to the Research Program conducted during the period beginning on November 30, 1993, and ending on November 30, 1998, in accordance with the Agreement, as amended and supplemented by this Amendment No. 3 and Supplement, or such earlier date as may be specified in a notification from Merck to Synaptic in accordance with Article 4 above. 7. Except as expressly amended and supplemented by this Amendment No. 3 and Supplement, the Agreement shall remain in full force and effect and unchanged. IN WITNESS WHEREOF, the parties have caused this Amendment No. 3 and Supplement to be executed and delivered as of the date first written above. SYNAPTIC PHARMACEUTICAL CORPORATION By:/s/ Kathleen P. Mullinix ------------------------------ Kathleen P. Mullinix Chairman, President and Chief Executive Officer MERCK & CO., INC. By:/s/ Bennett M. Shapiro ------------------------------ Bennett M. Shapiro Executive VP, Worldwide Basis Research 2 EX-10.37 6 EXHIBIT 10.37 ------------- AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of January 1, 1998, between SYNAPTIC PHARMACEUTICAL CORPORATION, a Delaware corporation (the "Company"), and ROBERT L. SPENCE (the "Employee"). The Employee is currently employed by the Company and possesses special and partic ular knowledge of the business and operations of the Company and of the industry in which it operates. The Company and the Employee are parties to an Employment Agreement dated as of January 1, 1994 (the "Original Employment Agreement") the initial term of which expires on January 1, 1998. The Company and the Employee now desire to amend and restate herein the terms of the Employee's employment by the Company. NOW, THEREFORE, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto agree as follows: 1. Employment. The Company hereby employs the Employee, and the Employee hereby accepts such employment by the Company, on the terms and subject to the conditions hereinafter set forth. 2. Term. Subject to earlier termination as provided herein, the employment of the Employee hereunder shall be for a four-year period commencing on January 1, 1998 (the "Effective Date") and ending on the fourth anniversary of the Effective Date; provided, however, that commencing as of such fourth anniversary and on each anniversary thereafter, unless either party hereto gives the other party at least 90 days' prior written notice of its or his election not to extend the period of the Employee's employment hereunder, such period shall automatically be extended for an additional one-year period on the same terms and conditions set forth herein, unless otherwise agreed upon by the parties. For convenience of reference, such period of employment, as the same may be extended as aforesaid, is referred to herein as the "Employment Period." 3. Duties. (a) During the Employment Period, the Employee shall be employed as the Senior Vice President, Finance and Chief Financial Officer of the Company and shall perform such duties for the Company consistent with such position as may be assigned to him by the persons having authority regarding such matters at the Company. (b) The Employee shall perform his duties hereunder at the offices of the Company in Paramus, New Jersey; provided, however, that the Company may require the Employee to travel in connection with the performance of such duties. Anything contained herein to the contrary notwithstanding, if the Company requires the Employee to be based anywhere other than within a 50-mile radius of New York City and notifies the Employee in writing that his continued employment by the Company is conditional upon such relocation and the Employee refuses to so -1- relocate, then any Termination of Employment of the Employee resulting therefrom, whether initiated by the Company or by the Employee, shall constitute a Termination Without Cause. 4. Time to be Devoted to Employment. Except for vacations in accordance with the Company's vacation policies and absences due to temporary illness, during the Employment Period, the Employee shall devote all of his business time, attention and energies to the performance of his duties under this Agreement. During the Employment Period, the Employee shall not be engaged in any other business activity which, in the judgment of the Company, conflicts with the duties of the Employee under this Agreement, whether or not such activity is pursued for gain, profit or other pecuniary advantage. 5. Compensation; Reimbursement. (a) Base Salary. During the Employment Period, the Company shall pay to the Employee a base salary of $170,000 per annum, subject to increase by the Board of Directors of the Company, in its discretion. For convenience of reference, such base salary, as the same may be increased as aforesaid, is referred to herein as the "Base Salary." The Base Salary shall be payable in such installments (but not less frequent than monthly) as is the policy of the Company generally with respect to its employees. (b) Annual Performance Bonus. The Employee shall be eligible to receive a cash bonus of at least $25,000 with respect to each calendar year during the Employment Period, subject to the achievement of the goals determined at the commencement of each year by the President of the Company. Such cash bonus, if earned, will be payable to the Employee within forty-five days after the end of the calendar year in respect of which such bonus is earned. Additional bonuses may be approved by the Board of Directors of the Company, in its discretion. (c) Benefits. During the Employment Period, the Employee shall be entitled to such benefits as are generally made available to other employees of the Company and to such additional benefits as are generally made available to employees of the Company at substantially the same level of employment as the Employee. (d) Reimbursement of Expenses. During the Employment Period, the Company shall reimburse the Employee, in accordance with the policies and practices of the Company in effect from time to time during such Period, for all reasonable and necessary traveling expenses and other disbursements incurred by him for or on behalf of the Company in connection with the perfor mance of his duties hereunder (such expenses being referred to herein as "Reimbursable Expenses") upon presentation by the Employee to the Company of appropriate documentation therefor. 6. Termination of Employment. (a) General. The Company may terminate the Employee's employment hereunder at any time for any reason. The Employee may terminate his employment hereunder pursuant to a Resignation for Good Reason, a Voluntary Termination or a Disability Termination. -2- The Employee's employment shall terminate automatically upon his death. Any termination of the Employee's employment is referred to herein as a "Termination of Employment." (b) Termination Notice. The Company or the Employee may initiate a Termination of Employment in any manner permitted hereunder by giving the other party written notice thereof (the "Termination Notice"). (c) Termination Date. The effective date (the "Termination Date") of any Termination of Employment shall be deemed to be the later of (i) the date on which the Termination Notice is given and (ii) the date specified as the effective date in the Termination Notice; provided, however, that in the case of the Employee's death, the Termination Date shall be his date of death. 7. Termination by the Company. (a) Termination for Cause. Any Termination of Employment initiated by the Company upon the occurrence of an event that constitutes Cause shall be a "Termination for Cause." For purposes of this Agreement, the term "Cause" shall mean the Employee's (i) willful failure to perform those duties that the Employee is required or expected to perform as an employee of the Company under Section 2 hereof, (ii) consistent failure over a substantial period of time to perform competently such duties, (iii) conviction of a crime involving moral turpitude, dishonesty, theft, unethical business conduct or conduct that significantly impairs the reputation of the Company or (iv) failure to devote all of his business time, attention and energies to the performance of his duties hereunder. In the event of a Termination for Cause, the Termination Notice given to the Employee by the Company shall state that the Termination of Employment is "for Cause." (b) Termination Without Cause. Any Termination of Employment initiated by the Company (other than a Termination for Cause or a Disability Termination) shall be a "Termination Without Cause." 8. Termination by the Employee. (a) Resignation for Good Reason. Any Termination of Employment initiated by the Employee within 90 days following the occurrence of any of the following events shall be a "Resignation for Good Reason": (i) subsequent to a Change in Control, and without the Employee's express written consent, (A) the assignment to the Employee of any duties inconsistent with his position, duties, responsibilities and status within the Company prior to such Change in Control, (B) any material change in the Employee's titles or offices as in effect prior to such Change in Control or (C) any removal of the Employee from or any failure to re-elect the Employee to any material position held by him prior to such Change in Control; (ii) subsequent to a Change in Control, a reduction in the Employee's Base Salary or a termination of the Employee's participation in any bonus plan or program (or a -3- substantial reduction in the level of such participation) as in effect on the Effective Date or as the same may be increased after the Effective Date and in effect at the time; (iii) subsequent to a Change in Control, and without the Employee's express written consent, any requirement that the Employee be based anywhere other than within a 50-mile radius of New York City; (iv) subsequent to a Change in Control, the failure by the Company to continue the Employee's participation in any benefit or compensation plan, life insurance plan, health-and- accident plan or disability plan in which the Employee is participating at the time of such Change in Control (or in plans providing the Employee with substantially similar or more favorable benefits) or the taking of any action by the Company which would materially adversely affect the Employee's participation in or materially reduce the Employee's benefits under any of such plans or deprive the Employee of any material fringe benefit enjoyed by the Employee at the time of such Change in Control; or (v) subsequent to a Change in Control, the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated by Section 16. In the event of a Resignation for Good Reason, the Termination Notice given to the Company by the Employee shall state that the Termination of Employment is a "Resignation for Good Reason." (b) Other Termination by the Employee. Any Termination of Employment initiated by the Employee (other than a Termination of Employment resulting from the Employee's death, a Resignation for Good Reason or a Disability Termination) shall be a "Voluntary Termination." 9. Termination by the Company or by the Employee -- Disability Termination. Any Termination of Employment resulting from the Employee's Disability shall be a "Disability Termination." For purposes of this Agreement, the term "Employee's Disability" shall mean the Employee's illness or other physical or mental disability that prevents the Employee from performing his duties hereunder for a period of 90 days in any 180-day period. In the event of a Disability Termination, the Termination Notice given to one party by the other party shall state that the Termination of Employment is a "Disability Termination." 10. Effect of Termination of Employment. (a) In the Event of a Termination of Employment (other than a Termination of Employment contemplated by Section 11(a)), neither the Employee nor his estate or beneficiaries shall have any further rights or claims against the Company under this Agreement except the right to receive: (i) the portion of the Base Salary which accrued with respect to the period prior to the Termination Date but which remained unpaid as of the Termination Date; -4- (ii) the aggregate amount of Reimbursable Expenses which were incurred prior to the Termination Date but which were not reimbursed by the Company as provided in Section 5(d) prior to the Termination Date; and (iii) any other benefits to which the Employee may be entitled upon such Termination of Employment under the plans, programs and policies of the Company then in effect, which benefits shall be payable in accordance with the terms of such plans, programs and policies; provided, however, that if the Termination of Employment is pursuant to a Termination Without Cause, then, in addition to the amounts computed pursuant to the foregoing provisions of this Section 10(a), the Employee shall have the right to receive as severance compensation an amount (the "Severance Amount") equal to 50% of one year's Base Salary, such Severance Amount to be payable at the same times at which and in the same manner in which the Base Salary would have been payable to the Employee had the Termination of Employment not occurred. (b) The Employee shall not be required to mitigate the amount of any payment provided for in this Section 10 by seeking other employment or otherwise, and no payment or benefit provided for in this Section 10 shall be reduced by compensation earned by the Employee as a result of his employment by another employer following the Termination Date, or otherwise. 11. Effect of Termination of Employment following a Change in Control. (a) In the event that the Employee's employment with the Company is terminated in contemplation of, or at any time within one year following, a Change in Control, and such termination constitutes a Termination Without Cause or a Resignation for Good Reason, neither the Employee nor his estate or beneficiaries shall have any further rights or claims against the Company under this Agreement other than the following: (i) the right to receive all amounts and benefits to which the Employee would be entitled under Section 10 upon a Termination of Employment; and (ii) all stock options, stock bonus awards and restricted stock grants relating to securities of the Company held by the Employee on the Termination Date shall vest or become exercisable, as the case may be, on the Termination Date, notwithstanding any provisions in any such stock options, stock bonus awards or restricted stock grants or the plans covering the same to the contrary, and all rights to exercise such stock options shall remain exercisable by the Employee for a period of not less than 120 days after the Termination Date. If the benefits payable hereunder, together with other payments in the nature of compensation to or with respect to the Employee, would otherwise be subject to the excise taxes imposed under Section 280G of the Internal Revenue Code of 1986, as amended ("Code"), and if the net value of such benefits and payments in the nature of compensation, after reduction for such taxes, is less than the aggregate value of the benefits and payments in the nature of compensation determined as if such amounts had been $1.00 less than a maximum amount which could be paid without imposition of -5- excise taxes, then the benefits payable hereunder shall be reduced to highest amount such that such excise taxes shall not be imposed with respect to the benefits or the other payments in the nature of compensation. It is the intention of this provision to reduce benefits payable hereunder only if the Employee would be in a superior position taking into account such excise taxes than if such payments were made, and such reduction shall, in any event, be the least amount in order that the Employee be better off with the reduction than before such reduction. The calculation of the value of benefits payable hereunder and other payments in the nature of compensation, and the implications of the excise tax rules of Section 280G of the Code, shall be determined by the Company in good faith based on written advice of a national accounting firm. (b) The Employee shall not be required to mitigate the amount of any payment provided for in this Section 11 by seeking other employment or otherwise, and no payment or benefit provided for in this Section 11 shall be reduced by compensation earned by the Employee as a result of his employment by another employer following the Termination Date, or otherwise. (c) As used herein, the term "Change in Control" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act"), if the Company were at that time subject to such reporting requirements of the Exchange Act; provided, however, that such term shall in any event be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities or (ii) during any one-year period or any period of two consecutive years, individuals who at the beginning of any such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof as of the end of such period unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors at the beginning of such period. 12. Notices. All notices or other communications that are required or permitted hereunder shall be in writing and shall be deemed to have been given if (a) personally delivered or sent by telecopier, (b) sent by nationally-recognized overnight courier or (c) sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Employee, to him at: 50 Jackson Place Lyndhurst, New Jersey 07071 -6- if to the Company, to it at: 215 College Road Paramus, New Jersey 07652 Attention: President Telecopier: 201-261-0623 or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such communication shall be deemed to have been received (i) when delivered, if personally delivered, sent by telecopier or sent by nationally-recognized, overnight courier and (ii) on the third Business Day following the date on which the piece of mail containing such communication is posted, if sent by mail. As used herein, the term "Business Day" means a day that is not a Saturday, a Sunday or a day on which banking institutions in the city to which the notice or communication is to be sent are not required to be open. 13. Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous negotiations, correspondence, understandings and agreements between the parties with respect thereto, including, without limitation, the Original Employment Agreement. This Agreement may be amended only by an agreement in writing signed by both parties hereto. Anything contained herein to the contrary notwithstanding, the provisions of Sections 10 and 11 shall survive the expiration or early termination of the Employment Period. 14. Assignment. This Agreement is personal in its nature. Accordingly, neither party hereto shall, without the consent of the other, assign this Agreement or any rights or obligations hereunder to any other person or entity. 15. Benefits of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, beneficiaries, executors, administrators and permitted assigns of the Employee and the successors and permitted assigns of the Company. 16. Obligation of the Company's Successors. Any successor to substantially all of the Company's assets and business, whether by merger, consolidation, purchase of assets or otherwise, shall succeed to the rights and obligations of the Company hereunder. The Company shall require any such successor, by agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to receive from the Company or its successor the same amounts and benefits that the Employee would be entitled to receive under Sections 11(a)(i) and 11(a)(ii) upon a Resignation for Good Reason. For purposes of implementing the immediately preceding sentence, the date on which any such succession becomes effective shall be deemed the Termination Date. -7- 17. Waiver of Breach. A waiver of any breach of any provision of this Agreement shall not constitute or operate as a waiver of any other breach of such provision or of any other provision, and any failure to enforce any provision hereof shall not operate as a waiver of such provision or of any other provision. 18. Execution in Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 19. Headings. The headings of sections in this Agreement are for convenience only, are not a part of this Agreement and shall not affect the construction of the provisions of this Agreement. 20. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New Jersey without giving effect to principles of conflicts of laws. 21. Enforceability. In the event that any provision of this Agreement is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such pro vision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or, if such provision cannot be modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this Agreement; provided, however, that the binding effect and enforceability of the remaining provisions of this Agreement, to the extent that the economic benefits conferred upon the parties by virtue of this Agreement remain substantially unimpaired, shall not be affected or impaired in any manner, and that any such invalidity, illegality or unenforceability with respect to such provisions shall not invalidate or render unenforceable such provision in any other jurisdiction. -8- IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. SYNAPTIC PHARMACEUTICAL CORPORATION By:/s/ Kathleen P. Mullinix ----------------------------- Name: Kathleen P. Mullinix Title: Chairman, President and Chief Executive Officer /s/ Robert L. Spence ------------------------------ Robert L. Spence -9- EX-10.38 7 EXHIBIT 10.38 ------------- Cooperation Agreement entered into as of January 12, 1998 (the "EFFECTIVE DATE" ) between Grunenthal GmbH Zieglerstr. 