-----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, IKjtkQu7OstuEpFFOmVv9IG3Vn+bRujjBGDJmdlqiU4Hd30labtikyuYy22F5YL9 01oHD18odRxD+443dgCWKA== 0000912057-97-011272.txt : 19970401 0000912057-97-011272.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-011272 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERAPEUTIC DISCOVERY CORP CENTRAL INDEX KEY: 0000899753 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 943173191 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 005-45501 FILM NUMBER: 97570045 BUSINESS ADDRESS: STREET 1: 1375 CALIFORNIA AVENUE STREET 2: P O BOX 10051 CITY: PALO ALTO STATE: CA ZIP: 94303 BUSINESS PHONE: 4154968203 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 Commission file number 0-21478 THERAPEUTIC DISCOVERY CORPORATION - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 94-3173191 - ----------------------------------- ---------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1454 Page Mill Rd. Suite 220, P.O. Box 10051, Palo Alto, CA 94303-0860 - ------------------------------------------------------------ -------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 496-8200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class - -------------- Class A Common Stock Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant, as of March 14, 1997: $80,374,704 Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of March 14, 1997: Title of Class Number of Shares - -------------- ---------------- Class A Common Stock 7,734,424 Class B Common Stock 100 DOCUMENTS INCORPORATED BY REFERENCE Items 10, 11, 12 and 13 of Part III are incorporated by reference to the definitive proxy statement for the registrant's Annual Meeting of Stockholders to be held on May 8, 1997. 1 THERAPEUTIC DISCOVERY CORPORATION FORM 10-K ANNUAL REPORT FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 TABLE OF CONTENTS PART I ITEM 1. BUSINESS......................................................... 3 ITEM 2. PROPERTIES....................................................... 13 ITEM 3. LEGAL PROCEEDINGS................................................ 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................................................... 15 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA).... 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................ 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................................. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............. 20 ITEM 11. EXECUTIVE COMPENSATION.......................................... 20 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 20 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................................................... 21 2 PART I NOTICE CONCERNING FORWARD-LOOKING STATEMENTS: Some of the statements made in this Annual Report on Form 10-K are forward-looking in nature, including but not limited to statements that are not historical facts and statements including forms of the words "intend", "believe", "will", "may", "could", "expect", "anticipate", "possible" and similar terms. The occurrence of the events described, and the achievement of the intended results, are subject to the future occurrence of many events which are unpredictable or outside Therapeutic Discovery Corporation's control and various risk factors that could cause Therapeutic Discovery Corporation's actual results to be materially different from those anticipated in any forward-looking statements. Many of the significant risks are described in this Annual Report on Form 10-K and include, without limitation, risks associated with technology and product development, risks relating to clinical development, changes in the health care marketplace, regulatory risks, risks related to patent and intellectual property matters, market acceptance of products (including third-party reimbursement) and competition and the risk of a lack of funds to complete development of products. ITEM 1. BUSINESS INTRODUCTION Therapeutic Discovery Corporation ("TDC"), a Delaware corporation with its mailing address at 1454 Page Mill Road, Suite 220, P.O. Box 10051, Palo Alto, California, 94303-0860, was formed on November 12, 1992 by ALZA Corporation ("ALZA") for the purpose of selecting and developing new human pharmaceutical products combining the proprietary drug delivery technologies of ALZA with various drug compounds (the "TDC Products"), and commercializing such TDC Products, most likely through licensing to ALZA. At the end of 1996, TDC had a number of products at various stages of development at ALZA, including several in clinical evaluation. The products under development incorporate several of ALZA's drug delivery technologies. On June 11, 1993, ALZA distributed a special dividend of units (each, a "Unit") to ALZA stockholders (the "Distribution"), each Unit consisting of one share of TDC Class A Common Stock and one warrant to purchase one-eighth of one share of ALZA Common Stock at an exercise price of $65 per share. Holders of record of ALZA Common Stock on May 28, 1993 received one Unit for every 10 shares of ALZA Common Stock held, with cash distributed in lieu of fractional Units. A total of 7,734,424 Units were distributed to ALZA stockholders. In connection with the Distribution, ALZA made a $250 million cash contribution to TDC's capital, which is being used primarily to fund the development of TDC Products. For a discussion of the contractual arrangements between TDC and ALZA, see "Arrangements with ALZA" below. In accordance with TDC's Restated Certificate of Incorporation, on June 11, 1996, the units separated into their component securities--TDC Class A Common Stock and ALZA 3 warrants. As a result of the separation, both securities are listed and trade independently on the Nasdaq Stock Market. The trading symbol for the TDC Class A Common Stock is "TDCA". 