6 52078 Aachen Federal Republic of Germany - hereinafter "GRUNENTHAL" - and Synaptic Pharmaceutical Corporation 215 College Road Paramus, NJ 07652-1431 U S A - hereinafter "SYNAPTIC" - 1 Table of Contents Page Article 1 Definitions 3 Article 2 Cooperation, Implementation of Projects 7 Article 3 Management and Planning Projects; 14 Reports and Exchange of Information Article 4 Early Stage of Projects 20 Article 5 Advanced Development Stage of Projects 24 Article 6 Post-Advanced Development Stage Production and Marketing 28 Article 7 Patent Protection 29 Article 8 License Grants; Restrictions on Use of Technology and Patent Rights 31 Article 9 Reimbursement or Other Payments of Costs 32 Article 10 Records and Reports, Inspection 33 Article 11 Confidentiality 34 Article 12 Termination of Projects 35 Article 13 Term and Termination of Agreement 36 Article 14 Effect of Termination or Expiration of Agreement 37 Article 15 Governing Law and Arbitration 39 Article 16 Concluding Provisions 39 2 Witnesseth WHEREAS, SYNAPTIC and GRUNENTHAL are each actively conducting research directed at discovering and developing a variety of therapeutic compounds; WHEREAS, SYNAPTIC has expertise in the discovery and cloning of receptor genes, the development of binding and functional assays that employ cloned receptors for use in drug discovery programs, and the design and discovery of compounds that act at the receptors of interest; WHEREAS, SYNAPTIC has utilized its expertise to discover and clone genes that code for receptors that have been implicated in pain, to develop binding and functional assays that employ such receptors and to design and discover compounds that are selective for such receptors; WHEREAS, GRUNENTHAL has compounds that it would like to screen at certain receptors cloned by SYNAPTIC, and has expertise in optimizing candidate compounds and in evaluating them in pharmacological models, including in vivo pain model systems; WHEREAS, SYNAPTIC has compounds that it would like to have evaluated in certain of GRUNENTHAL's pharmacological models, including in vivo pain model systems, and has expertise in optimizing candidate compounds; WHEREAS, GRUNENTHAL has expertise in preclinical and clinical testing of candidate compounds, getting regulatory approval and in commercializing pharmaceutical products; WHEREAS, SYNAPTIC and GRUNENTHAL have expressed a mutual interest in utilizing their skills and resources in a collaborative effort to discover and develop agonists and antagonists of mutually agreed upon receptors for alleviating pain; and WHEREAS, SYNAPTIC and GRUNENTHAL may in the future determine to expand their collaborative effort to discover and develop compounds that act at molecular targets in addition to receptors. NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter set forth, the parties agree as follows: Article 1 Definitions 1.1 ADVANCED DEVELOPMENT STAGE shall mean, with respect to each party and each CANDIDATE resulting from a PROJECT, the stage of development which (i) begins with the determination by the STEERING COMMITTEE to commence PHASE III TRIALS involving such CANDIDATE (it being understood that such determination 3 shall be made following completion of phase IIa clinical trials) and (ii) ends on the earlier of the date of the termination by the applicable party of the development activities with respect to such CANDIDATE or the receipt by such applicable party of final approval from at least one regulatory authority that allows marketing of such CANDIDATE to begin. 1.2 ALPHA-2 PROJECT shall have the meaning set forth in Section 2.2.4. 1.3 AVAILABLE TARGETS shall mean TARGETS, including the TARGETS identified in Schedule I, which fall into one of the categories set forth in Section 2.2.1 as determined by the STEERING COMMITTEE. Notwithstanding anything contained in here to the contrary, a TARGET shall cease to be an AVAILABLE TARGET at such time as it becomes an EXCLUDED TARGET. 1.4 BACKGROUND TECHNOLOGY shall mean, with respect to either party and any AVAILABLE TARGET which is the focus of a PROJECT, all know-how, trade secrets, assays, inventions, experimental data, experimental procedures, technology, biological, compounds and other materials and other proprietary information which were discovered or developed by such party, which relate to such TARGET and which existed prior to the initiation of a PROJECT relating to such TARGET. In addition, BACKGROUND TECHNOLOGY shall mean and include, with respect to GRUNENTHAL and any other AVAILABLE TARGET, all know-how, trade secrets, assays, inventions, experimental data, experimental procedures, technology, biological compounds and other materials and other proprietary information, which were discovered or developed by GRUNENTHAL which relate to such TARGET and which existed prior to the initiation of a PROJECT relating to such TARGET if such PROJECT is initiated or at any time during the term of this Agreement if such PROJECT is not initiated. 1.5 BUDGET shall have the meaning set forth in Section 3.1.3(d). 1.6 CANDIDATE shall mean a COMPOUND which is a LEAD for which the decision to start a Good Laboratory Practices four-week toxicology studies has been made by the STEERING COMMITTEE during a PROJECT. Such decision will be made at such time as the STEERING COMMITTEE determines that a LEAD satisfies the criteria established by the STEERING COMMITTEE regarding the desired pharmacological profile, stability, pharmacokinetic profile, bioavailability, synthesis and safety profile (safety pharmacology, toxicology, side-effect profile) and lack of any blocking third party patent. 1.7 COMMON STUDIES shall have the meaning set forth in Section 3.1.3(a) and may be conducted worldwide by each party, or its subsidiaries. 1.8 COMPOUND shall mean a chemical substance with a purity of 90% or more where the structure is characterized by standard analytical methods (e.g., NMR, MS, IR, etc.). 1.9 EARLY DEVELOPMENT STAGE shall mean, with respect to any CANDIDATE resulting from a PROJECT, the stage which (i) begins with the determination of the 4 STEERING COMMITTEE to commence Good Laboratory Practices four-week toxicology studies involving the CANDIDATE and (ii) ends on the earlier of the date of the termination by the STEERING COMMITTEE of the development activities with respect to such CANDIDATE or the determination by the STEERING COMMITTEE to commence PHASE III TRIALS involving such CANDIDATE (it being understood that any such determination shall be made following completion of phase IIa clinical trials). 1.10 EMEA shall mean the European Medicines Evaluation Agency. 1.11 EMEA STUDIES shall have the meaning set forth in Section 3.1.3(a) and shall be conducted in the GRUNENTHAL TERRITORY. 1.12 EVALUATION COMMITTEE shall mean the committee formed pursuant to Section 3.3. 1.13 EXCLUDED TARGET shall mean (i) any alpha 1 adrenergic receptor, galanin receptor, neuropeptide Y receptor (other than the Y2 and Y4 receptors) or serotonin receptor (other than the 5HT-4 receptor), (ii) any TARGET which was an AVAILABLE TARGET and became an EXCLUDED TARGET pursuant to Section 2.2.7 or pursuant to a decision by the STEERING COMMITTEE prior to the expiration of the applicable period set forth in Section 2.2.1 and (iii) any AVAILABLE TARGET which was at one time but is no longer the focus of a PROJECT and/or is no longer the focus of ongoing drug development activities of GRUNENTHAL pursuant to this Agreement. 1.14 EXISTING COLLABORATIVE PARTNERS shall mean Eli Lilly and Company, Merck & Co., Inc., Novartis Pharma A.G., and the Warner-Lambert Company. 1.15 FDA shall mean the United States Food and Drug Administration. 1.16 FDA STUDIES shall have the meaning set forth in Section 3.1.3(a) and shall be conducted in the SYNAPTIC TERRITORY. 1.17 GRUNENTHAL TERRITORY shall mean Europe (including CIS and Turkey), and all countries of Central America and South America including the Caribbean but excluding any country or island within SYNAPTIC TERRITORY. 1.18 HIT shall mean a COMPOUND which exhibits affinity for a and functional activity at a TARGET and which is approved for testing in in vivo models by the RESEARCH COMMITTEE. 1.19 LEAD shall mean a COMPOUND which (i) is or is derived from a HIT, (ii) belongs to a patentable class of chemical entities and/or is patentable with regard to its preparation procedure and (iii) in experimental animal models has an in vivo therapeutic profile that satisfies criteria set by the STEERING COMMITTEE. 5 1.20 NET SALES shall mean, with respect to any PRODUCT, the gross amount invoiced to non-affiliated customers for sales of such PRODUCT in each calendar year, after deduction for the following items, each of which shall be determined in accordance with the normal accounting practices of the party selling the PRODUCT: (i) trade, quantity and cash discounts or rebates actually allowed to such customers; (ii) credits, rebates, charge-back rebates, reimbursements or similar payments actually granted or given to such customers for PRODUCTS previously sold; (iii) any tax, tariff, duty or other governmental charge (other than income or similar tax) levied on the sale, transportation or delivery of such PRODUCT and borne by the seller thereof; (iv) any charge for freight or insurance actually borne by the customer; and (v) allowances for bad debt expense. 1.21 OTHER TERRITORIES shall mean all countries in the world other than those included in the SYNAPTIC TERRITORY or the GRUNENTHAL TERRITORY. 1.22 PAIN shall mean acute or chronic, weak, moderate to severe or severe pain (i) generated by central and/or peripheral mediators, whose action is blocked by analgesic and/or antiphlogistic agents or (ii) is associated with migraine headache. 1.23 PATENT RIGHTS shall mean patent applications and patents to which either SYNAPTIC or GRUNENTHAL have rights. Claims included in PATENT RIGHTS which are not covered by this Agreement are excluded. 1.24 PHASE III TRIALS shall mean trials that fulfill at least the following criteria: pivotal, confirmatory, controlled trials satisfying FDA and/or EMEA guidelines. 1.25 PRODUCT shall mean any human pharmaceutical product for alleviating PAIN which includes as an active ingredient a CANDIDATE. 1.26 PROJECT shall have the meaning set forth in Section 2.2.. 1.27 PROJECT TECHNOLOGY shall mean, with respect to any PROJECT, all know-how, trade secrets, assays, inventions, experimental data, experimental procedures, technology, biological, chemical and other materials and other proprietary information which relate to therapeutic uses of COMPOUNDS the mechanism of action of which involves the TARGET(S) of the PROJECT and which are discovered or developed during the PROJECT TERM of the PROJECT or during the period following the PROJECT TERM in which development or marketing activities with respect to a CANDIDATE resulting from or relating to such PROJECT are being conducted. 6 1.28 PROJECT TERM shall mean, with respect to any PROJECT, the period during which such PROJECT is conducted pursuant to this Agreement. 1.29 RESEARCH COMMITTEE shall mean each of the joint research committee(s) formed pursuant to Section 3.2.1. 1.30 RESEARCH STAGE shall mean, with respect to any PROJECT, the stage of the PROJECT during which the parties seek CANDIDATES for the TARGET(S) of the PROJECT. 1.31 STEERING COMMITTEE shall mean the joint steering committee formed pursuant to Section 3.1.1. 1.32 SYNAPTIC TERRITORY shall mean the United States of America and its territories, Canada and its territories and Mexico. 1.33 TARGET shall mean a gene product (e.g., receptor, transporter, enzyme, transcription factor, etc.). 1.34 TERRITORIES shall mean (i) with respect to SYNAPTIC, the SYNAPTIC TERRITORY and the OTHER TERRITORIES, (ii) with respect to GRUNENTHAL, the GRUNENTHAL TERRITORY and the OTHER TERRITORIES, and (iii) with respect to both parties, the SYNAPTIC TERRITORY, the GRUNENTHAL TERRITORY and the OTHER TERRITORIES. The plural includes the singular and vice versa when the context so admits. Article 2 Cooperation, Implementation of Projects 2.1 Field. During the term of this Agreement, the parties shall engage in a cooperation focused on the identification and development of pharmaceutical products for the alleviation of PAIN in humans. 2.2 Implementation. 2.2.1 Categorization and Reservation of Targets. Any TARGET identified by SYNAPTIC which falls into any of the following categories as determined by the STEERING COMMITTEE, including each of the TARGETS set forth in Schedule I attached hereto, shall automatically be an AVAILABLE TARGET and shall be exclusively reserved for this cooperation with respect to the identification and development of COMPOUNDS for the alleviation of PAIN for a period according to its category as set forth below: 7 i) Category I: Any TARGET with in-vivo evidence for mediation of PAIN, with COMPOUNDS available that have a minimum affinity for such TARGET as defined by the STEERING COMMITTEE. These TARGETS shall be AVAILABLE TARGETS for a period of one year after their identification by the STEERING COMMITTEE as Category I TARGETS, unless subsequently recategorized by the STEERING COMMITTEE, or determined by the STEERING COMMITTEE to be EXCLUDED TARGETS. ii) Category II: Any TARGET with in-vitro and/or theoretical evidence for mediation of PAIN, with COMPOUNDS available that have a minimum affinity for such TARGET as defined by the STEERING COMMITTEE. These TARGETS shall be AVAILABLE TARGETS for a period of three years after their identification by the STEERING COMMITTEE as Category II TARGETS, unless subsequently recategorized by the STEERING COMMITTEE, or determined by the STEERING COMMITTEE to be EXCLUDED TARGETS. iii) Category III: Any speculative TARGETS identified within tissue (meaning tissue as listed in Schedule II) known to be involved in the transmission or inhibition of PAIN, with COMPOUNDS available that have a minimum affinity for such TARGET as defined by the STEERING COMMITTEE. These TARGETS shall be AVAILABLE TARGETS for a period of five years after their identification by the STEERING COMMITTEE as Category III TARGETS, unless subsequently recategorized by the STEERING COMMITTEE, or determined by the STEERING COMMITTEE to be EXCLUDED TARGETS. iv) Category IV: Any speculative TARGET identified within tissue (meaning tissue as listed in Schedule II) known to be involved in the transmission or inhibition of PAIN, with no COMPOUNDS available. These TARGETS shall be AVAILABLE TARGETS for the term of this Agreement, unless subsequently recategorized by the STEERING COMMITTEE, or determined by the STEERING COMMITTEE to be EXCLUDED TARGETS. Any AVAILABLE TARGET may be switched by determination of the STEERING COMMITTEE from one category to another and accordingly be an AVAILABLE TARGET for a different period of time. In addition, an AVAILABLE TARGET may by determination of the STEERING COMMITTEE become an EXCLUDED TARGET prior to the expiration of the period of time applicable to the category in which such TARGET falls. 8 Notwithstanding anything in the contrary set forth in the first paragraph of this Section 2.2.1, if, within 90 days following the date that GRUNENTHAL is first notified in writing of the identification by SYNAPTIC of a new TARGET, GRUNENTHAL provides written notice to SYNAPTIC that it is rejecting such TARGET as an AVAILABLE TARGET, then such TARGET shall not become an AVAILABLE TARGET and thereafter neither party shall have any obligation to the other party with respect to such TARGET. 2.2.2 Evaluation of Available Targets. The EVALUATION COMMITTEE shall, on a regular basis, review the list of the AVAILABLE TARGETS, as well as the data relating to such TARGETS that are available at the time, and formulate for consideration by the STEERING COMMITTEE recommendations regarding the initiation of new PROJECTS and the appropriate prioritization of AVAILABLE TARGETS based upon their perceived value as potential targets of pharmaceutical products for the alleviation of PAIN. In an effort to generate data regarding AVAILABLE TARGETS, each party shall be obliged to perform High Throughput Screening for a minimum number of AVAILABLE TARGETS per year as determined by the STEERING COMMITTEE. It shall be SYNAPTIC's responsibility to attempt to develop pharmacological tools or design leads for Category IV TARGETS. While GRUNENTHAL acknowledges and agrees that SYNAPTIC may seek the help of a third party in developing the pharmacological tools and design leads contemplated by the preceding sentence, SYNAPTIC acknowledges and agrees that GRUNENTHAL shall have no obligation, financial or otherwise, with respect thereto. 2.2.3 Initiation of Projects. In furtherance of the cooperation, during the term of this Agreement, the STEERING COMMITTEE shall, on a quarterly basis, consider the recommendations of the EVALUATION COMMITTEE and determine whether to initiate new joint research and development projects with one or more AVAILABLE TARGETS as their focus. The purpose of any such project will be to identify and develop jointly, up to the commencement of PHASE III TRIALS, CANDIDATES that (i) alleviate PAIN in humans and (ii) have primary mechanism of action involving the TARGET(S). For convenience of reference, each research and development project initiated as contemplated by this Section 2.2 is referred to herein as a "PROJECT". It is contemplated by the parties that at any point in time they may be conducting several PROJECTS pursuant to this Agreement. The parties agree that all TARGETS and COMPOUNDS listed in Schedule I and Schedule III shall be provided exclusively from SYNAPTIC to GRUNENTHAL under the terms of this Agreement, subject to any limitations imposed or contemplated by this Agreement, including, without limitation, such limitations imposed or contemplated by Section 2.2.1, 2.4 and/or 8.1.1. GRUNENTHAL acknowledges and agrees that SYNAPTIC has agreements with its EXISTING COLLABORATIVE PARTNERS which relate to EXCLUDED TARGETS. The parties agree that EXCLUDED TARGETS 9 as defined in Section 1.13 (i) are not part of this Agreement but available to SYNAPTIC's EXISTING COLLABORATIVE PARTNERS. SYNAPTIC warrants that nothing in the agreements with its EXISTING COLLABORATIVE PARTNERS contradicts to any provision of this Agreement, however, GRUNENTHAL acknowledges that pursuant to such agreements, SYNAPTIC is not granting, and will not in the future grant (unless in the future it is in a position to do so), GRUNENTHAL a license to use its technology to develop compounds that bind any TARGET with an affinity which is less than ten times greater than their affinity for any galanin receptor, any serotonin receptor (other than 5 HT-4 receptor), any alpha 1 adrenergic receptor or any neuropeptide Y receptor (other than the Y 2 or Y 4 receptor). The STEERING COMMITTEE, in initiation PROJECTS, in designating CANDIDATES and in fulfillment of its other responsibilities under this Agreement, shall act in a manner consistent with the foregoing. 2.2.4 Initial Project. The parties have determined by mutual agreement that the alpha-2a, -2b and -2c adrenergic receptors are of particular interest to their cooperation and have, accordingly, selected such receptors as the TARGETS of their initial PROJECT. Such PROJECT (the,,ALPHA 2 PROJECT") shall be initiated beginning as of the EFFECTIVE DATE. Set forth on Schedule III attached hereto is a list of SYNAPTIC COMPOUNDS and a list of GRUNENTHAL COMPOUNDS, in each case identified by code number which may be active at one or more of such receptors and which, as of the EFFECTIVE DATE, are, in the judgment of each party, available as pharmacological tools or design leads for use in the ALPHA-2 PROJECT. Also set forth in said Schedule III is a complete list of GRUNENTHAL's and SYNAPTIC's present PATENT RIGHTS, if any, concerning ALPHA 2 PROJECTS. 2.2.5 Other Available Targets. Schedule I attached hereto sets forth a list of the AVAILABLE TARGETS, as of the EFFECTIVE DATE. As of the EFFECTIVE DATE such AVAILABLE TARGETS are not to SYNAPTIC's knowledge, covered by issued patents of third parties and as of such date could therefore be considered by the parties as the potential subjects of additional PROJECTS. At such time, if ever, as any such AVAILABLE TARGET becomes an EXCLUDED TARGET, Schedule I shall be deemed amended by deleting such TARGET therefrom. In case a third party patent covering an AVAILABLE TARGET is issued to such third party by the patent office in the United States, The European Patent Office or the patent office in Japan, SYNAPTIC and GRUNENTHAL shall consult on the further proceedings with respect to such AVAILABLE TARGET. 2.2.6 Other Potential Sources of Available Targets. The parties have discussed possible sources for AVAILABLE TARGETS that could provide the basis for additional PROJECTS, and agree that SYNAPTIC shall present new, if any, 10 AVAILABLE TARGETS to the STEERING COMMITTEE for categorization every six month period following the EFFECTIVE DATE. Such AVAILABLE TARGETS may result from SYNAPTIC's molecular biology efforts. In addition, the parties, through their representatives on the STEERING COMMITTEE, may (a) identify AVAILABLE TARGETS which, based upon the scientific literature, are known to exist pharmacologically but have not yet been cloned or have been cloned by a third party but are not proprietary to a third party and (b) direct SYNAPTIC to attempt to clone such receptors. Finally, it is contemplated that such AVAILABLE TARGETS may result from certain genomics efforts on the part of SYNAPTIC focused on spinal and supraspinal tissues. 2.2.7 Available Targets becoming Excluded Targets. In the event that during the periods set forth in Section 2.2.1 for each AVAILABLE TARGET the parties do not initiate a new PROJECT with such AVAILABLE TARGET as its focus, then SYNAPTIC shall be free to convert such AVAILABLE TARGET to an EXCLUDED TARGET by giving GRUNENTHAL written notice. Thereafter SYNAPTIC shall have the right to exploit such TARGET independently or with one or more third parties in each case without further liability or other obligation, financial or otherwise, to GRUNENTHAL, and GRUNENTHAL's right to exploit such TARGET using SYNAPTIC BACKGROUND TECHNOLOGY and PROJECT TECHNOLOGY shall immediately and indefinitely cease to exist and GRUNENTHAL's right to exploit such TARGET without the use of such SYNAPTIC BACKGROUND TECHNOLOGY and SYNAPTIC PROJECT TECHNOLOGY shall immediately cease to exist for a period of two years. 2.3 Structure. Each PROJECT shall include a RESEARCH STAGE and may include an EARLY DEVELOPMENT STAGE with respect to one or more CANDIDATES identified during the RESEARCH STAGE. Following the conclusion of the EARLY DEVELOPMENT STAGE with respect to a CANDIDATE, the parties, through the STEERING COMMITTEE, may determine to initiate an ADVANCED DEVELOPMENT STAGE with respect to the CANDIDATE. The rights and obligations of the parties during each of these stages, as well as their rights and obligations with respect to the production and marketing of each PRODUCT relating to or arising out of a PROJECT, are described herein. 2.4 No Independent Research or Research with Third Parties within Field. It is the intent of the parties that they be exclusive partners in the identification and/or development of COMPOUNDS for alleviating PAIN in humans to the extent that such COMPOUNDS act through one or more TARGETS that are the focus of one or more PROJECTS or subsequent drug development or marketing activities pursuant to this Agreement. Accordingly, without the approval of the other party, during the PROJECT TERM of any PROJECT and the period following the PROJECT TERM in which development or marketing activities with respect to a CANDIDATE resulting from or relating to such PROJECT are being conducted, neither party shall conduct, either independently or with a third party, any research directed toward the identification and/or development of COMPOUNDS for alleviating PAIN in humans to 11 the extent that any of the TARGETS through which such COMPOUNDS act is (i) the same as a TARGET of such a PROJECT, (ii) the same as a TARGET through which the CANDIDATE acts, or (iii) is an AVAILABLE TARGET provided, however, that the foregoing prohibition shall not apply to the collaborative project being conducted by SYNAPTIC and The DuPont Merck Pharmaceutical Company pursuant to the Collaborative Research Agreement dated February 5, 1996; provided further, however, that the foregoing prohibition shall not apply to SYNAPTIC's research relating to the identification and development of pharmaceutical products that act at one or more of the EXCLUDED TARGETS. 2.5 In-Licensing Opportunities. If, during the PROJECT TERM of any PROJECT or during the period following the PROJECT TERM in which development or marketing activities with respect to a CANDIDATE resulting from or relating to such PROJECT are being conducted, either party shall become aware of any opportunity to in-license for potential development of a pharmaceutical product for alleviating PAIN in humans a compound the mechanism of action of which involves a TARGET of such PROJECT or any other AVAILABLE TARGET, such party shall inform the other party. Neither party may consummate an agreement with respect to such compound unless both parties agree on the terms under which the agreement will be consummated. 2.6 Disclosure of Background Technology and Project Technology; Use of Background Technology and Project Technology Outside Cooperation. 2.6.1 Disclosure of Background Technology and Project Technology. If, during the PROJECT TERM of any PROJECT or during the period following the PROJECT TERM in which development or marketing activities with respect to a CANDIDATE resulting from or relating to such PROJECT are being conducted, either party should discover or develop BACKGROUND TECHNOLOGY or PROJECT TECHNOLOGY, such party shall disclose such BACKGROUND TECHNOLOGY or PROJECT TECHNOLOGY to the other party. 2.6.2 Use of Grunenthal Background Technology and Grunenthal Project Technology Relating to Targets for which an Indication other than the Alleviation of Pain has been Identified. If GRUNENTHAL is the discovering or developing party referred to in Section 2.6.1 and such BACKGROUND TECHNOLOGY and/or PROJECT TECHNOLOGY was not previously known by SYNAPTIC and relates to the use of a TARGET for an indication other than the alleviation of PAIN (a,,new indication"), then, SYNAPTIC shall have exclusive rights to pursue the discovery independently or with a third party, and to seek and pursue patent protection thereon if GRUNENTHAL has not yet filed a patent application. In the event that SYNAPTIC independently commercializes a product based upon such discovery and which is covered by an issued PATENT RIGHT of GRUNENTHAL, it shall pay GRUNENTHAL a royalty of 3 % of the NET SALES of the product for the new indication in countries in which such issued GRUNENTHAL PATENT RIGHT exists. In the event that SYNAPTIC licenses such issued GRUNENTHAL PATENT RIGHT to a third party, 12 SYNAPTIC shall pay GRUNENTHAL 33 % of any royalty which SYNAPTIC receives from the third party in respect of any such PATENT RIGHT in countries in which such GRUNENTHAL PATENT RIGHT exists. For COMPOUNDS provided by GRUNENTHAL Section 2.6.4 shall apply in lieu of this Section 2.6.2. 2.6.3 Use of Grunenthal Background Technology and Project Technology Relating to Excluded Targets for Pain. If GRUNENTHAL is the discovering or developing party referred to in Section 2.6.1 and such BACKGROUND TECHNOLOGY or PROJECT TECHNOLOGY relates to the use for PAIN of a TARGET which thereafter became an EXCLUDED TARGET, then SYNAPTIC shall have exclusive rights to pursue the discovery independently or with a third party, and to pursue patent protection thereon, with no further obligation to GRUNENTHAL, financial or otherwise. For COMPOUNDS provided by GRUNENTHAL Section 2.6.4 shall apply in lieu of this Section 2.6.3. 2.6.4 Use of Compounds Included in Grunenthal Background Technology or Grunenthal Project Technology. In connection with the exercise of its rights under Section 2.6.2 and/or Section 2.6.3 above, SYNPATIC shall be permitted to use COMPOUNDS included in GRUNENTHAL BACKGROUND TECHNOLOGY and/or GRUNENTHAL PROJECT TECHNOLOGY and to commercialize any products resulting therefrom, without compensation to GRUNENTHAL, financial or otherwise; provided, however, that if any such product incorporates the compound covered by an issued GRUNENTHAL PATENT RIGHT, SYNAPTIC shall pay GRUNENTHAL a royalty (a) 3 % of the NET SALES of such product in countries in which such issued GRUNENTHAL PATENT RIGHT exists if SYNAPTIC independently commercializes such product and (b) 33 % of any royalty which SYNAPTIC receives from a third party in respect of any such PATENT RIGHT if SYNAPTIC licenses the issued GRUNENTHAL PATENT RIGHT to a third party. 2.6.5 Use of Synaptic Background Technology and Synaptic Project Technology Relating to Chemistry. GRUNENTHAL shall be permitted to use SYNAPTIC BACKGROUND TECHNOLOGY and SYNAPTIC PROJECT TECHNOLOGY relating to chemistry for the purpose of developing compounds useful for the alleviation of PAIN, the mechanism of action of which involves a TARGET which is neither an EXCLUDED TARGET nor an AVAILABLE TARGET. In the event that any product which incorporates any of such SYNAPTIC BACKGROUND TECHNOLOGY or SYNAPTIC PROJECT TECHNOLOGY, whether or not patented or patentable by SYNAPTIC, is proposed to be commercialized, GRUNENTHAL shall promptly inform SYNAPTIC and shall negotiate with SYNAPTIC in good faith appropriate compensation to be paid to SYNAPTIC in respect of such TECHNOLOGY, based upon its relative contribution and importance to such product. In case the parties are not able to agree within 180 days on appropriate compensation SYNAPTIC shall be free to offer such rights on such products to 13 third parties, and any right that GRUNENTHAL may have had under this Section 2.6.5 and any right that GRUNENTHAL may have to market such product shall automatically be forfeited thereafter. 2.6.6 Request for Access to Blocking Technology and Patent Rights. Prior to entering into a collaboration with a third party to develop compounds which (a) have as their mechanism of action a TARGET that is the focus of a PROJECT and(b) are for an indication other than the alleviation of PAIN SYNAPTIC shall use all reasonable efforts to seek from such party the right to use, and to permit GRUNENTHAL to use, technology resulting from such collaboration and related patent rights for the development of compounds for the alleviation of PAIN. At the time that SYNAPTIC and any such third party begin negotiating an agreement covering such a collaboration, SYNAPTIC shall inform GRUNENTHAL and shall thereafter regularly consult with GRUNENTHAL regarding such negotiation as it relates to the foregoing. SYNAPTIC shall obtain the same rights and conditions as for itself also for GRUNENTHAL's use in the GRUNENTHAL TERRITORY or OTHER TERRITORIES for the alleviation of PAIN. Any costs associated with GRUNENTHAL's obtaining or exercising such right to use such technology shall be borne by GRUNENTHAL. 2.6.7 The rights granted in Section 2.6.2, 2.6.3, 2.6.4, 2.6.5 shall be granted as long as such technology or PATENT RIGHTS exists and shall survive the termination or expiration of this Agreement regardless of the reason of termination or expiration provided however, that the respective party has complied with its payment obligation in connection with such rights. In case the respective party is in breach of such payment obligation Section 13.2 shall apply. Article 3 Management and Planning of Projects; Reports and Exchange of Information 3.1 Steering Committee; Management Committee. 3.1.1 Formation; Composition. A STEERING COMMITTEE shall be formed promptly following the EFFECTIVE DATE, but in no event later than 30 days thereafter. Each party shall be entitled to appoint three members of its staff to act as its representatives on the STEERING COMMITTEE. Each party may from time to time change its representation on the STEERING COMMITTEE, but shall notify the other party promptly in writing of any such change. 3.1.2 Responsibilities. The STEERING COMMITTEE shall be responsible for the following: (a) designating AVAILABLE TARGETS to the categories set forth in Section 2.2.1, designating which new PROJECTS shall be initiated, 14 determining the timing for each PROJECT, deciding which AVAILABLE TARGET may become an EXCLUDED TARGET prior to the applicable time periods set forth in Section 2.2.1 and determining the minimum number of AVAILABLE TARGETS in category IV with respect to which each party is obliged to perform High Throughput Screening as contemplated in Section 2.2.2; (b) devising, in collaboration with the RESEARCH COMMITTEE for each PROJECT, an initial research plan for the PROJECT setting forth the principal goals to be achieved during the RESEARCH STAGE of the PROJECT, the principal activities to be conducted during such STAGE, the relative priorities of the parties and the proposed timetables for achieving the goals and conducting the activities; (c) establishing criteria regarding pharmacological profile, stability, pharmacokineticprofile, bioavailability, synthesis and safety profile which must be satisfied in order for a LEAD to become a CANDIDATE; (d) establishing criteria regarding the in vivo therapeutic profile which must be satisfied in order for a COMPOUND to be considered a LEAD; (e) preparing such procedures and mechanisms as may be necessary for the STEERING COMMITTEE and each RESEARCH COMMITTEE to operate in a manner which will ensure the efficient conduct of each PROJECT hereunder; (f) deciding to start Good Laboratory Practices four-week toxicology studies with respect to a LEAD, thereby rendering such LEAD a CANDIDATE; (g) monitoring and directing the activities of each RESEARCH COMMITTEE; (h) preparing, for review and approval by each party, a detailed schedule of activities proposed to be conducted during the EARLY DEVELOPMENT STAGE with respect to each CANDIDATE, as well as a proposed budget of costs associated with certain of such activities (such proposed budget to be prepared in accordance with Section 3.1.3 below); and (i) monitoring and directing the activities conducted during the EARLY DEVELOPMENT STAGE with respect to each CANDIDATE and, if determined to be appropriate, proposing for consideration and approval by each party, revisions to any previously approved schedule of activities and/or budget. The STEERING COMMITTEE shall not, in any year, withhold its approval of any increases in a previously approved BUDGET proposed by one party so long as the aggregate of such 15 increases is less than 50% of the entire BUDGET for such year. To the extent that the aggregate of proposed increases in any year exceed 50% of the entire BUDGET for such year, the STEERING COMMITTEE shall not unreasonably withhold its approval thereof. (j) determining to commence PHASE III TRIALS, it being understood that such determiantion shall be made following the completion of phase II a clinical trials and no party shall block such determination. In addition, the STEERING COMMITTEE shall have such other responsibilities as are set forth herein or contemplated hereby. 3.1.3 Three Types of Studies; Preparation of Budget Covering Common Studies Only. (a) It is contemplated by the parties that three types of studies may be conducted during the EARLY DEVELOPMENT STAGE with respect to a CANDIDATE: (i) those studies which both parties agree should be conducted as part of phase I and phase IIa clinical trials with respect to the CANDIDATE in order ultimately to satisfy both FDA and EMEA requirements (the,,COMMON STUDIES"); (ii) those studies which SYNAPTIC believes should be conducted as part of phase I and phase IIa clinical trials with respect to the CANDIDATE in order ultimately to satisfy FDA requirements but which GRUNENTHAL does not believe need to be conducted in order ultimately to satisy EMEA requirements (the,,FDA STUDIES"); and (iii) those studies which GRUNENTHAL believes should be conducted as part of phase I and phase IIa clinical trials with respect to the CANDIDATE in order ultimately to satisfy EMEA requirements but which SYNAPTIC does not believe need to be conducted in order ultimately to satisfy FDA requirements (the,,EMEA STUDIES"). (b) The proposed budget of costs to be prepared by the STEERING COMMITTEE for the EARLY DEVELOPMENT STAGE with respect to a CANDIDATE pursuant to Section 3.1.2 (i) and (h) above shall include the total estimated cost of conducting the COMMON STUDIES only, as well as a detailed breakdown of the costs which the parties expect to incur in conducting the COMMON STUDIES during the first 12 months of the EARLY DEVELOPMENT STAGE. (c) Within 60 days prior to the end of each 12-month period during the EARLY DEVELOPMENT STAGE (or, if the 12-month period commences in January, then within 90 days prior to the end of such period), the STEERING COMMITTEE shall prepare a new detailed budget of costs expected to be incurred in conducting the COMMON STUDIES during the subsequent 12-month period and shall submit it to each party for its review and approval. 16 (d) The budget with respect to each CANDIDATE, as the same may be modified from time to time and approved by the parties as provided in this Section 3.1.3 or in Section 3.1.2 above, shall be referred to herein as the ,,BUDGET." 3.1.4 Initial Meetings; Initial Research Plans. The STEERING COMMITTEE shall meet promptly following the EFFECTIVE DATE, but in no event later than 30 days thereafter (a) to devise, in collaboration with the RESEARCH COMMITTEE, the initial research plan for the ALPHA-2 PROJECT and (b) to review the available scientific data relating to the AVAILABLE TARGETS identified in Schedule I attached hereto, so as to categorize such TARGETS as contemplated by Section 2.2.1. The STEERING COMMITTEE shall also meet promptly following the determination by the parties to initiate each new PROJECT as contemplated by Section 2.2 to devise, in collaboration with the RESEARCH COMMITTEE for such PROJECT, the initial research plan for the PROJECT. The initial research plan for each PROJECT shall be subject to review and approval by each party. Modifications to any initial research plan shall be made in accordance with Section 3.6. 3.1.5 Additional Meetings; Agendas and Minutes. The STEERING COMMITTEE shall meet at least quarterly and shall prepare agendas and minutes for each of its meetings. 3.1.6 Actions; Resolution of Issues by Management Committee. All actions taken and decisions made by the STEERING COMMITTEE shall be made in accordance with Section 3.4. Any issues which cannot be resolved by the STEERING COMMITTEE shall be referred to a MANAGEMENT COMMITTEE, comprising one individual from SYNAPTIC and one individual from GRUNENTHAL, for resolution. The members of the MANAGEMENT COMMITTEE are currently, from SYNAPTIC: Kathleen P. Mullinix, Chairman, President and Chief Executive Officer; and from GRUNENTHAL: Dr. E.P. Paques. Each of SYNAPTIC and GRUNENTHAL may from time to time change its representation on the MANAGEMENT COMMITTEE, but shall notify the other party promptly in writing of any such change. 3.2 Research Committees. 3.2.1 Formation; Composition. A RESEARCH COMMITTEE for the ALPHA-2 PROJECT shall be formed promptly following the EFFECTIVE DATE, but in no event later than 30 days thereafter. With respect to each additional PROJECT initiated by the parties as contemplated by Section 2.2, a RESEARCH COMMITTEE shall be formed promptly, but in no event later than 30 days following the determination by the parties to initiate such PROJECT. Each party shall be entitled to appoint three members of its staff to act as its representatives on each RESEARCH COMMITTEE. Each party may from time to time change its representation on the RESEARCH COMMITTEE(S), but shall notify the other party promptly of any such change. 17 Each RESEARCH COMMITTEE shall report to and operate under the overall direction of the STEERING COMMITTEE. 3.2.2 Responsibilities. Each RESEARCH COMMITTEE shall be responsible for the following: (a) monitoring and directing the activities of the scientists working on its PROJECT; (b) elaborating and coordinating action plans; (c) the economic use of capacities; (d) the fulfillment of the research plan for such PROJECT; and (e) approving COMPOUNDS which exhibit affinity for, and functional activity at, a TARGET which is the focus of a PROJECT for testing in in vivo models. In addition, each RESEARCH COMMITTEE shall have such other responsibilities as are set forth herein or contemplated hereby. 3.2.3 Initial Meetings; Initial Research Plans. The RESEARCH COMMITTEE for the ALPHA-2 PROJECT shall meet promptly following the EFFECTIVE DATE, but in no event later than thirty days thereafter, to devise, in collaboration with the STEERING COMMITTEE, the initial research plan for the PROJECT. The RESEARCH COMMITTEE shall also meet promptly following the determination by the parties to initiate each new PROJECT as contemplated by Section 2.2 to devise, in collaboration with the STEERING COMMITTEE, the initial research plan for the PROJECT. Modifications to any such plan shall be made in accordance with Section 3.5. 3.2.4 Additional Meetings; Agendas and Minutes. Each RESEARCH COMMITTEE shall meet at least quarterly. Each RESEARCH COMMITTEE shall prepare agendas and minutes for each of its meetings. 3.2.5 Actions. All actions taken and decisions made by the RESEARCH COMMITTEE shall be made in accordance with Section 3.4. Any issues which cannot be resolved by the RESEARCH COMMITTEE shall be referred to the STEERING COMMITTEE. 3.3 Evaluation Committee. 3.3.1 Formation; Composition; An EVALUATION COMMITTEE shall be formed promptly following the EFFECTIVE DATE. Each party shall appoint one member of its staff to act as its representative. Each party may from time to time change its representation on the EVALUATION COMMITTEE, but shall notify the other party 18 promptly of any such change. The EVALUATION COMMITTEE shall report to and operate under the overall direction of the STEERING COMMITTEE. 3.3.2 Responsibilities; The EVALUATION COMMITTEE shall with respect to each AVAILABLE TARGET prior to the initiation of a PROJECT with such AVAILABLE TARGET as its focus, be responsible for the following: (a) monitoring and directing the activities of the scientists working on the evaluation of any AVAILABLE TARGET; (b) elaborating and coordinating action plans; (c) the economic use of capacities; (d) the fulfillment of the evaluation plan for each AVAILABLE TARGET; (e) selecting COMPOUNDS which exhibit affinity for, and/or functional activity at, an AVAILABLE TARGET for testing in in vivo models; (f) preparation of yearly reviews on the AVAILABLE TARGETS including recommendations to the STEERING COMMITTEE as to which AVAILABLE TARGET may become an EXCLUDED TARGET and (g) recommending to the STEERING COMMITTEE on a quaterly basis which AVAILABLE TARGETS, if any, should be switched from one category to another. In addition the EVALUATION COMMITTEE shall have such other responsibilities as are set forth herein or contemplated hereby. 3.4 Meetings. All actions and decisions by the MANAGEMENT COMMITTEE, the STEERING COMMITTEE each RESEARCH COMMITTEE and the EVALUATION COMMITTEE (together referred to as ,,COMMITTEE(S)") shall be taken or made only if (i) at least one member of the respective COMMITTEE of each party is present and acting on behalf of such party and (ii) only by unanimous agreement of all the COMMITTEE members present. However, it is envisaged by the parties that all of the members of a COMMITTEE shall be available at each meeting. The COMMITTEES may meet by telephone or in person, as determined by the respective members of such committees; provided, however, that at least two meetings of the RESEARCH COMMITTEE shall be held in person each year. Attendance at meetings shall be at the respective expenses of the participating parties. The parties shall alternate the right to determine the location of each meeting. 