1996 PRODUCT DEVELOPMENT ACTIVITIES From inception through the end of 1996, TDC has invested more than $205 million in product development. During 1996, TDC focused its efforts on the products in its pipeline with the highest commercial potential, while reducing development activities on other products due to changes in the marketplace and the results of initial studies. As is true throughout the pharmaceutical industry, products in development must overcome a number of technological, clinical, regulatory, proprietary and commercial hurdles in order to become successful products. Development of some TDC Products has been terminated and there can be no assurance that any or all of the products in development by TDC, including any of those listed below, will reach the marketplace or will become commercially successful products. In addition, if expenditures on TDC Products continue at approximately current levels, funds for product development will be exhausted in the second half of 1997 and at that time TDC will not have funds to continue or complete development of such products. At the end of 1996, a New Drug Application for TDC's second-generation transdermal testosterone product to follow ALZA's existing Testoderm-Registered Trademark- product was submitted to the United States Food and Drug Administration (the "FDA"). This product, designed to provide physiologic testosterone replacement therapy, is a single patch that can be worn on the arm or torso. In January of 1997, ALZA exercised its option to license this product from TDC for 12 European countries, and ALZA entered into an agreement with Ferring N.V. to market the product in such countries. As a result of the granting of the license, TDC received a portion of Ferring's upfront payment to ALZA and will receive payments from ALZA based on sales of the product in the 12 European countries covered by ALZA's agreement with Ferring. See "Arrangements with ALZA: Product License Option" below. Significant progress was also made in 1996 in the development of the DUROS-TM- leuprolide human implant product and, in early 1997, an Investigational New Drug application was filed for this product with the FDA in anticipation of commencing clinical trials. The DUROS-TM- leuprolide product, which is designed to administer leuprolide continuously for an extended period, is in development for the treatment of prostate cancer. TDC's OROS-Registered Trademark- oxybutynin product is currently in Phase III clinical studies. The product, a once-daily dosage form, is intended for the treatment of urge urinary incontinence and is designed to provide an equivalent or decreased level of incontinent episodes with reduced side effects compared to current therapies. In the area of endocrinology, TDC has in Phase III clinical trials an intrauterine system for the delivery of progesterone as an adjunctive therapy to estrogen hormone 4 replacement therapy in women. The product is designed to provide local delivery of progesterone directly to the uterus for 18 up to 24 months, and is intended to provide protection from endometrial hyperplasia while having reduced side effects compared to oral progesterone replacement therapy. In the area of pain management, at the end of 1996 TDC had a once-daily OROS-Registered Trademark- hydromorphone product in Phase III development. In February of 1997, ALZA exercised its option to license this product from TDC for the entire world, and ALZA entered into an agreement with Knoll Pharmaceutical Company and its parent company Knoll AG (collectively, "Knoll") for the further clinical development and worldwide commercialization of this product. Under the terms of its license to ALZA, TDC will receive a portion of the amounts ALZA receives from Knoll based on worldwide sales of the product and a portion of certain milestone payments made by Knoll to ALZA. See "Arrangements with ALZA: Product License Option" below. In 1996, TDC continued preclinical development on the OROS-Registered Trademark- methylphenidate product, designed to provide once-daily dosing of methylphenidate with a uniquely efficacious pattern of delivery for the treatment of attention deficit disorder. Clinical studies are expected to begin with this product in the second half of 1997. In choosing appropriate product candidates for development, TDC and ALZA have used a