19 3.5 Personnel and Resources. Each party shall commit such personnel, facilities, expertise and other resources to each PROJECT as it may determine to be necessary to perform its obligations under the research plan for such PROJECT, as the same may be modified from time to time in accordance with the provisions of this Agreement. 3.6 Modification of Research Plan(s). The STEERING COMMITTEE will review the research plan for each ongoing PROJECT at least quarterly and may approve any proposed changes thereto which are not material in nature. Any material changes that the STEERING COMMITTEE determines to be appropriate in light of changing priorities of the PROJECT or experience gained in the course of the PROJECT shall be subject to review and approval by each party. 3.7 Conduct of Studies. All studies done in connection with the PROJECT(S) shall be carried out in strict compliance with all applicable laws, regulations and guidelines governing the conduct of research at the site where such studies are being conducted. Article 4 Early Stage of Projects 4.1 Research Stage. 4.1.1 SYNAPTIC Activities. During the RESEARCH STAGE of each PROJECT, SYNAPTIC will conduct such of the following activities as the STEERING COMMITTEE determines to be appropriate: (a) make its in vitro assay systems relating to the TARGET(S) of such PROJECT available for testing COMPOUNDS provided by GRUNENTHAL and/or SYNAPTIC as part of the PROJECT; (b) profile and characterize such COMPOUNDS to the extent possible by the scope of its assay systems; and (c) in conjunction with GRUNENTHAL attempt to generate LEADS. 4.1.2 GRUNENTHAL Activities. During the RESEARCH STAGE of each PROJECT, GRUNENTHAL will conduct such of the following activities as the STEERING COMMITTEE determines to be appropriate: (a) make its in vitro assay systems relating to the TARGET(S) of such PROJECT available for testing COMPOUNDS provided by GRUNENTHAL and/or SYNAPTIC as part of the PROJECT; 20 (b) profile and characterize such COMPOUNDS to the extent possible by the scope of its assay systems; (c) evaluate the profile (e.g., stability, side effects, etc.) of such COMPOUNDS in its in vivo assay systems in PAIN; and (d) generate LEADS. 4.1.3 Responsibility for Costs. Each party shall be responsible for its own costs incurred in connection with a PROJECT during the RESEARCH STAGE of such PROJECT. 4.2 Early Development Stage. 4.2.1 Coordination of Activities to be Conducted. (a) All activities to be conducted with respect to a CANDIDATE during the EARLY DEVELOPMENT STAGE shall be subject to monitoring and direction by the STEERING COMMITTEE. GRUNENTHAL shall be responsible for conducting all such activities, which may include (but shall not be limited to) the following: (i) production of the necessary amount of Good Manufacturing Practices (,,GMP") and non-GMP material for safety pharmacological, toxicological and pharmacokinetic studies, COMMON STUDIES and EMEA STUDIES; (ii) optimization of the synthesis route in order to allow further clinical development and commercial production; (iii) development of suitable application forms; (iv) conducting the necessary safety pharmacological, toxicological and pharmacokinetic studies, all according to the European guidelines, taking into account requirements of the FDA as far as possible in order to enable safety (i.v. and/or p.o.) trials to enter into dose finding efficacy studies; and (v) conducting all phase I and phase IIa COMMON STUDIES, EMEA STUDIES and FDA STUDIES necessary for the commencement of PHASE III TRIALS (and activities relating thereto) . (b) In addition to the activities referred to in subparagraph (a) above, at SYNAPTIC's expense (as provided in Section 4.2.2 below), GRUNENTHAL will conduct at its discretion, in accordance with FDA requirements, FDA STUDIES and related activities requested by SYNAPTIC. Such activities may 21 include (but shall not be limited to) production of the necessary amount of GMP and non-GMP material necessary to conduct such FDA STUDIES. 4.2.2 Responsibility for Costs. Subject to Section 4.2.3, each party shall be responsible for 50% of any costs incurred pursuant to the BUDGET for a PROJECT. GRUNENTHAL shall be responsible for 100% of any costs incurred in connection with conducting EMEA STUDIES and related activities. SYNAPTIC shall be responsible for 100% of any costs incurred in connection with conducting FDA STUDIES and related activities. 4.2.3 Election to Cease Participation. In case one party (the ,,nonparticipating party") determines after the identification of a CANDIDATE by the STEERING COMMITTEE and prior to or during the EARLY DEVELOPMENT STAGE with respect to such CANDIDATE that it no longer desires to participate in the development of the CANDIDATE, it may elect, by providing written notice (the ,,nonparticipation notice") to the other party (the ,,participating party"), to terminate its participation, whereupon the following shall apply: (a) The nonparticipating party shall cease to be obligated pursuant to Section 4.2.2 for any costs incurred in connection with the CANDIDATE following such notification; (b) The participating party may continue its development activities with respect to such CANDIDATE, but shall inform the nonparticipating party of the progress of such activities in writing no less frequently than quarterly. Such activities may also be performed in the exclusive TERRITORIES of the nonparticipating party; (c) Subject to the other provisions of this Section 4.2.3 and Section 4.2.4, the nonparticipating party shall cease to have any marketing or other rights with respect to such CANDIDATE, and the participating party shall be free to exploit the CANDIDATE in the TERRITORIES of the nonparticipating party; and (d) The participating party shall pay the nonparticipating party with respect of any PRODUCT comprising such CANDIDATE (i) in the nonparticipating party's exclusive part of the TERRITORY a royalty of 4 % of the NET SALES or in the event the participating party licenses such product to a third party, 33,3 % of any compensation payable to the participating party by such third party whichever is higher (determined on a country-by-country basis) and/or (ii) in the OTHER TERRITORIES a royalty of 2 % of the NET SALES or in the event the participating party licenses such product 22 to a third party, 16,65 % of any compensation payable to the participating party by such third party whichever is higher (determined on a country-by-country basis). Section 5.1.2.5 shall apply mutatis mutandis. 4.2.4 Election to Recommence Participation. If, during the course of the development of a CANDIDATE by the participating party, the nonparticipating party wants to join in again, this shall be possible against a reimbursement of 50% of the costs incurred by the participating party following its receipt of the nonparticipation notice, plus a surcharge on such costs determined in accordance with Schedule A, plus interest on such costs for the period from the date of the nonparticipation notice to the date of reentry at the discount rate, as long as the nonparticipating party's right of first refusal has not been activated pursuant to Section 4.2.5. Such right shall be deemed activated when the participating party provides the notification contemplated thereby to the nonparticipating party. 4.2.5 Right of First Refusal. In the event the participating party negotiates an agreement with a third party pursuant to which such third party will license the CANDIDATE with respect to which the nonparticipating party ceded its rights pursuant to Section 4.2.3, it shall notify the nonparticipating party of the principal terms of such agreement and provide it with a right of first refusal. The nonparticipating party shall have 90 days following such notification within which to provide notice to the participating party of its acceptance of such principal terms. In the event the nonparticipating party provides such notice of acceptance, the parties shall use their best efforts to conclude an agreement within 180 days thereafter. Should this right of first refusal not be exercised within the 90-day period or should an agreement not be concluded within the 180-day period, the participating party shall be free to license the CANDIDATE to the third party on substantially the same terms provided in the notification, subject to the payment to the nonparticipating party of (i) in the nonparticipating party's exclusive part of the TERRITORY a royalty of 4 % of the NET SALES or in the event the participating party licenses such product to a third party, 33,3 % of any compensation payable to the participating party by such third party whichever is higher (determined on a country-by-country basis) and/or (ii) in the OTHER TERRITORIES a royalty of 2 % of the NET SALES or in the event the participating party licenses such product to a third party, 16,65 % of any compensation payable to the participating party by such third party whichever is higher (determined on a country-by-country basis). Section 5.1.2.5 shall apply mutatis mutandis. 23 4.2.6 Access to Data Generated in Connection with Phase I, Phase IIa or Phase IIb Clinical Trials. (a) All data generated pursuant to COMMON STUDIES conducted during the EARLY DEVELOPMENT STAGE or the ADVANCED DEVELOPMENT STAGE with respect to a CANDIDATE and all information relating to manufacturing and formulation of such CANDIDATE and generated prior to the commencement of the ADVANCED DEVELOPMENT STAGE shall be provided to both parties in the available data format at no charge. (b) All data generated pursuant to FDA STUDIES conducted during the EARLY DEVELOPMENT STAGE or the ADVANCED DEVELOPMENT STAGE with respect to a CANDIDATE shall (i) if reasonably necessary to ensure completeness of a registration package for such CANDIDATE in Europe and if not generated pursuant to FDA STUDIES, be provided to GRUNENTHAL at GRUNENTHAL's request in the available data format at no charge and (ii) if not reasonably necessary to ensure completeness of a registration package for such CANDIDATE in Europe and if generated pursuant to FDA STUDIES, be provided to GRUNENTHAL at GRUNENTHAL's request in the available data format against reimbursement of 50% of the costs of conducting such studies, plus a surcharge of 10%. (c) All data generated pursuant to EMEA STUDIES conducted during the EARLY DEVELOPMENT STAGE or the ADVANCED DEVELOPMENT STAGE with respect to a CANDIDATE shall (i) if reasonably necessary to ensure completeness of a registration package for such CANDIDATE in the United States and if not generated pursuant to EMEA STUDIES, be provided to SYNAPTIC at SYNAPTIC's request in the available data format at no charge and (ii) if not reasonably necessary to ensure completeness of a registration package for such CANDIDATE in the United States or if generated pursuant to EMEA STUDIES, be provided to SYNAPTIC at SYNAPTIC's request in the available data format against reimbursement of 50% of the costs of conducting such studies, plus a surcharge of 10%. Article 5 Advanced Development Stage of Projects 5.1 Conduct of Activities During Advanced Development Stage. 5.1.1 Activities directed towards pursuing Regulatory Approval; During the ADVANCED DEVELOPMENT STAGE with respect to a CANDIDATE, GRUNENTHAL in the GRUNENTHAL TERRITORY and SYNAPTIC either independently or with a third party in the SYNAPTIC TERRITORY shall be 24 responsible for diligently conducting activities, including PHASE III TRIALS, directed towards pursuing regulatory approval for a PRODUCT, comprising such CANDIDATE. The parties shall use commercially reasonable efforts to achieve the approval for commencement of PHASE III TRIALS from the EMEA or the FDA respectively, and thereafter to commence such PHASE III TRIALS in Europe or the United States respectively. In the event SYNAPTIC intends to seek a licensee for the above mentioned activities, it shall use commercially reasonable efforts to cause any such licensee to commence PHASE III TRIALS - as contemplated above - as promptly as possible, recognizing that if any such licensee is going to undertake manufacturing of materials or if SYNAPTIC or its licensees commission a TOLL MANUFACTURER to manufacture such material for such PHASE III TRIALS, certain delays may occur as a result. Such delay shall not invoke the consequences of Section 5.1.2, provided however, such delay is in no case longer than 12 months following the end of the two-year period referred to in Section 5.1.2. GRUNENTHAL undertakes to support SYNAPTIC in its search for a TOLL MANUFACTURER or licensee. 5.1.2 Timeframe; Consequences of Delay to Commence Phase III Clinical Trials. In the event one party (the ,,delayed party") has not commenced and pursued diligently PHASE III TRIALS in its TERRITORY with respect to a CANDIDATE as contemplated in Section 5.1.1. within two years following the commencement of PHASE III TRIALS ("PHASE III COMMENCEMENT DATE") by the other party (the ,,timely party") in its TERRITORY with respect to such CANDIDATE as contemplated in Section 5.1.1. the following shall apply: The delayed party shall lose its rights in its exclusive TERRITORY and the OTHER TERRITORIES for the respective PRODUCT, giving the timely party the option to receive worldwide exclusive rights for such PRODUCT against 5.1.2.1 reimbursement of the accumulated costs incurred by the delayed party with respect to such PRODUCT; and 5.1.2.2 a royalty of 6 % on the NET SALES of the PRODUCT in the exclusive TERRITORY of the delayed party; and 5.1.2.3 a royalty of 4 % on the NET SALES of the PRODUCT in the OTHER TERRITORIES. 5.1.2.4 In the event that the timely party licenses such PRODUCT to a third party, the delayed party shall receive the amount calculated pursuant to Section 5.1.2.1 and either 25 (i) the amounts calculated according to Section 5.1.2.2 and Section 5.1.2.3 above or (ii) of any compensation which the timely party may become entitled to receive from the third party for such license, either 33,3 % if it concerns a license in the delayed party's exclusive part of the TERRITORY or 22,2 % if it concerns a license in the OTHER TERRITORIES whichever is higher (determined on a country-by-country basis). 5.1.2.5 In the event that the commercialization of such PRODUCT in the exclusive part of the TERRITORY of the delayed party or in the OTHER TERRITORY is dependent on intellectual property rights of another party, then 33,3 % of any compensation payable to such other party shall be borne by the delayed party and 66,7 % of such compensation shall be borne by the timely party. The consequences set forth in this Section 5.1.2 shall not apply in either of the following cases: (i) Within one year following the PHASE III COMMENCEMENT DATE, SYNAPTIC requests that GRUNENTHAL produce FDA conformed materials pursuant to Section 5.1.3.3, GRUNENTHAL notifies SYNAPTIC within 90 days after such request that it will produce such materials for SYNAPTIC, GRUNENTHAL fails to provide such materials to SYNAPTIC prior to the second anniversary of the PHASE III COMMENCEMENT DATE and, as a consequence, SYNAPTIC is unable to commence PHASE III TRIALS prior to such second anniversary; or (ii) The delayed party fails to commence PHASE III TRIALS prior to the second anniversary of the PHASE III COMMENCEMENT DATE due to circumstances beyond its control, including, without limitation, acts or omissions of any governmental authority such as the FDA or the EMEA. 5.1.3 Production of FDA-Conformed Materials. In order to fulfill the obligations described in the preceding paragraphes of this Article , SYNAPTIC shall be required to produce FDA-conform material of any CANDIDATE in GMP-quality and in sufficient quantity necessary for diligently conducting PHASE III TRIALS in SYNAPTIC TERRITORY either 5.1.3.1 independently; or 5.1.3.2 with exclusive licensee, or 26 5.1.3.3 with GRUNENTHAL. In the event that SYNAPTIC offers GRUNENTHAL to produce such material, GRUNENTHAL shall have an option - to be exercised within 90 days after receipt of notice to produce exclusively such material until the approval of such PRODUCT comprising such CANDIDATE in the United States. SYNAPTIC shall purchase from GRUNENTHAL such PRODUCT against reimbursement of cost of production plus 20 % surcharge. For the purpose of this Agreement, "cost of production" shall be calculated in accordance with standard accounting procedures. In case GRUNENTHAL has exercised such option, GRUNENTHAL shall produce such FDA-material of any CANDIDATE in GMP-quality and in sufficient quantity as mentioned in Section 5.1.2 above, using all reasonable efforts to achieve the upscaling of the production from the existing level to production scale in reasonable time. 50 % of the cost of such upscaling shall be borne by SYNAPTIC, it being understood that such cost shall not include costs incurred in building a facility or other building improvements. 5.1.3.4 In the event that GRUNENTHAL does not exercise such option and SYNAPTIC desires to seek a toll manufacturer to produce such materials, SYNAPTIC shall use best efforts to seek a toll manufacturing organization which is under the obligation (i) to keep all nonpublic information relating to the manufacturing and formulation process strictly confidential for an unlimited period of time, and (ii) not to produce the product for the benefit of any person or entity other than SYNAPTIC and its licensees defined herewith as ,,TOLL MANUFACTURER". SYNAPTIC shall use best efforts to seek - in cooperation with GRUNENTHAL - an agreement for any such TOLL MANUFACTURER not to produce the PRODUCT for any person or entity other than SYNAPTIC or its licensees until the expiration of the fifth anniversary of the expiration of the last blocking patent relating to the PRODUCT in the United States. The parties agree that the time period between the notification pursuant to Section 5.1.3.3 and GRUNENTHAL's decision whether to exercise such option or not shall be added to the period refered to in Section 5.1.2. 5.1.4 Geographic Limitation on Conduct of Activities. Neither party shall conduct any activities with respect to a CANDIDATE outside its exclusive TERRITORY without the prior consent of the other party. 5.2 Responsibility for Costs. Each party shall be responsible for its own costs incurred during the ADVANCED DEVELOPMENT STAGE with respect to any CANDIDATE. The parties recognize the possibility that the ADVANCED DEVELOPMENT STAGE with respect to a CANDIDATE shall commence following 27 completion of phase IIa clinical trials but before commencement or completion of phase II clinical trials. As a consequence, phase II clinical trials with respect to a CANDIDATE could occur during or after the ADVANCED DEVELOPMENT STAGE with respect to the CANDIDATE. Notwithstanding the first sentence of this Section 5.2, costs incurred in connection with any phase II clinical trials shall be borne by the parties in accordance with Section 4.2.2 above. 5.3 Access to Data Generated in Connection with Phase III Clinical Studies. Each party shall keep the other party reasonably apprised of the results of any PHASE III TRIALS and any other activities conducted by or on behalf of such party without the participation of the other party during the ADVANCED DEVELOPMENT STAGE with respect to a CANDIDATE. All data generated pursuant to such studies shall be provided to the other party at the other party's request in the available data format against reimbursement of 50% of the costs of conducting such studies, plus a surcharge of 10%; provided, however, that clinical safety data shall be provided to the other party in the available data format free of charge. 5.4 Information on Status of Phase III Trials. The parties shall keep each other informed on the status of their preparation and conduct of PHASE III TRIALS on a half-yearly basis, starting six months after the commencement of the ADVANCED DEVELOPMENT STAGE. Article 6 Post-Advanced Development Stage Production and Marketing 6.1 SYNAPTIC Territory. SYNAPTIC will have exclusive rights for production - if not transferred to GRUNENTHAL according to Section 5.1.3 - and marketing in the SYNAPTIC TERRITORY. 6.2 GRUNENTHAL Territory. GRUNENTHAL will have exclusive rights for production and marketing in the GRUNENTHAL TERRITORY. 6.3 Sublicensing Rights in Exclusive Territories. Each party shall have the right to license to third parties its rights with respect to the production and marketing of PRODUCTS in any country within its exclusive TERRITORY. 6.4 Other Territories. With respect to each country within the OTHER TERRITORIES both parties shall cooperate as closely as possible in seeking regulatory approvals for CANDIDATES but each party shall have an independent right to produce and market PRODUCTS without obligation, financial or otherwise, to the other party; provided, however, that prior to 28 the filing by one party of regulatory approval to market a PRODUCT in each such country, the parties shall discuss the possibility of entering such country together, rather than proceeding independently; provided further, however, that neither party shall market any PRODUCT in any such country under more than one trademark or sublicense its marketing rights to more than one party without the prior written consent of the other party. In case of sublicense in any country within the OTHER TERRITORIES the respective licensor shall be excluded from marketing such PRODUCT in such country. With respect to Japan - due to the peculiarities of the process of regulatory approval in Japan the following shall apply: As soon as one party starts seeking regulatory approval for a CANDIDATE, it shall promptly inform the other party in order to allow the other party within 90 days from such notice to establish a relationship with a Japanese Clinical Research Organization which in close cooperation with the first party will conduct all activities for a second regulatory approval for such CANDIDATE. Such second regulatory approval shall be transferred to the licensee of the second party. If the other party has not established such a relationship the one party shall be entitled to proceed with its activities. 