market-driven approach under which they have examined unmet medical needs in selected therapeutic areas and then targeted cost-effective products for development. The therapeutic areas in which TDC Products are focused are pain management, urology, supportive therapies in oncology and AIDS and endocrinology; however, ALZA and TDC have also pursued product opportunities outside these therapeutic areas where ALZA's drug delivery systems can add significant value to drug therapy. As TDC's cash available for product development has decreased, TDC has focused less attention on choosing additional product candidates, and correspondingly more attention on its products already under development. By the end of 1996, TDC product discovery activities were essentially complete. ARRANGEMENTS WITH ALZA TECHNOLOGY LICENSE AGREEMENT. TDC and ALZA are parties to a technology license agreement pursuant to which ALZA granted to TDC, subject to certain pre-existing rights, an exclusive, worldwide, royalty-free license, in perpetuity, to use ALZA's drug delivery technology and patents (the "ALZA Technology") solely for the development and commercialization of TDC Products. ALZA retains the right to use ALZA Technology in any other manner and for all other purposes. PRODUCT DEVELOPMENT. TDC and ALZA are parties to a development agreement (the "Development Contract") pursuant to which ALZA conducts research and development activities on behalf of TDC in connection with the development of TDC Products. Payments to ALZA under the Development Contract consist of the fully- 5 burdened costs (the "Development Costs") of all activities undertaken by ALZA in connection with the development of TDC Products under work plans approved by TDC. TDC is required to utilize all funds contributed to TDC by ALZA, plus any investment income earned thereon, less organization costs and administrative expenses (including reasonable reserves for TDC operations) and the costs of the Distribution (the "Available Funds") on the development of TDC Products. Most of TDC's Available Funds have been and will continue to be used to reimburse ALZA for activities undertaken with respect to the development of TDC Products. Based on TDC's current rate of expenditures on TDC Products, it can be expected that TDC's Available Funds will be exhausted in the second half of 1997 and product development funding by TDC will cease. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." TDC owns all TDC Products. ALZA owns all technology developed or otherwise obtained pursuant to the Development Contract ("Developed Technology"), subject to TDC's right to use Developed Technology solely in connection with the development and commercialization of TDC Products. Costs incurred to obtain and maintain patents covering Developed Technology are shared equally by TDC and ALZA during the term of the Development Contract. ALZA owns all patents covering Developed Technology; TDC has an exclusive license to such patents solely for use in connection with the development and commercialization of TDC Products. ALZA will pay royalties (the "Technology Royalties") to TDC, on a country-by-country basis, in respect of sales in the relevant country of any product, other than a TDC Product, that is covered at the time of sale by one or more patents issued in such country which are based on Developed Technology (each, an "Other Royalty-Bearing Product"). The Technology Royalties will be the sum of (i) 1% of ALZA's net sales of such Other Royalty-Bearing Product in such country, plus (ii) 10% of any percentage of sales or other payment received by ALZA with respect to third party sales of such Other Royalty-Bearing Product in such country. In determining the Technology Royalties due to TDC for any Other Royalty-Bearing Product, net sales and other payments will be reduced by the dollar amount of any license or similar payments due to third parties from ALZA with respect to such Other Royalty-Bearing Product. If the Other Royalty-Bearing Product is an electrotransport product, this reduction will include payments due from ALZA to Medtronic, Inc. ("Medtronic") under an existing agreement between ALZA and Medtronic covering electrotransport products. ALZA has the option to buy out the right of TDC to receive Technology Royalties with respect to any Other Royalty-Bearing Product on either a country-by-country or worldwide basis at a buy-out price determined according to formulae specified in the Development Contract. PRODUCT LICENSE OPTION. TDC has granted to ALZA an option to acquire, on a product-by-product and country-by-country basis, a perpetual, exclusive, royalty-bearing license to make, have made, use and sell any or all TDC Products (the "License Option"). 6 If ALZA exercises its License Option for any TDC Product (a "Licensed TDC Product"), ALZA will pay the following royalties ("Product Royalties") to TDC: (a) if the Licensed TDC Product is sold by ALZA, Product Royalties of up to a maximum of 5% of ALZA's net sales of the Licensed TDC Product determined as follows: (i) 1% of net sales, other than sales to distributors or sublicensees who agree to pay royalties or make percentage of sales payments to ALZA or any affiliate of ALZA and in respect of which the Product Royalties are determined as provided in clause (b) below, plus (ii) an additional 0.1% of such net sales for each full $1 million of the Development Costs of the Licensed TDC Product paid by TDC; and (b) if the Licensed TDC Product is sold by a third party, Product Royalties of up to a maximum of 50% of third party payments to ALZA with respect to such Licensed TDC Product determined as follows: (i) 10% of such third party payments, plus (ii) an additional 1% of such third party payments for each full $1 million of the Development Costs of the Licensed TDC Product paid by TDC. In each case, net sales and other third party payments will be reduced by the dollar amount of any license or similar payments due to third parties from ALZA with respect to the Licensed TDC Product. If the Licensed TDC Product is an electrotransport product, this reduction will include the amount of any payments due from ALZA to Medtronic. It is possible that, in order to develop a TDC Product, licenses or other arrangements with third parties may be necessary or appropriate. Such arrangements could require payments by ALZA which would reduce net sales and other payments in determining payments owed to TDC. ALZA may exercise the License Option with respect to any TDC Product, on a country-by-country basis, at any time until 90 days after the earliest of the following: (a) approval to market the TDC Product in such country by the appropriate regulatory agency; (b) approval to market the TDC Product in the United States by the FDA; or (c) the expiration of the Purchase Option (as defined below). ALZA has the option to buy out TDC's right to receive Product Royalties with respect to any Licensed TDC Product on either a country-by-country or worldwide basis. The country-by-country buy-out option may be exercised in respect of any Licensed TDC Product in any country at any time after the twelfth complete calendar quarter following the first commercial sale of the Licensed TDC Product in such country. The worldwide buy-out option may be exercised in respect of any Licensed TDC Product at any time after the twelfth complete calendar quarter following the first commercial sale of the Licensed TDC Product in either (x) the United States or (y) two of the following countries: the United Kingdom, France, Germany, Italy or Japan. The buy-out price in the case of a country specific buy-out will be 15 times the Product Royalties paid by or due from ALZA to TDC in respect of such Licensed TDC Product in such country. The buy-out price in the case of a worldwide buy-out will be 20 times the worldwide Product Royalties paid by or due from ALZA to TDC in respect of sales of the Licensed TDC Product (and, in addition, such 7 Product Royalties as would have been paid or due from ALZA to TDC if ALZA had not exercised any country specific buy-out option with respect to such Licensed TDC Product), less any amounts previously paid to exercise any country specific buy-out option with respect to such Licensed TDC Product. In either case, the buy-out price will be determined with reference to the most recent four calendar quarters, preceding the date of exercise of the buy-out option, for which Product Royalties were paid. As described above under "1996 Product Development Activities," since the beginning of 1997 ALZA has exercised its License Option with respect to TDC's transdermal testosterone product for 12 European countries and with respect to TDC's OROS-Registered Trademark- hydromorphone product on a worldwide basis. Product Royalties payable to TDC with respect to the OROS-Registered Trademark- hydromorphone product differ from the standard royalty payment because TDC and ALZA agreed that, in exchange for TDC foregoing its share of an upfront payment and the first milestone payment to be received by ALZA from Knoll, ALZA will pay TDC an additional 1% of net sales and an additional 10% of third party payments plus the standard Product Royalties described above. PURCHASE OPTION. ALZA has certain rights pursuant to the Restated Certificate of Incorporation of TDC to purchase all (but not less than all) of the TDC Class A Common Stock (the "Purchase Option"). The Purchase Option may be exercised by written notice to TDC at any time during the period ending on December 31, 1999; provided that such date will be extended for successive one year periods if, as of any June 30 beginning with June 30, 1999, TDC has not used at least 90% of all Available Funds pursuant to the Development Contract. The Purchase Option will in any case terminate on the 60th day after the later of the filing or the due date of a Form 10-K or Form 10-Q of TDC containing a balance sheet showing less than $5 million of cash, cash equivalents and short-term and long-term investments. Based on TDC's current rate of expenditures on TDC Products, it can be expected that TDC's balance sheet will reach this threshold in the second half of 1997. See Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." If