6.5 Coordination of Marketing Strategy. Each party will, to the extent reasonably practicable, take into account the marketing strategy of the other party in formulating its own marketing strategy. 6.6 Exchange of Information. Each party shall provide to the other party, free of charge, all safety data generated with respect to a CANDIDATE following the ADVANCED DEVELOPMENT STAGE. In addition, each party shall keep the other party reasonably apprised of any other data generated in connection with the further development of an approved CANDIDATE as far as these data may be relevant for registration purposes in the other party's TERRITORIES. Such additional data shall be provided to the other party at the other party's request in the available data format against reimbursement of 50% of the costs incurred in generating such data, plus a surcharge of 10%. Article 7 Patent Protection 7.1 Patent Rights. 7.1.1 Inventions by Either Party. Each party shall own BACKGROUND TECHNOLOGY and PROJECT TECHNOLOGY, including inventions, made solely by its employees. The party which owns an invention shall promptly inform the other party about the invention and shall have the right to file a patent application covering such invention. All expenses relating to the preparation, filing, prosecution, extension and maintenance of such application and any patent granted thereon shall be borne by such party. In the event that 29 such party determines (a) not to file a patent application for such an invention in the TERRITORIES, (b) not to continue prosecution or maintenance thereof in the TERRITORIES or (c) not to extend any patent granted thereon in the TERRITORIES, it shall promptly notify the other party and the other party shall be given the opportunity to seek and pursue patent protection on such invention in such territory at its own expense. In the event the other party pursues such patent protection, ownership of the PATENT RIGHTS for such invention in such territories shall be assigned to such other party. 7.1.2 Joint Inventions. An invention made jointly by employees of SYNAPTIC and employees of GRUNENTHAL shall be owned jointly by SYNAPTIC and GRUNENTHAL. In such case, the preparation of the priority patent application shall be carried out by counsel mutually agreeable to the parties, with the expenses incurred in connection with such preparation being shared by the parties on a 50:50 basis. Each of SYNAPTIC and GRUNENTHAL, respectively, shall be responsible for selecting counsel to file, prosecute and ensure maintenance of such patent applications under its name in its exclusive TERRITORIES and for the costs associated therewith. The parties shall jointly select counsel to file, prosecute and ensure maintenance of such patent applications in their names in the OTHER TERRITORIES and shall share on a 50:50 basis the costs associated therewith. In the event a party decides not to file a patent application or to maintain the PATENT RIGHTS in any OTHER TERRITORIES, the other party shall have the right to file a patent application or to maintain the PATENT RIGHTS under its name in such territory at its own expense. 7.1.3 Assistance. If so requested by the party pursuing patent protection in accordance with the foregoing provisions of this Section 7.1, the other party shall provide the necessary declarations and reasonable assistance to such party in order to obtain the patent protection for any invention. 7.2 Availability of License to Other Party's Inventions Made during or after Advanced Development Stage and Related Patent Rights. Each process, formulation or new use invention relating to a CANDIDATE made by one party during or after the ADVANCED DEVELOPMENT STAGE with respect to such CANDIDATE, and PATENT RIGHTS relating thereto in the other party's exclusive TERRITORIES and in the OTHER TERRITORIES, shall be made available for license to such other party against payment of a royalty on the NET SALES of the PRODUCT comprising such CANDIDATE in such TERRITORIES, such royalty to be determined in accordance with the formula set forth in Schedule B. 30 Article 8 License Grants; Restrictions on Use of Technology and Patent Rights 8.1 License Relating to Products. 8.1.1 Grant by SYNAPTIC. Subject to any limitations set forth in Section 8.1.3, SYNAPTIC grants to GRUNENTHAL an exclusive license to use SYNAPTIC PROJECT TECHNOLOGY and SYNAPTIC BACKGROUND TECHNOLOGY, and PATENT RIGHTS relating thereto, in GRUNENTHAL TERRITORY and the OTHER TERRITORIES for the sole purpose of carrying out PROJECTS initiated pursuant to this Agreement and discovering, developing, manufacturing, having manufactured, using and selling PRODUCTS resulting from such PROJECTS. 8.1.2 Grant by GRUNENTHAL. GRUNENTHAL grants to SYNAPTIC an exclusive license to use the GRUNENTHAL PROJECT TECHNOLOGY and GRUNENTHAL BACKGROUND TECHNOLOGY, and PATENT RIGHTS relating thereto, in SYNAPTIC TERRITORY and the OTHER TERRITORIES for the sole purpose of carrying out PROJECTS initiated pursuant to this Agreement and discovering, developing, manufacturing, having manufactured, using and selling PRODUCTS resulting from such PROJECTS. 8.1.3 Limitations on License Grant of Section 8.1.1. (a) With respect to the alpha 2 adrenergic receptors, SYNAPTIC has granted to The DuPont Merck Pharmaceutical Company (,,DUPONT MERCK") a nonexclusive license. As a consequence, the license grant to GRUNENTHAL pursuant to Section 8.1.1 to use BACKGROUND TECHNOLOGY relating to such receptors shall be nonexclusive for so long as DUPONT MERCK continues to have such license. The DUPONT MERCK license will expire on February 5, 1998, unless DUPONT MERCK notifies SYNAPTIC prior to such date that it has decided to undertake optimization and development efforts with respect to a compound screened against such receptors. As of the EFFECTIVE DATE, SYNAPTIC had not received any such notification from DUPONT MERCK and shall notify GRUNENTHAL in the event it receives any such notification. (b) Certain of SYNAPTIC's PATENT RIGHTS relating to alpha-2 agonists overlap with patent rights of Procter & Gamble. As a consequence, GRUNENTHAL's license with respect to such alpha-2 agonists cannot be defined at the present time. In the event SYNAPTIC negotiates with Procter & Gamble to license such PATENT RIGHT to Procter & Gamble, it shall use all reasonable efforts to seek from Procter & Gamble the rights to develop and rights to permit 31 GRUNENTHAL to develop such alpha-2 agonists for the alleviation of PAIN. SYNAPTIC shall obtain the same rights and conditions with respect to development of such compounds for the alleviation of PAIN as for itself also for GRUNENTHAL's use in the GRUNENTHAL TERRITORY or OTHER TERRITORIES for the allevation of PAIN. Any costs associated with GRUNENTHAL's obtaining or exercising such rights shall be borne by GRUNENTHAL. 8.2 Sublicense Relating to Products. Each party shall have the right to grant sublicenses of the rights granted to it under Section 8.1 with respect to each PRODUCT commencing at any time after the beginning of the ADVANCED DEVELOPMENT STAGE with respect to the CANDIDATE comprised by such PRODUCT provided, however, that in any country of the TERRITORIES a party is only using one of such rights either for itself or for its sublicensee. If any party grants any such sublicense, it shall promptly provide written notification thereof to the other party. 8.3 The rights granted in Section 8.1.1, 8.1.2 and 8.2 shall be granted as long as such technology or PATENT RIGHTS exists and shall survive the termination or expiration of this Agreement regardless of the reason of termination or expiration provided however, that the respective party has complied with its payment obligation in connection with the rights. In case the respective party is in breach of any such payment obligation Section 13.2 shall apply. Article 9 Reimbursement or Other Payment of Costs 9.1 Calculation of Costs. For all purposes of this Agreement, ,,costs" shall be calculated in accordance with the applicable party's standard method for computing costs, applied in a manner consistent with all other activities carried out by such party. 9.2 Reimbursement of Ongoing Costs. (a) Costs incurred pursuant to the BUDGET for a PROJECT during the EARLY DEVELOPMENT STAGE with respect to a CANDIDATE shall in the first instance be paid by GRUNENTHAL. At the end of the first six months of each 12-month period for which detailed costs are provided in any such BUDGET, SYNAPTIC shall pay GRUNENTHAL 25% of the total amount of such detailed costs. Within 60 days after the end of each such 12-month period, GRUNENTHAL will provide to SYNAPTIC an invoice for 50% of the total costs incurred by it during such year pursuant to the BUDGET, net of the amount previously paid by SYNAPTIC in respect of such BUDGET during such year, together with a detailed accounting of all of such costs. Within 30 days after its receipt of the invoice, SYNAPTIC shall pay GRUNENTHAL the balance due GRUNENTHAL. In no event, however, shall SYNAPTIC be required with respect to any year to pay GRUNENTHAL more than 50% of the total amount of the detailed costs for such year 32 reflected in the BUDGET unless SYNAPTIC shall have approved modifications thereto. (b) If, prior to any date as of which SYNAPTIC is required to reimburse GRUNENTHAL for costs incurred with respect to a CANDIDATE pursuant to Section 9.2 (a), SYNAPTIC provides written notification to GRUNENTHAL that it is in good faith actively attempting to identify a third party to which to license its production and marketing rights with respect to such CANDIDATE, then SYNAPTIC's reimbursement obligations with respect to costs associated with such CANDIDATE shall be suspended for the period from the date of such notification until the earlier of (i) the 30th day following the consummation by SYNAPTIC of a licensing arrangement with a third party or (ii) the first anniversary of such notice. 9.3 Payment of Royalties. Any royalties that may be payable hereunder shall be paid within sixty days after the close of each calendar quarter. With each such quarterly payment, the paying party shall furnish the other party with a royalty statement, setting forth on a country-by-country basis the total number of units of each Product made, used and/or sold during the calendar quarter with respect to which the royalty payment is being made. 9.4 Other Reimbursements and Payments. Any other reimbursements or payments which one party is required to make to the other party shall be made within 60 days following receipt by the paying party of an invoice therefor. Article 10 Records and Reports, Inspection 10.1 Maintenance of Records; Provision of Reports. The parties agree to keep accurate records of each PROJECT. Each party shall also keep, and shall require its permitted sublicensees to keep, accurate books and accounts of record in connection with the manufacture, use and/or sale by or for it of any PRODUCTS with respect to which royalties may be payable hereunder in sufficient detail to permit accurate determination of all figures necessary for verification of royalty obligations. 10.2 Inspection of Records. Each party agrees to allow an independent chartered accountant designated by the other party and reasonably acceptable to such party (a) to examine such party's records of each PROJECT in order to verify the fulfillment of such party's obligations under this Agreement and (b) to examine such party's records for the purpose of verifying royalty statements. Such examinations shall not be conducted more frequently than once a year. 33 The chartered accountant shall be obliged to keep his findings in strict confidence and shall inform its client only about whether the obligations of the other party have been met and whether the royalty amounts have been verified. Only in case the chartered accountant finds reasonable proof of the fact that obligations of this Agreement have not been adhered to or that royalty payments made were less than amounts properly due shall he provide further information. The costs of such chartered accountant shall be borne by his client unless the accountant establishes a violation of an obligation under this Agreement or an underpayment of royalties, in which case the costs shall be borne by the other party. Article 11 Confidentiality 11.1 Obligations. Each of SYNAPTIC and GRUNENTHAL shall use its best efforts to retain in confidence and not use, except as provided in this Agreement, all information received from the other party pursuant to or in connection with this Agreement. All third parties involved, licensees, sublicensees or TOLL MANUFACTURER shall be bound accordingly and each party shall be responsible for the conduct of such parties. Such information may, however, be disclosed in order to allow either party to defend against litigation with a third party (subject, where possible, to adequate safeguards for confidentiality), in connection with either party's filing and prosecution of patent applications and in order to enable either party to comply with laws and governmental regulations. 11.2 Waiver of Confidentiality Obligation. The obligation of confidentiality set forth in Section 11.1 shall be deemed waived as to information which (a) is in the public domain, (b) comes into the public domain through no fault of the party claiming waiver, (c) the party claiming waiver can show by written records was known by it prior to disclosure hereunder, (d) is disclosed to the party claiming waiver without obligation of confidentiality by a third party having a legal right to make such disclosure or (e) is required to be disclosed by law. 11.3 Disclosure of Agreement. Except as required by law, neither party shall release to any third person or publish in any way any non-public information relating to the terms of this Agreement or to any PROJECT, without the prior written consent of the other party, which consent shall not be unreasonably withheld. 34 11.4 Publicity. The text of any press release relating to this Agreement or the transactions contemplated hereby shall be reviewed in advance by both parties and may not, except as required by law, be published without the prior written approval of both parties. 11.5 Scientific Publications. Neither party shall make any scientific publication concerning the results of its studies carried out under this Agreement without the prior approval of the other party. Each party shall provide the other party with the opportunity to review any proposed manuscripts or abstracts which relate to any PROJECT at least 30 days prior to their intended submission to any scientific publisher and shall not submit any such manuscript or abstract without the written authorization of the reviewing party, which shall not be unreasonably withheld. Article 12 Termination of Projects 12.1 Termination of Projects by Mutual Agreement. The parties may at any time, by mutual agreement, terminate any PROJECT. The rights and obligations of the parties with respect to the subject matter of such PROJECT shall be set forth in a separate written agreement at the time of such termination, and shall supercede in their entirety the rights and obligations of the parties with respect to such subject matter set forth in this Agreement. 12.2 Termination of Projects Due to Impasse at the Management Committee Level. In the event that pursuant to Section 3.1.6 the MANAGEMENT COMMITTEE is presented with, but is unable within 180 days after such presentation to resolve, an issue relating to the direction or conduct of a PROJECT, such PROJECT shall automatically terminate. Upon any such termination, neither party shall, at any time during the five year period thereafter, undertake any further research or development activities focused on the identification of any compound the primary mechanism of action which involves any TARGET that was the focus of such PROJECT for the alleviation of PAIN. 12.3 Termination of Project during the Research Stage. In case one party (the ,,nonparticipating party") determines during the RESEARCH STAGE of a PROJECT that it no longer desires to participate in such PROJECT, it may elect, by providing written notice (the ,,nonparticipation notice") to the other party (the ,,participating party"), to terminate its participation in the PROJECT, whereupon 35 such PROJECT shall immediately terminate. In the event of any such termination, the following shall apply: (a) The nonparticipating party shall cease to be obligated to conduct any activities contemplated by either Section 5.1 or the research plan for such PROJECT to be conducted by it following such notification; (b) The participating party may continue its activities with respect to the PROJECT and shall continue to have the right to use (i) any TARGET that is the focus of such PROJECT, (ii) COMPOUND, (iii) BACKGROUND TECHNOLOGY and/or (iv) PROJECT TECHNOLOGY in connection therewith. Such activities may be performed in any TERRITORY, including any TERRITORY of the nonparticipating party; (c) The nonparticipating party shall cease to have the right to use any TARGET that is the focus of such PROJECT, any COMPOUND the mechanism of action of which involves such TARGET and the related BACKGROUND TECHNOLOGY and PROJECT TECHNOLOGY for the purpose of identifying and developing COMPOUNDS for alleviating PAIN in humans; and (d) The participating party shall have no liability or other obligation, financial or otherwise, to the nonparticipating party in respect of any PRODUCT resulting from such PROJECT. Article 13 Term and Termination of Agreement 13.1 Term. This Agreement enters into force as of the EFFECTIVE DATE and continues in full force for a period of five years thereafter, unless terminated earlier pursuant to the other provisions of this Article 13. Thereafter, it shall be automatically renewed every two years for an additional period of two years, unless one party gives the other party written notice at least 6 months prior to the expiration of the original five-year period or the next subsequent two-year period of its desire not to renew, in which case this Agreement shall terminate effective upon the expiration of such period. 13.2 Termination for Breach. If either party shall be in material default of any of its obligations under this Agreement and shall fail to remedy such default within 90 days after written notice thereof specifying the nature of such default, then, notwithstanding anything to the contrary contained in this Agreement, the party not in default shall have the option of terminating this Agreement by giving written notice of termination to the party in 36 default, which option, if it is to be exercised, must be exercised within 60 days following the expiration of the 90 days allowed to correct the default. 13.3 Termination due to change of control. 13.3.1 GRUNENTHAL may terminate this Agreement upon 180 days' written notice in case any single person or entity (or group of affiliated entities) becomes the owner directly or indirectly of more than 50 % of shares of SYNAPTIC or acquires otherwise comparable dominating influence on SYNAPTIC and GRUNENTHAL has reasons to believe that the change has a negative impact on the cooperation. The aforementioned right to terminate shall not apply, (i) in case Dr. Mullinix becomes 50 % owner of the shares of SYNAPTIC or obtains otherwise comparable dominating influence, or (ii) in case of an acquisition by an affiliate of SYNAPTIC in which SYNAPTIC owns more than 50 % of shares or (iii) in case a financial institution is acquiring such shares or dominating influence. 13.3.2 SYNAPTIC may terminate this Agreement upon 180 days' written notice in case a third party becomes owner of directly or indirectly more than 50 % of shares of GRUNENTHAL or acquires otherwise comparable dominating influence on GRUNENTHAL and SYNAPTIC has reasons to believe that the change has a negative impact on the cooperation.The Wirtz-family or companies belonging or controlled by members of the Wirtz-family shall not be considered as third parties. Article 14 Effect of Termination or Expiration of Agreement 14.1 Termination or expiration of this Agreement shall not affect the rights and obligations of the parties under provisions which by their meaning or intent have an effect beyond the duration of this Agreement. Such provisions shall, except to the extent expressly limited by their terms, survive any such termination or expiration. In addition, the liabilities of the parties for any breach of this Agreement shall survive expiration or termination hereof. Without in any way limiting the foregoing, but subject to Section 14.2, PROJECTS and drug development activities relating to CANDIDATES resulting from PROJECTS shall not be affected by any termination of this Agreement pursuant to Article 13 and any provisions of this Agreement relating thereto shall survive any such termination. 14.2 The parties are aware that termination or expiration of this Agreement has an impact on the development of PROJECTS and needs special considerations. The parties therefore agree in clarification of Section 14.1 above on the following: 37 14.2.1 Termination during Research Stage pursuant to Section 13.1, 13.2 and 13.3. At least 90 days prior to termination of this Agreement, with regard to any PROJECT which has not at such time progressed beyond the RESEARCH STAGE, the parties shall discuss in good faith whether or not to continue jointly such PROJECT. If the parties cannot agree in such discussions to continue such PROJECT jointly within the above mentioned 90 days, such PROJECT shall terminate and then 14.2.1.1 each party shall be entitled to continue on its own to attempt to identify and develop compounds whose mechanism of action is the TARGET of such PROJECT for the alleviation of PAIN and to use in connection therewith any BACKGROUND TECHNOLOGY, PROJECT TECHNOLOGY and PATENT RIGHTS of the other party which exist at the time of termination, 14.2.1.2 neither party shall have any obligation to provide any additional data or other information relating to such TARGET or its continuing efforts to identify and develop such compounds to the other party and 14.2.1.3 neither party shall have any financial obligation to the other party with respect to any product which may result from its efforts or with respect to its use of any technology, rights or other data or information referred to in this Section 14.2.1. 