the Purchase Option is exercised, the exercise price (the "Purchase Option Exercise Price") will be the greatest of the following: (a) $100 million; (b) the greater of (i) 25 times the worldwide Product Royalties and Technology Royalties paid by or due from ALZA to TDC with respect to all Licensed TDC Products and Other Royalty-Bearing Products (and, in addition, such Product Royalties and Technology Royalties as would have been paid by or due from ALZA to TDC if ALZA had not exercised its buy-out option with respect to any Licensed TDC Product or Other Royalty-Bearing Product) during the most recent four calendar quarters preceding the exercise of the Purchase Option for which such royalties were paid or due, or (ii) 100 times such Product Royalties or Technology Royalties paid by or due from ALZA to TDC during the most recent such calendar quarter, but in either case less any amounts previously paid to 8 exercise any buy-out option with respect to a Licensed TDC Product or an Other Royalty-Bearing Product; (c) the fair market value of one million shares of ALZA Common Stock; or (d) $325 million less all amounts spent by TDC under the Development Contract. Based on information available at the end of 1996, the Purchase Option Exercise Price is expected to be $100 million. For purposes of calculating the Purchase Option Exercise Price, any special upfront third party payments will be amortized equally over a period of 28 calendar quarters beginning with the calendar quarter in which such payment is made. In each case, the amount payable will be reduced to the extent, if any, that TDC's liabilities at the time of exercise of the Purchase Option (other than liabilities under the Development Contract) exceed TDC's cash and cash equivalents, and short-term and long-term investments (excluding from such cash and cash equivalents, and short-term and long-term investments the amount of Available Funds remaining at such time). At the time of exercise of the Purchase Option ALZA may decide, in its discretion, to pay the Purchase Option Exercise Price in cash, in ALZA Common Stock, or in any combination of cash and ALZA Common Stock. ALZA has not made a decision as to whether it will exercise the Purchase Option. ALZA is under no obligation to exercise the Purchase Option and will do so only if ALZA determines that it is in the best interests of ALZA and its stockholders at the time the decision is made. Until the expiration of the Purchase Option, ALZA, as the sole holder of TDC's Class B Common Stock, is entitled to vote separately as a class with respect to, and therefore could prevent, any merger or liquidation of TDC, the sale, lease, exchange, transfer or other disposition of any substantial asset of TDC, and any amendments to the Restated Certificate of Incorporation of TDC that would alter the Purchase Option, TDC's capitalization, or the provisions of the Restated Certificate of Incorporation concerning TDC's board of directors. SERVICES AGREEMENT. TDC and ALZA have a services agreement (the "Services Agreement") pursuant to which ALZA provides TDC with administrative services on a fully-burdened cost reimbursement basis. TDC may terminate the Services Agreement at any time upon 60 days' written notice. 9 PRODUCT DEVELOPMENT RISKS All pharmaceutical products require extensive development and clinical activities before an application can be filed for regulatory approval to market the product. There are many risks inherent in this process and it should be expected that some of the products for which development is initiated ultimately will not become commercial products. Substantial technical, financial and human resources are required to successfully complete the development of a product. The proper performance characteristics for the product must be defined, and the product must be designed and developed to meet those characteristics. Every product faces significant technological hurdles, and often one or more of these cannot be achieved. After the product is manufactured on a pilot scale, clinical safety and efficacy must be shown. Clinical studies are very costly, and can take many years to complete. There can be no assurance that the desired outcomes will be shown in the clinical studies or that regulatory approval for the product will be obtained. Several years, and millions of dollars, may be spent before it can be known whether all technical and clinical requirements for a product can be met. There are further technology risks in converting a pilot scale manufacturing process to a commercial scale manufacturing process. Finally, even once a product is developed, approved by regulatory authorities and manufactured, there can be no assurance of its commercial success. In order to provide added value and gain medical and commercial acceptance, a product must show some performance improvements over products incorporating the same or similar drug compounds. In some cases, these benefits may be difficult to establish. As discussed above, if expenditures on TDC Products continue at approximately current levels, funds for product