14.2.2 Termination during Early Development Stage pursuant to Section 13.1 or Section 13.3. Upon termination due to Section 13.1 or Section 13.3 of this Agreement with regard to any PROJECT which has progressed at such time to the EARLY DEVELOPMENT STAGE the parties shall continue the development of the CANDIDATE resulting from such PROJECT until the end of phase II a clinical trials. Thereafter Article 5 and all other applicable provision of this Agreement shall apply. With respect to any such PROJECT Section 12.2 shall survive if the termination is pursuant to Section 13.1 but shall not survive if the termination is pursuant to Section 13.3. 14.2.3 Termination during Early Development Stage pursuant to Section 13.2 Upon termination of this Agreement pursuant to Section 13.2 with regard to any PROJECT which has progressed at such time to the EARLY DEVELOPMENT STAGE each party shall be entitled to continue to develop and to market on its own and any product resulting therefrom in its exclusive TERRITORY and in the OTHER TERRITORIES. The parties shall not be obliged to further collaborate during this EARLY DEVELOPMENT STAGE or at any time thereafter. Thereafter each party shall be entitled to continue on its own and all other applicable provisions of this Agreement shall apply and the party shall be entitled to use in connection therewith any BACKGROUND TECHNOLOGY, PROJECT TECHNOLOGY and PATENT RIGHTS of the other party which 38 exists at the time of termination. The right to terminate this Agreement pursuant to Section 13.2 shall not prevent the terminating party to claim further damage. With respect to any such PROJECT Section 12.2 shall not survive. Article 15 Governing Law and Arbitration 15.1 Governing Law. This Agreement shall be exclusively governed by the laws of Switzerland (without regard to principles of conflicts of laws). 15.2 Arbitration. Any controversy or claim arising out of or relating to this Agreement shall be finally settled by arbitration in accordance with the Rules of the International Chamber of Commerce (ICC). The arbitration hearings shall be held in Zurich, Switzerland, in English language. Article 16 Concluding Provisions 16.1 No Agency. It is understood and agreed that SYNAPTIC and GRUNENTHAL shall each have the status of an independent contractor under this Agreement and that nothing in this Agreement shall be construed as authorization for either party to act as agent for the other party. 16.2 Notices. Any notice required or permitted to be given under this Agreement shall be in writing and shall be sent by first class certified or registered mail, postage prepaid, or by express courier services, addressed to the party to be notified at its address shown below or such other address as may have been furnished in writing to the notifying party. 39 If to SYNAPTIC: Synaptic Pharmaceutical Corporation 215 College Road Paramus, New Jersey 07652 Attention: Kathleen P. Mullinix Chairman, President and CEO If to GRUNENTHAL: Grunenthal GmbH Zieglerstr. 6 52078 Aachen Federal Republic of Germany Attention: Dr. Eric Paques, Geschaftsfuhrung Any notice hereunder shall be deemed given as of the actual date of receipt by SYNAPTIC or GRUNENTHAL. 16.3 Force Majeure. No failure or omission by either party in the performance of any obligation of this Agreement shall be deemed a breach of this Agreement or create any liability if the same shall have arisen from any cause or causes beyond the control of the party, including, without limitation, any of the following: an act of God; acts or omissions of any government; any rules, regulations or orders issued by any governmental authority or by any officer, department, agency or instrumentality thereof; a fire; a storm; a flood; an earthquake; an accident; a war; a rebellion; an insurrection; a riot; an invasion; a strike; and a lockout, provided, in each case, that such failure or omission is cured as soon as is practicable following the occurrence of such event. 16.4 Amendment; Waiver. This Agreement may not be amended, supplemented or otherwise modified, except by a written instrument signed by both parties. Any obligation of either party may be waived by a written instrument signed by the other party. Any delay or omission on the part of any party in the exercise of its rights hereunder will not impair such rights, nor will it constitute a renunciation or waiver of such rights. The waiver by either party of any term or condition of this Agreement in any one instance shall not be deemed or construed to be a waiver of such term or condition for any other instance in the future (whether similar or dissimilar) or of any subsequent breach thereof. 40 16.5 Indemnification. Each party (the ,,indemnifying party") shall indemnify the other party for, and defend and hold such other party harmless from and against, any and all losses, claims, liabilities, costs and expenses whatsoever (including reasonable attorneys' fees) that may be imposed upon or asserted against such other party as a result of a wilful or negligent conduct of the indemnifying party in testing, making, using or selling any PRODUCT or CANDIDATE which not reasonably could have been detected by such other party. 16.6 Assignment. This Agreement shall not be assigned wholly or in part to third parties or to the legal successor by either party without the prior written consent of the other party; provided, however, that, subject to the other party's right to terminate pursuant to Section 13.3, either party may assign this Agreement in connection with the sale of its business without the consent of the other party. 16.7 No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either party. 16.8 Counterparts. This Agreement may be executed in one or two counterparts, each of which shall be an original, but both of which together shall constitute one and the same instrument. 16.9 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes all prior agreements, understandings and arrangements, whether oral or written, of the parties with respect thereto. 16.10 Headings. The headings of the sections of this Agreement are for general information and reference only, and this Agreement shall not be construed by reference to such headings. 41 16.11 Severability. In the event that any provision of this Agreement is or becomes ineffective, the validity of the remaining provisions shall thereby not be affected. In place of the ineffective provision the parties shall find a provision being the nearest legally possible approach to that which the parties have decided in consideration of the spirit and object of this Agreement. Date: January 12, 1998 Date: January 12, 1998 GRUNENTHAL GMBH SYNAPTIC PHARMACEUTICAL CORPORATION /s/ Michael Wirtz /s/ Franz Wirtz /s/ Kathleen P. Mullinix 42 Schedule A Surcharge Pursuant to Section 4.2.4 Surcharge If nonparticipation notice provided prior to phase I Completion 10% If nonparticipation notice provided Post-phase I Completion 20% 43 Schedule B Royalties for Licenses to Certain Patent Rights Applicable Royalty Payable only with respect to NET SALES in the years during which the market exclusivity has been extended if the PATENT RIGHTS relate to: Process 2 % Formulation 3 % New Use 3 % The maximum cummulative percentage on two or more of the above items shall be 4%. 44 Schedule I Available Targets 1. Neuropeptide Y2 receptor 2. Neuropeptide Y4 receptor 3. Glycine transporter 4. GAT-2 transporter 5. GAT-3 transporter 6. Taurine transporter 7. Betaine transporter 8. 5HT-4 receptor 9. Orphan transporter 10. Hp 15a (orphan receptor) 11. HL-18a (orphan receptor) 12. FB41a (orphan receptor) 45 Schedule II Tissues Known to be Involved in Transmission or Inhibition of Pain Dorsal Root Ganglia (DRG) Spinal Cord especially Dorsal-Horns Thalamus Periaqueductal Gray Matter (PAG) Medulla especially Nucleus Raphe Magnus (NRM) Locus coerulus Trigeminal Ganglion Sp 5 (Spinal trigeminal ganglion) 46 Schedule III Alpha 2 Compounds and Alpha 2 Patent Rights [**] 47 [** CONFIDENTIAL TREATMENT REQUESTED] EX-10.39 8 EXHIBIT 10.39 ------------- AMENDED AND RESTATED EMPLOYMENT AGREEMENT dated as of February 7, 1998, between SYNAPTIC PHARMACEUTICAL CORPORATION, a Delaware corporation (the "Company"), and LISA L. REITER (the "Employee"). The Employee is currently employed by the Company and possesses special and particular knowledge of the business and operations of the Company and of the industry in which it operates. The Company and the Employee are parties to an Employment Agreement dated as of February 7, 1994 (the "Original Employment Agreement") the initial term of which expires on February 7, 1998. The Company and the Employee now desire to amend and restate the terms of the Employee's employment by the Company. ACCORDINGLY, in consideration of the mutual covenants and obligations hereinafter set forth, the parties hereto agree as follows: 1. Employment.The Company hereby employs the Employee, and the Employee hereby accepts such employment by the Company, on the terms and subject to the conditions hereinafter set forth. 2. Term. Subject to earlier termination as provided herein, the employment of the Employee hereunder shall be for a four-year period commencing on February 7, 1998 (the "Effective Date"), and ending on the fourth anniversary of the Effective Date; provided, however, that commencing as of such fourth anniversary and on each anniversary thereafter, unless either party hereto gives the other party at least 90 days' prior written notice of its or her election not to extend the period of the Employee's employment hereunder, such period shall automatically be extended for an additional one-year period on the same terms and conditions set forth herein, unless otherwise agreed upon by the parties. For convenience of reference, such period of employment, as the same may be extended as aforesaid, is referred to herein as the "Employment Period." 3. Duties. (a) During the Employment Period, the Employee shall be employed as Vice President, General Counsel and Secretary of the Company and shall perform such duties for the Company consistent with such position as may be assigned to her from time to time by the President of the Company. (b) The Employee shall perform her duties hereunder at the offices of the Company in Paramus, New Jersey; provided, however, that the Company may require the Employee to travel in connection with the performance of such duties. Anything contained herein to the contrary notwithstanding, if the Company requires the Employee to be based anywhere other than within a 50-mile radius of New York City and notifies the Employee in writing that her continued employment by the Company is conditional upon such relocation and the Employee refuses to so relocate, then any Termination of Employment of the Employee resulting therefrom, whether initiated by the Company or by the Employee, shall constitute a Termination Without Cause. -1- 4. Time to be Devoted to Employment. Except for vacations in accordance with Section 5(d) and absences due to temporary illness, during the Employment Period, the Employee shall devote all of her business time, attention and energies to the performance of her duties under this Agreement. During the Employment Period, the Employee shall not be engaged in any other business activity which, in the judgment of the Company, conflicts with the duties of the Employee under this Agreement, whether or not such activity is pursued for gain, profit or other pecuniary advantage. 5. Compensation; Reimbursement. (a) Base Salary. During the Employment Period, the Company shall pay to the Employee a base salary of $170,000 per annum, subject to increase by the Board of Directors of the Company, in its discretion. For convenience of reference, such base salary, as the same may be increased as aforesaid, is referred to herein as the "Base Salary." The Base Salary shall be payable in such installments (but not less frequent than monthly) as is the policy of the Company generally with respect to its employees. (b) Annual Performance Bonus. The Employee shall be eligible to receive a cash bonus of at least $25,000 with respect to each calendar year during the Employment Period, subject to the achievement of the goals determined at the commencement of each year by the President of the Company. Such cash bonus, if earned, will be payable to the Employee within forty-five days after the end of the calendar year in respect of which such bonus is earned. Additional bonuses may be approved by the Board of Directors of the Company, in its discretion. (c) Benefits. During the Employment Period, the Employee shall be entitled to such benefits as are generally made available to other employees of the Company and to such additional benefits as are generally made available to employees of the Company at substantially the same level of employment as the Employee. (d) Vacation. During each calendar year of the Employment Period, the Employee shall be entitled to five weeks of vacation time with full pay. (e) Reimbursement of Expenses. During the Employment Period, the Company shall reimburse the Employee, in accordance with the policies and practices of the Company in effect from time to time during such Period, for all reasonable and necessary traveling expenses and other disbursements incurred by her for or on behalf of the Company in connection with the perfor mance of her duties hereunder (such expenses being referred to herein as "Reimbursable Expenses") upon presentation by the Employee to the Company of appropriate documentation therefor. 6. Termination of Employment. (a) General. The Company may terminate the Employee's employment hereunder at any time for any reason. The Employee may terminate her employment hereunder pursuant to a Resignation for Good Reason, a Voluntary Termination or a Disability Termination. -2- The Employee's employment shall terminate automatically upon her death. Any termination of the Employee's employment is referred to herein as a "Termination of Employment." (b) Termination Notice. The Company or the Employee may initiate a Termination of Employment in any manner permitted hereunder by giving the other party written notice thereof (the "Termination Notice"). (c) Termination Date. The effective date (the "Termination Date") of any Termination of Employment shall be deemed to be the later of (i) the date on which the Termination Notice is given and (ii) the date specified as the effective date in the Termination Notice; provided, however, that in the case of the Employee's death, the Termination Date shall be her date of death. 7. Termination by the Company. (a) Termination for Cause. Any Termination of Employment initiated by the Company upon the occurrence of an event that constitutes Cause shall be a "Termination for Cause." For purposes of this Agreement, the term "Cause" shall mean the Employee's (i) willful failure to perform those duties that the Employee is required or expected to perform as an employee of the Company under Section 3 hereof, (ii) consistent failure over a substantial period of time to perform competently such duties, (iii) conviction of a crime involving moral turpitude, dishonesty, theft, unethical business conduct or conduct that significantly impairs the reputation of the Company or (iv) failure to devote all of her business time, attention and energies to the performance of her duties hereunder. In the event of a Termination for Cause, the Termination Notice given to the Employee by the Company shall state that the Termination of Employment is "for Cause." (b) Termination Without Cause. Any Termination of Employment initiated by the Company (other than a Termination for Cause or a Disability Termination) shall be a "Termination Without Cause." 8. Termination by the Employee. (a) Resignation for Good Reason. Any Termination of Employment initiated by the Employee within 90 days following the occurrence of any of the following events shall be a "Resignation for Good Reason": (i) subsequent to a Change in Control, and without the Employee's express written consent, (A) the assignment to the Employee of any duties inconsistent with her position, duties, responsibilities and status within the Company prior to such Change in Control, (B) any material change in the Employee's titles or offices as in effect prior to such Change in Control or (C) any removal of the Employee from or any failure to re-elect the Employee to any material position held by her prior to such Change in Control; (ii) subsequent to a Change in Control, a reduction in the Employee's Base Salary or a termination of the Employee's participation in any bonus plan or program (or a -3- substantial reduction in the level of such participation) as in effect on the Effective Date or as the same may be increased after the Effective Date and in effect at the time; (iii) subsequent to a Change in Control, and without the Employee's express written consent, any requirement that the Employee be based anywhere other than within a 50-mile radius of New York City; (iv) subsequent to a Change in Control, the failure by the Company to continue the Employee's participation in any benefit or compensation plan, life insurance plan, health-and- accident plan or disability plan in which the Employee is participating at the time of such Change in Control (or in plans providing the Employee with substantially similar or more favorable benefits) or the taking of any action by the Company which would materially adversely affect the Employee's participation in or materially reduce the Employee's benefits under any of such plans or deprive the Employee of any material fringe benefit enjoyed by the Employee at the time of such Change in Control; or (v) subsequent to a Change in Control, the failure by the Company to obtain the assumption of the agreement to perform this Agreement by any successor as contemplated by Section 16. In the event of a Resignation for Good Reason, the Termination Notice given to the Company by the Employee shall state that the Termination of Employment is a "Resignation for Good Reason." (b) Other Termination by the Employee. Any Termination of Employment initiated by the Employee (other than a Termination of Employment resulting from the Employee's death, a Resignation for Good Reason or a Disability Termination) shall be a "Voluntary Termination." 9. Termination by the Company or by the Employee -- Disability Termination. Any Termination of Employment resulting from the Employee's Disability shall be a "Disability Termination." For purposes of this Agreement, the term "Employee's Disability" shall mean the Employee's illness or other physical or mental disability that prevents the Employee from performing her duties hereunder for a period of 90 days in any 180-day period. In the event of a Disability Termination, the Termination Notice given to one party by the other party shall state that the Termination of Employment is a "Disability Termination." 10. Effect of Termination of Employment. (a) In the Event of a Termination of Employment (other than a Termination of Employment contemplated by Section 11(a)), neither the Employee nor her estate or beneficiaries shall have any further rights or claims against the Company under this Agreement except the right to receive: (i) the portion of the Base Salary which accrued with respect to the period prior to the Termination Date but which remained unpaid as of the Termination Date; -4- (ii) the aggregate amount of Reimbursable Expenses which were incurred prior to the Termination Date but which were not reimbursed by the Company as provided in Section 5(e) prior to the Termination Date; and (iii) any other benefits to which the Employee may be entitled upon such Termination of Employment under the plans, programs and policies of the Company then in effect, which benefits shall be payable in accordance with the terms of such plans, programs and policies; provided, however, that if the Termination of Employment is pursuant to a Termination Without Cause, then, in addition to the amounts computed pursuant to the foregoing provisions of this Section 10(a), the Employee shall have the right to receive as severance compensation an amount (the "Severance Amount") equal to 50% of one year's Base Salary, such Severance Amount to be payable at the same times at which and in the same manner in which the Base Salary would have been payable to the Employee had the Termination of Employment not occurred. (b) The Employee shall not be required to mitigate the amount of any payment provided for in this Section 10 by seeking other employment or otherwise, and no payment or benefit provided for in this Section 10 shall be reduced by compensation earned by the Employee as a result of her employment by another employer following the Termination Date, or otherwise. 11. Effect of Termination of Employment following a Change in Control. (a) In the event that the Employee's employment with the Company is terminated in contemplation of, or at any time within one year following, a Change in Control, and such termination constitutes a Termination Without Cause or a Resignation for Good Reason, neither the Employee nor her estate or beneficiaries shall have any further rights or claims against the Company under this Agreement other than the following: (i) the right to receive all amounts and benefits to which the Employee would be entitled under Section 10 upon a Termination of Employment; and (ii) all stock options, stock bonus awards and restricted stock grants relating to securities of the Company held by the Employee on the Termination Date shall become exercisable or vest, as the case may be, on the Termination Date, notwithstanding any provisions in any such stock options, stock bonus awards or restricted stock grants or the plans covering the same to the contrary, and all rights to exercise such stock options shall remain exercisable by the Employee for a period of not less than 120 days after the Termination Date. If the benefits payable hereunder, together with other payments in the nature of compensation to or with respect to the Employee, would otherwise be subject to the excise taxes imposed under Section 280G of the Internal Revenue Code of 1986, as amended ("Code"), and if the net value of such benefits and payments in the nature of compensation, after reduction for such taxes, is less than the aggregate value of the benefits and payments in the nature of compensation determined as if such amounts had been $1.00 less than a maximum amount which could be paid without imposition of -5- excise taxes, then the benefits payable hereunder shall be reduced to highest amount such that such excise taxes shall not be imposed with respect to the benefits or the other payments in the nature of compensation. It is the intention of this provision to reduce benefits payable hereunder only if the Employee would be in a superior position taking into account such excise taxes than if such payments were made, and such reduction shall, in any event, be the least amount in order that the Employee be better off with the reduction than before such reduction. The calculation of the value of benefits payable hereunder and other payments in the nature of compensation, and the implications of the excise tax rules of Section 280G of the Code, shall be determined by the Company in good faith based on written advice of a national accounting firm. (b) The Employee shall not be required to mitigate the amount of any payment provided for in this Section 11 by seeking other employment or otherwise,and no payment or benefit provided for in this Section 11 shall be reduced by compensation earned by the Employee as a result of her employment by another employer following the Termination Date, or otherwise. (c) As used herein, the term "Change in Control" shall mean a change in control of the Company of a nature that would be required to be reported in response to Item 1 of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), if the Company were at that time subject to such reporting requirements of the Exchange Act; provided, however, that such term shall in any event be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities or (ii) during any one-year period or any period of two consecutive years, individuals who at the beginning of any such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority thereof as of the end of such period unless the election, or the nomination for election by the Company's stockholders, of each new director was approved by a vote of at least two-thirds of the directors of the Company then still in office who were directors at the beginning of such period. 12. Notices. All notices or other communications that are required or permitted hereunder shall be in writing and shall be deemed to have been given if (a) personally delivered or sent by telecopier, (b) sent by nationally-recognized overnight courier or (c) sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: if to the Employee, to her at: 530 E. 72nd Street, Apt. #17-B New York, New York 10021 -6- if to the Company, to it at: 215 College Road Paramus, New Jersey 07652 Attention: President Telecopier: 201-261-0623 or to such other address as the party to whom notice is to be given may have furnished to each other party in writing in accordance herewith. Any such communication shall be deemed to have been received (i) when delivered, if personally delivered, sent by telecopier or sent by nationally-recognized, overnight courier and (ii) on the third Business Day following the date on which the piece of mail containing such communication is posted, if sent by mail. As used herein, the term "Business Day" means a day that is not a Saturday, a Sunday or a day on which banking institutions in the city to which the notice or communication is to be sent are not required to be open. 13. Entire Agreement; Amendments. This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior or contemporaneous negotiations, correspondence, understandings and agreements between the parties with respect thereto, including, without limitation, the Original Employment Agreement . This Agreement may be amended only by an agreement in writing signed by both parties hereto. Anything contained herein to the contrary notwithstanding, the provisions of Sections 10 and 11 shall survive the expiration or early termination of the Employment Period. 14. Assignment. This Agreement is personal in its nature. Accordingly, neither party hereto shall, without the consent of the other, assign this Agreement or any rights or obligations hereunder to any other person or entity. 15. Benefits of Agreement. The provisions of this Agreement shall be binding upon and inure to the benefit of the heirs, beneficiaries, executors, administrators and permitted assigns of the Employee and the successors and permitted assigns of the Company. 16. Obligation of the Company's Successors. Any successor to substantially all of the Company's assets and business, whether by merger, consolidation, purchase of assets or otherwise, shall succeed to the rights and obligations of the Company hereunder. The Company shall require any such successor, by agreement in form and substance satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to receive from the Company or its successor the same amounts and benefits that the Employee would be entitled to receive under Sections 11(a)(i) and 11(a)(ii) upon a Resignation for Good Reason. For purposes of implementing the immediately preceding sentence, the date on which any such succession becomes effective shall be deemed the Termination Date. -7- 17. Waiver of Breach. A waiver of any breach of any provision of this Agreement shall not constitute or operate as a waiver of any other breach of such provision or of any other provision, and any failure to enforce any provision hereof shall not operate as a waiver of such provision or of any other provision. 18. Execution in Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 19. Headings. The headings of sections in this Agreement are for convenience only, are not a part of this Agreement and shall not affect the construction of the provisions of this Agreement. 20. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New Jersey without giving effect to principles of conflicts of laws. 21. Enforceability. In the event that any provision of this Agreement is determined to be partially or wholly invalid, illegal or unenforceable in any jurisdiction, then such pro vision shall, as to such jurisdiction, be modified or restricted to the extent necessary to make such provision valid, binding and enforceable, or, if such provision cannot be modified or restricted, then such provision shall, as to such jurisdiction, be deemed to be excised from this Agreement; provided, however, that the binding effect and enforceability of the remaining provisions of this Agreement, to the extent that the economic benefits conferred upon the parties by virtue of this Agreement remain substantially unimpaired, shall not be affected or impaired in any manner, and that any such invalidity, illegality or unenforceability with respect to such provisions shall not invalidate or render unenforceable such provision in any other jurisdiction. -8- IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. SYNAPTIC PHARMACEUTICAL CORPORATION By:/s/ Kathleen P. Mullinux ----------------------------- Name: Kathleen P. Mullinix Title: Chairman, President and Chief Executive Officer /s/ Lisa L. Reiter ----------------------------- Lisa L. Reiter -9- EX-10.40 9 EXHIBIT 10.40 ------------- AMENDMENT NO. 4 TO RESEARCH COLLABORATION AND LICENSE AGREEMENT Amendment No. 4 dated and effective as of March 2, 1998 between SYNAPTIC PHARMACEUTICAL CORPORATION, a Delaware corporation ("SYNAPTIC"), and MERCK & CO., INC., a New Jersey Corporation ("MERCK"). WHEREAS, SYNAPTIC and MERCK are parties to a Research Collaboration and License Agreement dated as of November 30, 1993, an Amendment No. 1 dated February 15, 1995, a letter agreement dated August 25, 1995, an Amendment No. 2 and Supplement dated October 9, 1996 and an Amendment No. 3 and Supplement dated December 1, 1997 (the "AGREEMENT"). Capitalized terms used and not defined in this Amendment No. 4 shall have the meanings ascribed to them in the AGREEMENT, and WHEREAS, To their mutual benefit, the parties are willing for certain rights under PATENTS to be provided to GLAXO (hereinafter defined). NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties agree as follows: 1. Amendment to the Agreement. The AGREEMENT shall be amended as of the date first written above as follows: (i) In ARTICLE 1 - DEFINITIONS. Add the following new definitions: 1.22 GLAXO shall mean Glaxo Group Limited, a company organized and existing under the laws of the United Kingdom and having a principal office at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 ONN UK. 1.23 GLAXO PRODUCT shall mean a BPH PRODUCT, as such term is defined in the OPTION AND LICENSE AGREEMENT. 1.24 OPTION AND LICENSE AGREEMENT shall mean the Agreement between SYNAPTIC and GLAXO which grants rights under 1 PATENTS to GLAXO, a copy of which is attached hereto and made a part hereof. (ii) In ARTICLE 3 - LICENSE GRANT. Add the following Section 3.3: 3.3 MERCK hereby grants back to SYNAPTIC such rights as may be necessary for the sole purpose of enabling SYNAPTIC to grant to GLAXO the rights set forth in the OPTION AND LICENSE AGREEMENT. (iii) In ARTICLE 7 - MILESTONES. Article 7.1(b) shall be amended by inserting after "MAJOR MARKET COUNTRY" the words: "in the event that MERCK makes such filing of a New Drug Application or its equivalent prior to filing by GLAXO of a New Drug Application for a GLAXO PRODUCT with the FDA or an equivalent of a New Drug Application for a GLAXO PRODUCT in another MAJOR MARKET COUNTRY". (iv) In ARTICLE 9 - ROYALTIES. Article 9.3 shall be replaced by Articles 9.3 (a) and 9.3 (b) below: 9.3 (a) In the event that GLAXO has not sold a GLAXO PRODUCT during any portion of the calendar year in any country of the TERRITORY and annual NET SALES of PRODUCT exceed $500,000,000.00 (five hundred million dollars), an additional two percent (2%) royalty will be paid by MERCK on the excess NET SALES above $500,000,000.00 (five hundred million dollars)for that particular year. 9.3 (b)In the event that GLAXO has sold a GLAXO PRODUCT during any portion of the calendar year in any country of the TERRITORY and annual NET SALES of PRODUCT exceed $300,000,000.00 (three hundred million dollars), an additional two percent (2%) royalty will be paid by MERCK on the excess NET SALES above $300,000,000.00 (three hundred million dollars)for that particular year. 2 2. Representations and Warranties. MERCK hereby represents and warrants to SYNAPTIC that, as of the date first written above, (i) MERCK is actively continuing to develop the Safety Assessment Candidate known as L-771,688 (SNAP-6383) and has no intention to discontinue its development efforts with respect thereto, (ii) MERCK has no intention to abandon its efforts to develop a selective alpha-1a antagonist for the treatment of BPH should MERCK's development efforts with respect to the aforementioned Safety Assessment Candidate fail, and (iii) MERCK has no intention to terminate the AGREEMENT nor does MERCK have any understanding with GLAXO regarding any such possible termination. MERCK makes no representation or warranty that its conduct or intentions in the future will be consistent with items (i), (ii) and (iii) above. 3. Effect of Amendment. From and after the date first written above, all references in the AGREEMENT to "this AGREEMENT," "hereunder," "hereof," "herein," or words of similar import, shall be a reference to the AGREEMENT, as amended by this Amendment No. 4. Except as expressly amended by this Amendment No. 4, the AGREEMENT shall remain in full force and effect and unchanged. 4. Disclaimer. It is understood that the parties disagree about the extent of sublicensing rights granted to MERCK under the AGREEMENT. Execution of this AMENDMENT NO. 4 is not an admission by either party of the extent of such rights and shall not be used by any party to establish or dispute the extent of such rights. 3 IN WITNESS WHEREOF, the parties have caused this Amendment No. 4 to be executed and delivered as of the date first written above. SYNAPTIC PHARMACEUTICAL CORPORATION By:/s/ Kathleen P. Mullinix ------------------------ Name: Kathleen P. Mullinix Title: Chairman, President and CEO MERCK & CO., INC. By:/s/ Edward Scolnik ------------------------- Name: Edward Scolnik Title: EX-10.41 10 EXHIBIT 10.41 ------------- OPTION AND LICENSE AGREEMENT This Agreement (this "AGREEMENT") is effective as of the 2nd day of March, 1998 (the "Effective Date") by and between Synaptic Pharmaceutical Corporation ("SYNAPTIC"), a corporation organized and existing under the laws of the State of Delaware and having a principal office at 215 College Road, Paramus, New Jersey 07652, and Glaxo Group Limited, a corporation organized and existing under the laws of the United Kingdom, and having a principal office at Glaxo Wellcome House, Berkeley Avenue, Greenford, Middlesex, UB6 ONN, U.K. ("GLAXO"). WHEREAS, SYNAPTIC possesses patent rights pertaining to (i) the use of selective human alpha-1a adrenergic receptor compounds which may be useful for the treatment of benign prostate hyperplasia ("BPH") and other medical conditions and (ii) cloned human alpha-1a, -1b and -1d adrenergic receptors; and WHEREAS, MERCK & CO., INC. One Merck Drive, P. O. Box 100, Whitehouse Station, New Jersey 08889-0100 ("MERCK") and SYNAPTIC are parties to a Research Collaboration and License Agreement dated November 30, 1993, as amended ("MERCK-SYNAPTIC AGREEMENT") under which MERCK has exclusive rights under the FUNCTIONAL USE PATENTS (as hereinafter defined), and by an amendment thereto of even date herewith MERCK has separately granted back to SYNAPTIC such 1 rights as may be necessary for SYNAPTIC to grant the rights set forth in Article 3 herein to GLAXO; and WHEREAS, GLAXO is developing selective human alpha-1a adrenergic receptor compounds which may be useful for the treatment of BPH and other medical conditions and is using cloned human alpha-1 adrenergic receptors in connection therewith; and WHEREAS, SYNAPTIC wishes to grant GLAXO certain licenses under its patents, as well as an option to expand the scope and extend the term of some of such licenses, and GLAXO wishes to acquire such licenses and option on the terms and conditions set forth herein; NOW, THEREFORE, SYNAPTIC and GLAXO agree as follows: ARTICLE 1 - DEFINITIONS 1.1 AFFILIATE shall mean any corporation or business entity of which GLAXO or SYNAPTIC owns directly or indirectly, fifty percent (50%) or more of the outstanding stock, or any corporation over which GLAXO or SYNAPTIC, directly or indirectly, exercises effective control, or any parent corporation which owns, directly or indirectly, fifty percent (50%) or more of the outstanding stock of GLAXO or SYNAPTIC or indirectly controls GLAXO or SYNAPTIC. 2 1.2 AGENCY shall mean any governmental regulatory authority responsible for granting health approvals, registrations, pricing and other approvals required before a product may be tested or marketed in the TERRITORY. 1.3 BPH COMPOUND shall mean any SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR COMPOUND for which regulatory approval to sell for the treatment of BPH or for the inhibition of contraction of prostate tissue has been obtained or is being sought. 1.4 BPH PRODUCT shall mean any prescription or over-the-counter pharmaceutical preparation containing BPH COMPOUND(S) for use in humans. 1.5 FUNCTIONAL USE PATENT(S) shall mean the United States patents set forth in Schedule A hereto, the foreign counterparts thereto, and any patents that are reissues, re-examinations, continuations, continuations-in-part, divisions, renewals, extensions, patents of addition or the like thereof. 1.6 HUMAN ALPHA-1 ADRENERGIC RECEPTORS shall mean those receptors so defined by references to Genbank Accession Numbers as follows: 3 Subtype Genbank Accession Nos. alpha-1a U02569, U03866, D25235 alpha-1b U03865, M99590 alpha-1d S70782, U03864 1.7 MAJOR MARKET COUNTRY shall mean any of the following countries: the United States, France, Germany, Italy or the United Kingdom. 1.8 MERCK PRODUCT shall mean a product being developed or marketed by MERCK for the treatment of BPH which is subject to a license from SYNAPTIC under any of the PATENTS. 1.9 NET SALES shall mean, with respect to each of BPH PRODUCTS and SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR PRODUCTS which are not BPH PRODUCTS, the gross invoice price of all such PRODUCTS sold by GLAXO and its AFFILIATES to independent third parties, after deducting, if not already deducted in the amount invoiced: 1. all goods returned; 2. trade discounts; 4 3. rebates and allowances of invoiced price; and 4. Seven (7%) of the gross invoice price of all sales to cover early settlement discounts (where such discounts are non-discretionary) and excise, sales and other taxes which GLAXO and its AFFILIATES have to pay or absorb. 1.10 PATENTS shall mean the FUNCTIONAL USE PATENT(S) and RECEPTOR PATENT(S), or any of the foregoing. 1.11 RECEPTOR PATENT(S) shall mean the United States patent set forth in Schedule B hereto, the foreign counterparts thereto, and any patents that are reissues, re-examinations, continuations, continuations-in-part, divisions, renewals, extensions, patents of addition or the like thereof. 1.12 SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR COMPOUND shall mean any compound which has an affinity for the human alpha-1a adrenergic receptor which is more than ten (10) times greater than its affinity for another Human Alpha- 1 Adrenergic Receptor and the mechanism of action of which in vivo involves the human alpha-1a adrenergic receptor. 5 1.13 SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR PRODUCT shall mean any prescription or over-the-counter pharmaceutical preparation containing SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR COMPOUND(S) for use in human or non-human animals. 1.14 TERRITORY shall mean all countries of the world. 1.15 THERAPEUTIC INDICATION shall mean, with respect to any SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR PRODUCT, the main therapeutic use as classified in the 2nd level of the World Health Organization Anatomical, Therapeutic, Clinical (ATC) drug classification system. 1.16 VALID PATENT shall mean, with respect to any of the PATENTS, an issued and unexpired patent, at least one of the claims of which has not been (a) declared invalid or unenforceable by a court of competent jurisdiction from which no appeal can be or is taken or (b) admitted by SYNAPTIC to be invalid. ARTICLE 2 - OPTION GRANT; OPTION AND LICENSE FEES 2.1 SYNAPTIC grants to GLAXO an option (the "Option") to obtain the non-exclusive license described in Article 3.2 below upon the terms and conditions set forth in this Agreement. 6 2.2 As consideration for the Option and the nonexclusive licenses described in Article 3.1, GLAXO shall make to SYNAPTIC a non-refundable, noncreditable payment of $2,000,000 (two million dollars) within 10 days of receipt of an invoice from Synaptic following execution of this Agreement. 2.3 The Option shall be exercisable by GLAXO in accordance with Article 2.4 at any time from execution of this Agreement until May 22, 1999 (the "EXPIRATION DATE") after which date it shall automatically expire. 2.4 The Option shall be exercisable by delivery of written notice from GLAXO to SYNAPTIC prior to the EXPIRATION DATE along with the payment of [**] by GLAXO to SYNAPTIC. GLAXO shall provide MERCK with a copy of the written notice to SYNAPTIC. ARTICLE 3 - LICENSE GRANTS 3.1 (a) SYNAPTIC hereby grants to GLAXO and its AFFILIATES throughout the TERRITORY, for the sole purpose of developing, making, having made, using and selling SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR PRODUCTS which are not BPH PRODUCTS, a non- 7 [** CONFIDENTIAL TREATMENT REQUESTED] exclusive license under any of the RECEPTOR PATENTS. The license grant in this Article 3.1(a) shall extend back in time to apply to acts by GLAXO prior to the Effective Date of this AGREEMENT. (b) For the period beginning on the Effective Date and ending on the EXPIRATION DATE, SYNAPTIC hereby grants to GLAXO and its AFFILIATES, throughout the TERRITORY, for the sole purpose of developing, making, having made and using but not selling BPH PRODUCTS a non-exclusive license under the RECEPTOR PATENTS. The license grant in this Article 3.1(b) shall extend back in time to apply to acts by GLAXO prior to the Effective Date of this AGREEMENT. (c) For the period beginning on the Effective Date and ending on the EXPIRATION DATE, SYNAPTIC hereby grants to GLAXO and its AFFILIATES, throughout the TERRITORY, for the sole purpose of developing, making, having made and using but not selling BPH PRODUCTS a non-exclusive license under the FUNCTIONAL USE PATENTS. 3.2 Upon exercise of the Option, SYNAPTIC grants to GLAXO and its AFFILIATES throughout the TERRITORY, for the sole purpose 8 of developing, making, having made, using and selling BPH PRODUCT(S) a non-exclusive license under the PATENTS. ARTICLE 4 - WARRANTIES AND PATENT VALIDITY 4.1 SYNAPTIC represents and warrants to GLAXO that as of the Effective Date it possesses the rights required to grant the licenses under Article 3 hereof. 