development will be exhausted in the second half of 1997 and at that time TDC will not have funds to complete development of such products. GOVERNMENTAL REGULATION Under the United States Food, Drug, and Cosmetic Act, "new drugs" must obtain clearance from the FDA before they lawfully can be marketed in the United States. Applications for marketing clearance must be based on extensive clinical and other testing, the cost of which is very substantial. The packaging and labeling of all new drug products are also subject to FDA regulation. Approvals (sometimes including pricing approvals) are required from health regulatory authorities in foreign countries before marketing of pharmaceutical products may commence in those countries. Requirements for approval may differ from country to country, and can involve additional testing. There can be substantial delays in obtaining required clearances from both the FDA and foreign regulatory authorities after applications are filed. Even after clearances are obtained, further delays may be encountered before the products become commercially available. All facilities and manufacturing techniques used for the manufacture of products for clinical use or for sale must conform with "Good Manufacturing Practices", the FDA 10 regulations governing the production of pharmaceutical products, and comparable regulations of health regulatory authorities in foreign countries. From time to time, the FDA and other federal, state and local government agencies (including, without limitation, those agencies mandated to oversee environmental laws and regulations) may adopt regulations that affect the manufacturing and marketing of TDC Products. PATENTS AND PATENT APPLICATIONS Under the Development Contract, ALZA determines whether and to what extent to seek patent protection for TDC Products and Developed Technology. If ALZA declines to seek patent protection for any TDC Product or any Developed Technology, TDC does not have the right to do so. Patent protection generally has been important in the pharmaceutical industry and the commercial success of TDC Products may depend, in part, upon ALZA's election to seek patent protection and its ability to obtain such patents both in the United States and abroad. Although ALZA's patents, pending patent applications, and any patents obtained on future applications covering any ALZA Technology, Developed Technology or TDC Product, may be important to future operations, there can be no assurance that any additional patents will be issued or that any patents, now or hereafter issued, will be of commercial benefit. In the United States, patents are generally granted for specified periods of time. Some of ALZA's earlier patents covering various aspects of ALZA Technology licensed to TDC have begun to expire, or will expire, over the next several years; however, ALZA Technology is generally covered by multiple patents. Although a patent has a statutory presumption of validity in the United States, the issuance of a patent is not conclusive as to such validity or as to the enforceable scope of the claims of the patent. There can be no assurance that ALZA patents covering any ALZA Technology, Developed Technology or TDC Product will not be successfully challenged in the future. In some cases, third parties have initiated reexamination by the Patent and Trademark Office of patents issued to ALZA. The validity or enforceability of ALZA patents after their issuance have also been challenged in litigation. If the outcome of such litigation is adverse to ALZA, third parties may then be able to use the invention covered by the patent, in some cases without payment. There can be no assurance that ALZA patents will not be infringed or successfully avoided through design innovation. It is also possible that third parties may obtain patent or other proprietary rights that may be necessary or useful to TDC. With numerous other companies engaged in developing drug delivery technologies, it can be expected that other parties may in some circumstances file patent applications or obtain patents that compete in priority with ALZA's patent applications. Such competition may result in adversarial proceedings such as patent interferences and oppositions, which can increase the uncertainty of patent coverage. In cases where third parties are first to invent a particular product or technology, it is possible that those parties will obtain patents that will be sufficiently broad so as to prevent TDC from using certain technology or from further developing or 11 commercializing certain products. If licenses from third parties are necessary but cannot be obtained, commercialization of the TDC Product would be delayed or prevented. In addition, TDC utilizes significant unpatented proprietary ALZA Technology, and there can be no assurance that others will not develop similar technology. COMPETITION All TDC Products and Other Royalty-Bearing Products, if any, will face competition both from more traditional forms of drug delivery and from advanced delivery systems being developed by others. In some instances, because TDC is developing products which incorporate drugs that are off-patent or being developed by multiple companies, TDC will face competition from products based on the same drug components. This competition potentially includes all of the pharmaceutical companies in the world. Many of these other pharmaceutical companies have greater financial resources, technical staffs and manufacturing and marketing capabilities than ALZA or TDC. A number of smaller companies also are developing drug delivery technologies. Competition in drug delivery systems is generally based on performance characteristics and price. Acceptance by hospitals, physicians and patients is crucial to the success of a product. Health care reimbursement policies of managed care organizations, insurers and government agencies will continue to exert pressure on pricing, and various federal and state agencies have enacted regulations requiring rebates of a portion of the purchase price of many pharmaceutical products. Cost-effectiveness, although often difficult to measure, is becoming increasingly critical. The health care industry has continued to change rapidly as the public, government, medical practitioners and the pharmaceutical industry focus on ways to expand medical coverage while controlling the growth in health care costs. The growth of managed care organizations and the resulting pressures for cost-containment in the United States health care system are expected to continue to put pressures on the prices charged for pharmaceutical products. Prescription drug reimbursement practices and the growth of large managed care organizations, as well as generic and therapeutic substitution (substitution of a different product for the same indication), could significantly affect TDC's business. While TDC believes the changing health care environment may increase the value of TDC Products over the long term, it is impossible to predict the impact these changes may have on TDC. REVENUES AND NET LOSS Revenues, consisting of net interest and investment income earned on invested funds and license fees, were approximately $8.2 million in 1996, $11.5 million in 1995, and $8.7 million in 1994. Revenues were approximately $34.3 million for the period from inception (November 1992) to December 31, 1996. As TDC's funds have continued to be utilized under the Development Contract, lower cash balances are available for 12 investment, and net interest income therefore continues to decrease. Based on TDC's current rate of expenditures on TDC Products, it can be expected that TDC's funds will be exhausted in the second half of 1997. TDC reported a net loss of approximately $94.8 million or $12.25 per common share for 1996, $59.4 million or $7.68 per common share for 1995, and $25.7 million or $3.32 per common share for 1994. TDC had a net loss of approximately $180.2 million for the period from inception (November 1992) to December 31, 1996. The increasing net loss resulted primarily from the substantial increase in development activities each year since 1994. RESEARCH AND DEVELOPMENT EXPENSES TDC incurred research and development expenses of approximately $100.0 million during 1996, $68.9 million during 1995, and $31.6 million during 1994. Research and development expenses have totaled approximately $205.4 million for the period from inception (November 1992) to December 31, 1996. The increase in research and development activities is due to an increase in product development activities and products reaching later stages of development. EMPLOYEES On December 31, 1996, TDC had one employee, Dr. Gary L. Neil, its President and Chief Executive Officer. ITEM 2. PROPERTIES TDC's corporate offices are located in Palo Alto, California. TDC does not own any facilities. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 EXECUTIVE OFFICERS OF THE REGISTRANT
Principal Occupations for Name Age Past Five Years - ----------------------- ----- ------------------------------------------ Gary L. Neil, PhD 56 June 1993 to present, President and Chief President and Chief Executive Officer of TDC; April 1990 to May Executive Officer 1993, Executive Vice President, Wyeth- Ayerst Research; May 1989 to April 1990, Senior Vice President, Wyeth-Ayerst Research; prior to 1989, various scientific and other management positions with the Upjohn Company. David R. Hoffmann* 52 Vice President and Treasurer of ALZA Vice President, Finance Corporation since 1994; other positions and Secretary with ALZA, including Vice President, Finance/Vice President and Controller, since 1976. Suzanne C. Martin* 47 Vice President, Development Programs of Vice President, ALZA Corporation since October 1994; Research and other positions with ALZA Corporation, Development including Executive Director, Project Administration Management and Senior Director of Research and Development Administration since 1988.