4.2 SYNAPTIC and GLAXO each shall immediately give notice to the other of any certification of which they become aware filed under the U.S. "Drug Price Competition and Patent Term Restoration Act of 1984" claiming that a FUNCTIONAL USE PATENT or a RECEPTOR PATENT covering a SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR PRODUCT (including a BPH PRODUCT) is invalid or that infringement will not arise from the manufacture, use or sale of BPH PRODUCT by a third party. The parties agree to discuss and cooperate on an appropriate course of subsequent action. 4.3 SYNAPTIC shall promptly give notice to GLAXO of the grant, lapse, revocation, surrender, invalidation or intentional abandonment of any PATENTS licensed to GLAXO for which SYNAPTIC is responsible for the filing, prosecution and maintenance. 9 4.4 GLAXO acknowledges that the licenses and options granted hereunder do not convey the right under any PATENTS to develop, make, have made, use or sell any compound whose mechanism of action does not involve an alpha-1a adrenergic receptor. GLAXO warrants that it shall not infringe any VALID PATENT owned by SYNAPTIC by activities as to which SYNAPTIC has not expressly granted rights to GLAXO hereunder or under any other agreement. ARTICLE 5 - MILESTONE AND OTHER PAYMENTS 5.1 In consideration of the rights granted under this AGREEMENT, the following non-creditable and non- refundable payments will be made by GLAXO on only the first achievement of the following milestones, regardless of the number of times thereafter that such milestones are again achieved, provided that GLAXO has a license under the FUNCTIONAL USE PATENTS at the time the applicable milestone is achieved: (a) [**] due within thirty (30) days of the filing of a New Drug Application for BPH PRODUCT with the United States Food and Drug Agency (FDA) or the filing of its equivalent with an AGENCY in another MAJOR MARKET COUNTRY in the event that 10 [** CONFIDENTIAL TREATMENT REQUESTED] GLAXO or an AFFILIATE makes such filing of a New Drug Application or its equivalent prior to such a filing by MERCK on a MERCK PRODUCT. (b) If the MERCK-SYNAPTIC AGREEMENT is terminated prior to December 31, 2000 then GLAXO shall pay SYNAPTIC [**] within thirty (30) days of entry into Phase III of a BPH PRODUCT or the equivalent entry in another MAJOR MARKET COUNTRY. 5.2 If the MERCK-SYNAPTIC AGREEMENT is terminated subsequent to May 22, 1999, but prior to December 31, 2000 then GLAXO shall have the option to obtain exclusive rights under the FUNCTIONAL USE PATENT(S), if available at the time of termination, by payment of an additional [**] to SYNAPTIC provided that the Option has been exercised under and in accordance with Article 2.4. If the MERCK-SYNAPTIC AGREEMENT is terminated prior to May 23, 1999, then GLAXO shall have the option to obtain exclusive rights under the FUNCTIONAL USE PATENT(S), if available at the time of termination, by payment of an additional [**] to SYNAPTIC, provided that the Option is exercised under and in accordance with Article 2.4 prior to the exercise of the option contemplated by this Article 5.2. SYNAPTIC shall promptly notify GLAXO of any such termination 11 [** CONFIDENTIAL TREATMENT REQUESTED] if exclusive rights under the FUNCTIONAL USE PATENT(S) are then available. GLAXO's option under this Article 5.2 shall be exercisable by the delivery of written notice of exercise to SYNAPTIC, together with the [**] payment, within 60 days following GLAXO's receipt of SYNAPTIC's notification. Promptly upon receipt of the written notice of exercise and the [**] payment, SYNAPTIC and GLAXO shall enter into good faith negotiations concerning the terms of the exclusive license. SYNAPTIC shall not enter into negotiations with a third party with respect to a license to the FUNCTIONAL USE PATENT(S) during the 180-day period following SYNAPTIC's receipt of the notice of exercise and payment. GLAXO's option to obtain exclusive rights under the FUNCTIONAL USE PATENT(S) under this Article 5.2 shall automatically expire at the end of the aforementioned 60-day period if not exercised within such period in accordance with this Article 5.2 or if an agreement is not consummated within the aforementioned 180-day period. In the event SYNAPTIC and GLAXO are unable to reach an agreement concerning the terms of an exclusive license and GLAXO's option to obtain such a license thus expires at the end of the 180-day period, SYNAPTIC shall promptly return to GLAXO the [**] payment previously received from GLAXO. 12 [** CONFIDENTIAL TREATMENT REQUESTED] ARTICLE 6 - ROYALTIES 6.1 (a) In any country in the TERRITORY in which the manufacture, use or sale of a BPH PRODUCT would infringe a VALID FUNCTIONAL USE PATENT but for a license hereunder, GLAXO shall pay to SYNAPTIC a royalty on NET SALES of such BPH PRODUCT of [**] percent [**]. (b) In the event that GLAXO has more than one product subject to royalties under Section 6.1(a) for a single THERAPEUTIC INDICATION on sale in any country within the TERRITORY during any calendar quarter, GLAXO shall pay to SYNAPTIC (i) the royalty in 6.1(a) on only the product for such therapeutic indication of highest NET SALES in such country calculated for that calendar quarter and (ii) a royalty on NET SALES of each other product for such therapeutic indication of [**] percent [**]. 6.2 (a) For any SELECTIVE ALPHA-1A ADRENERGIC RECEPTOR PRODUCT the manufacture, use or sale of which is not within Section 6.1 above, GLAXO shall pay to SYNAPTIC a royalty of [**] percent [**] on NET SALES of such PRODUCT until expiration of the last to expire of the RECEPTOR PATENTS, provided that there is a VALID 13 [** CONFIDENTIAL TREATMENT REQUESTED] RECEPTOR PATENT in a MAJOR MARKET COUNTRY at the relevant date. (b) In the event that GLAXO has more than one product subject to royalties under Section 6.2(a) for a single THERAPEUTIC INDICATION, on sale in any country within the TERRITORY during any calendar quarter, GLAXO shall pay the royalty in 6.2(a) on only the product for such therapeutic indication of highest NET SALES in such country calculated for that calendar quarter. 6.3 In the event that MERCK has not sold MERCK PRODUCT during any portion of a calendar year in any country in the TERRITORY and annual NET SALES of BPH PRODUCT exceed $500,000,000.00 (five hundred million dollars), an additional two percent (2%) royalty will be paid by GLAXO to SYNAPTIC on the excess NET SALES of BPH PRODUCT above $500,000,000.00 (five hundred million dollars) for that calendar year, provided that there is an existing royalty obligation under Article 6. 6.4 In the event that MERCK has sold MERCK PRODUCT during any portion of a calendar year in any country in the TERRITORY and annual NET SALES of BPH PRODUCT exceed $300,000,000.00 (three hundred million dollars), an additional two percent (2%) royalty will be paid by GLAXO to SYNAPTIC on 14 the excess NET SALES of BPH PRODUCT above $300,000,000.00 (three hundred million dollars) for that calendar year, provided that there is an existing royalty obligation under Article 6. 6.5 Sales between GLAXO and its AFFILIATES, or among such AFFILIATES, for subsequent sales to an independent third party shall not be subject to royalty, but in such cases royalty shall be calculated upon GLAXO's or its AFFILIATE's NET SALES to such independent third party. 6.6 The obligation to pay royalties is imposed only once with respect to the same unit of product. ARTICLE 7 - ACCOUNTING AND REPORTS 7.1 GLAXO shall deliver to SYNAPTIC within sixty (60) days after the end of each calendar quarter a written account, including value, of GLAXO's and GLAXO's AFFILIATES' NET SALES subject to royalty payments and the amount of the royalty payment due to SYNAPTIC for such quarter on a country by country basis. 7.2 When GLAXO delivers the accounting to SYNAPTIC, GLAXO shall also deliver all royalty payments due to SYNAPTIC for the calendar quarter, provided however that any additional royalty 15 payable under Article 6.4 may be payable within 60 days following GLAXO's receipt of notification by SYNAPTIC that MERCK has sold MERCK PRODUCT during any portion of the calendar year in any country in the TERRITORY. 7.3 GLAXO shall keep accurate records in sufficient detail to enable the amounts due to SYNAPTIC to be determined. Upon SYNAPTIC's request, GLAXO shall permit an independent, certified public accountant selected by SYNAPTIC, except one to whom GLAXO has reasonable objection, to have access during ordinary business hours to GLAXO's records necessary to determine the correctness of any report or payment made in respect to any calendar quarter and obtain information as to the amount payable to SYNAPTIC for any such period in case of GLAXO's failure to report or make payment. Such examination shall be at SYNAPTIC's expense and shall not take place more than once each year; provided, however, that in the event it is determined that amounts paid to SYNAPTIC were more than five percent (5%) less than the amounts to which SYNAPTIC was entitled, the expenses of such examination shall be borne by GLAXO and GLAXO shall pay SYNAPTIC the amounts due but not previously paid within thirty (30) days following notice of such determination, together with interest thereon from the date as of which such amounts were originally payable to the date of payment at the prime rate plus two percent (2%). These rights 16 with respect to any year shall terminate three (3) years after the end of any such year. Information supplied to SYNAPTIC by such independent, certified public accountant shall not include any proprietary information not required to be disclosed under other sections of this AGREEMENT. 7.4 All payments to be made by GLAXO to SYNAPTIC under this AGREEMENT shall be made in United States dollars by bank wire transfer in immediately available funds. In the case of sales outside the United States, the rate of exchange to be used in computing the amount of currency equivalent in United States dollars due SYNAPTIC shall be made at the rate of exchange utilized by GLAXO in its worldwide accounting system, prevailing on the fourth-to-the last business day of the calendar quarter. 7.5 During the term of this AGREEMENT, GLAXO shall notify SYNAPTIC within 30 days of achievement of any of the milestones referred to in Article 5.1 in respect of a BPH PRODUCT and within 30 days of the filing of a New Drug Application for any other SELECTIVE ALPHA-1a ADRENERGIC RECEPTOR PRODUCT with the United States Food and Drug Agency (FDA) or its equivalent with an AGENCY in another MAJOR MARKET COUNTRY and on which royalties would be due pursuant to this AGREEMENT. 17 7.6 Any income tax or other tax which GLAXO is required by law to pay or withhold with respect to royalties payable under this Agreement shall be deducted from the amount of royalties otherwise due provided that in regard to any such deduction GLAXO shall give SYNAPTIC such assistance as may reasonably be necessary to enable or assist SYNAPTIC to claim exemption therefrom and shall provide to SYNAPTIC promptly proper evidence as to the payment of the tax. 7.7 Distribution of products as free samples by GLAXO and its AFFILIATES to independent parties shall not be subject to royalties as long as in any calendar year the aggregate amount of such products provided as free samples does not exceed two percent (2%) of the units of such products on which royalties are paid. ARTICLE 8 - CONFIDENTIALITY 8.1 All SYNAPTIC or GLAXO confidential information which is disclosed by either party and identified as confidential information at the time of disclosure during the term of this Agreement shall be maintained in confidence by the receiving party and shall not be disclosed to any other person, firm, or agency, governmental or private, without the prior written 18 consent of the disclosing party, except to the extent that such SYNAPTIC or GLAXO information: (a) is or becomes part of the public domain through no fault of the receiving party; or (b) is subsequently disclosed to the receiving party by a third party not under an obligation of confidentiality to the disclosing party; or (c) is known at the time of its receipt by the receiving party as documented by written records; or (d) is independently developed by the receiving party as documented by written records; or (e) is legally required to be disclosed. 8.2 The obligations of this Article 8 shall survive termination or expiration of this AGREEMENT for a period of ten (10) years. ARTICLE 9 - DURATION 9.1 This AGREEMENT becomes effective as of the day and year first above written and may be terminated as set forth in Article 10 hereof. If GLAXO does not exercise the option in 19 accordance with ARTICLE 2, this AGREEMENT shall expire upon the expiration of the last RECEPTOR PATENT to expire. If GLAXO exercises the Option in accordance with Article 2, the AGREEMENT expires upon the later of the expiration of the last FUNCTIONAL USE PATENT or the last RECEPTOR PATENT to expire. At such time, the rights and licenses granted to GLAXO under this AGREEMENT shall be fully paid up and shall continue in full force and effect and no further payments shall be due under the terms of this AGREEMENT. ARTICLE 10 - TERMINATION 10.1 Upon any material breach by either party under this AGREEMENT, in addition to any other remedy it may have, the other party may terminate this AGREEMENT by ninety (90) days written notice to the breaching party, specifying the material breach, default or other defect. The termination shall become effective at the end of the ninety (90) day period unless the breaching party cures the breach during the ninety (90) day period. 10.2 Either party may terminate this AGREEMENT with notice if the other party becomes insolvent, makes an assignment for the benefit of creditors, is the subject of proceedings in voluntary (other than for re-organization) or involuntary bankruptcy 20 instituted on behalf of or against such party, or has a receiver or trustee appointed for all or substantially all of its property; provided that in the case of an involuntary bankruptcy proceeding such right to terminate shall only become effective if the party consents to the involuntary bankruptcy or such proceeding is not dismissed within ninety (90) days after the filing thereof. 10.3 Any expiration or early termination of this AGREEMENT shall be without prejudice to the rights of either party against the other accrued or accruing under this AGREEMENT prior to termination, including the obligation to pay royalties for product sold prior to such termination. ARTICLE 11 - GOVERNING LAW 11.1 This AGREEMENT shall be construed and the respective rights of the parties hereto determined according to the substantive laws of the State of New Jersey, notwithstanding the provisions governing conflict of laws under such law to the contrary. In the event of any controversy or claim relating to this AGREEMENT or breach thereof, the parties shall use reasonable efforts to develop practical solutions of mutual benefit to settle conflicts amicably between themselves. 21 ARTICLE 12 - ASSIGNMENT 12.1 Neither party may assign this AGREEMENT in whole or in part without the prior written consent of the other, except that no such consent shall be required in the case of GLAXO if GLAXO assigns this AGREEMENT to an AFFILIATE whose obligations GLAXO guarantees and in the case of SYNAPTIC if SYNAPTIC assigns this AGREEMENT to a third party who acquires all or substantially all of its business. ARTICLE 13 - SEVERANCE 13.1 If any provision of this Agreement is held to be invalid or unenforceable, all other provisions shall nevertheless continue in full force and effect, unless there is a material change in the benefits and/or rights received under this AGREEMENT. ARTICLE 14 - AMENDMENT 14.1 This AGREEMENT and all Schedules appended hereto constitute the entire agreement between the parties and supersede all previous arrangements whether written or oral. Any amendment or modification to this AGREEMENT shall be made in writing and signed by both parties. 22 ARTICLE 15 - NOTICE 15.1 Notices to SYNAPTIC shall be addressed to: Synaptic Pharmaceutical Corporation 215 College Road Paramus, New Jersey 07652 Attention: President Notices to GLAXO shall be addressed to: Glaxo Group Limited Glaxo Wellcome House Berkeley Avenue Greenford Middlesex UB6 ONN UNITED KINGDOM Attention: Company Secretary Either party may change its address by giving notice to the other party in the manner herein provided. Any notice required or provided for by the terms of this AGREEMENT shall be in writing and sent by registered or certified mail, return receipt requested, postage prepaid or by express courier services providing evidence of delivery and properly addressed in accordance with the paragraph above. The effective date of notice shall be the actual date of receipt by SYNAPTIC or GLAXO. 23 ARTICLE 16 - FORCE MAJEURE 16.1 No failure or omission by the parties hereto in the performance of any obligation of this AGREEMENT shall be deemed a breach of this AGREEMENT or create any liability if the same shall arise from any cause or causes beyond the control of the parties, including, but not limited to, the following: act of God; acts or omissions of any government; any rules, regulations or orders issued by any governmental authority or by any officer, department, agency or instrumentality thereof; fire; storm; flood; earthquake; accident; war; rebellion; insurrection; riot; invasion; strikes; and lockouts and provided that such failure or omission resulting from one of the above causes is cured as soon as is practicable after the occurrence of one or more of the above-mentioned causes. ARTICLE 17 - INDEMNIFICATION 17.1 GLAXO will indemnify and hold SYNAPTIC and MERCK harmless with respect to any injury, loss or cost resulting from exercise by GLAXO of the licenses granted to GLAXO by SYNAPTIC under this AGREEMENT. 24 ARTICLE 18 - PUBLIC ANNOUNCEMENTS 18.1 Any public announcements or similar publicity with respect to this AGREEMENT or the rights granted hereunder shall be at such time and in such manner as SYNAPTIC and GLAXO shall agree; provided that nothing herein shall prevent either party upon notice to the other from making such public announcements as such party's legal obligations require. ARTICLE 19 - MISCELLANEOUS 19.1 It is expressly agreed that GLAXO and SYNAPTIC shall be independent contractors and that the relationship between the two parties shall not constitute a partnership, joint venture or agency. Neither GLAXO nor SYNAPTIC shall have the authority to make any statements, representations or commitments of any kind, or to take any action, which shall be binding on the other party without the prior written consent of such other party. 25 19.2 This AGREEMENT may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. GLAXO GROUP LIMITED SYNAPTIC PHARMACEUTICAL CORPORATION By: /s/Jeremy Strachaw By:/s/Kathleen P. Mullinix ------------------ ----------------------- Title: Director Title: Chairman, President & CEO Date: March 5, 1998 Date: 26 SCHEDULE A FUNCTIONAL USE PATENTS USP 5,403,847 USP 5,578,611 27 SCHEDULE B RECEPTOR PATENTS USP 5,556,753 28 EX-23 11 EXHIBIT 23.1 ------------ Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333- 05793) pertaining to the 1988 Amended and Restated Incentive Plan, 1996 Incentive Plan and the 1996 Nonemployee Director Stock Option Plan of Synaptic Pharmaceutical Corporation of our report dated January 30, 1998 (except for the second paragraph of Note 11 as to which the date is March 2, 1998), with respect to the financial statements of Synaptic Pharmaceutical Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /s/ ERNST & YOUNG LLP Hackensack, NJ March 26, 1998 EX-24 12 EXHIBIT 24 ---------- POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints each of Kathleen P. Mullinix and Lisa L. Reiter, or either of them, such person's true and lawful attorney-in-fact and agent with full power of substitution and re- substitution for such person and in his or her name, place and stead, in any and all capacities, to sign this Annual Report on Form 10-K and any or all amendments thereto and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission and the National Association of Securities Dealers, granting unto said attorney-in-fact and agent full power and authority, to do and perform each and every act and thing requisite or necessary to be done in and about the premises, to all intents and purposes and as fully as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or her substitutes may lawfully do or cause to be done by virtue hereof. Signature Title Date - ------------------------------ ---------------------- -------------- /s/ Kathleen P. Mullinix Chairman of the Board, March 13, 1998 - ------------------------------ President, and Chief Kathleen P. Mullinix Executive Officer /s/ Robert L. Spence Senior Vice President, March 12, 1998 - ------------------------------ Chief Financial Officer, Robert L. Spence and Treasurer /s/ Jonathan J. Fleming Director March 13, 1998 - ------------------------------ Jonathan J. Fleming /s/ Zola P. Horovitz, Ph.D Director March 13, 1998 - ------------------------------ Zola P. Horovitz, Ph.D /s/ Eric R. Kandel, M.D Director March 13, 1998 - ------------------------------ Eric R. Kandel, M.D /s/ John E. Lyons Director March 13, 1998 - ------------------------------ John E. Lyons /s/ Sandra Panem, Ph.D Director March 13, 1998 - ------------------------------ Sandra Panem, Ph.D /s/ Alison Taunton-Rigby, Ph.D Director March 13, 1998 - ------------------------------ Alison Taunton-Rigby, Ph.D EX-27 13
5 YEAR DEC-31-1997 DEC-31-1997 23,113,000 38,987,000 40,000 0 0 34,437,000 8,447,000 3,765,000 69,402,000 1,698,000 0 0 0 105,000 67,599,000 69,402,000 0 10,307,000 0 17,853,000 0 0 5,000 (5,346,000) 0 (5,346,000) 0 0 0 (5,346,000) (0.66) (0.66)
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