* Mr. Hoffmann and Ms. Martin are employees of ALZA who provide services to TDC under its agreements with ALZA. They do not receive compensation from TDC. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS TDC Class A Common Stock was originally traded as part of Units, each Unit consisting of one share of TDC Class A Common Stock and one warrant to purchase one-eighth of one share of ALZA Common Stock at an exercise price of $65 per share. The Units were quoted on the Nasdaq Stock Market under the symbol TDCAZ until June 11, 1996. On June 11, 1996, the Units separated into their component securities--TDC Class A Common Stock and ALZA warrants. As a result of the separation, TDC Class A Common Stock is quoted independently on the Nasdaq Stock Market under the symbol "TDCA". The TDC Class B Common Stock is not publicly traded. As of December 31, 1996, there were approximately 5,827 holders of record of TDC Class A Common Stock and one holder of TDC Class B Common Stock. TDC has not paid any dividends on its Common Stock and does not intend to do so. In addition, TDC's Restated Certificate of Incorporation prohibits the payment of dividends with Available Funds. (Available Funds are defined as all funds contributed to TDC by ALZA, plus any investment income earned thereon, less the costs of the Distribution and TDC's reasonable ongoing administrative expenses, including reasonable reserves for TDC's operations.) The quarterly high and low sales prices of Units (prior to June 11, 1996) and TDC Class A Common Stock (after June 11, 1996) for the calendar years 1996 and 1995 as quoted on the Nasdaq Stock Market were as follows: 1996 1995 -------------------- ------------------- High Low High Low ---- --- ---- --- First Quarter $ 10 5/8 $ 7 1/8 $ 6 1/2 $ 5 1/4 Second Quarter $ 9 7/8 $ 8 7/8 $ 7 7/8 $ 6 Third Quarter $ 10 $ 8 $ 7 3/4 $ 6 3/4 Fourth Quarter $ 11 3/8 $ 9 3/8 $ 7 1/4 $ 6 3/4 15 ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
Period from Period from Inception Inception Year Ended Year Ended Year Ended (November 1992) (November 1992) December 31, December 31, December 31, to December 31, to December 31, 1996 1995 1994 1993 1996 ------------ ------------ ------------ -------------- --------------- Total revenues (net interest and investment $ 8,215 $ 11,540 $ 8,673 $ 5,908 $ 34,336 income and license fees) Net loss $ (94,750) $ (59,403) $ (25,661) $ (384) $(180,198) Net loss per common share $ (12.25) $ (7.68) $ (3.32) $ (.05) Total assets $ 88,460 $ 181,437 $ 220,427 $ 251,928 Total liabilities $ 19,316 $ 16,965 $ 7,849 $ 2,454
No cash dividends were paid from inception (November 1992) through December 31, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES TDC was formed in November 1992 by ALZA and was fully capitalized and commenced operations in June 1993 with approximately $250 million in cash contribued by ALZA. TDC had cash and cash equivalents and short-term investments of approximately $85.3 million at December 31, 1996, as compared with $176.6 million at December 31, 1995, and $213.7 million at December 31, 1994. During 1994, TDC realized losses of approximately $3.9 million when it repositioned its investment portfolio to take advantage of higher interest rates. TDC's cash expenditures for operating activities were approximately $90.4 million in 1996, as compared with $48.3 million in 1995, and $19.4 million in 1994. Cash expenditures for operating activities were approximately $163.0 million from inception (November 1992) to December 31, 1996, and differ from TDC's net losses of approximately $180.2 million for the same period due primarily to the amount payable to ALZA for research and development and amortization of organization expenses. TDC's remaining cash, plus interest earned thereon, less administrative expenses (including reasonable reserves for TDC's operations) will be used primarily to fund the development of TDC Products under the Development Contract. Funds not immediately required for development activities and administrative expenses have been invested in low risk securities. TDC's investment portfolio includes investments in collateralized mortgage 16 securities, U.S. Government securities, corporate notes, and asset backed notes. As TDC's funds continue to be utilized under the Development Contract, increasingly lower cash balances will be available for investment. Based on TDC's current rate of expenditures on TDC Products, it is expected that funds for product development will be exhausted in the second half of 1997 and product development funding by TDC will cease. However, several factors could impact the level and timing of TDC funding, including the discontinuation of the development of any TDC Products, any commercial arrangements between ALZA and other companies which would cause ALZA to exercise its License Option with respect to any TDC Product, any change in the number of projects advancing to or continuing in later stages of development or any adjustments in the rate of spending on products currently in development. When cash available for product development is exhausted, which is anticipated to occur in the second half of 1997, certain critical timetables will be triggered. First, ALZA's Purchase Option with respect to all of TDC's Class A Common Stock will expire on the 60th day after the later of the filing or the due date of a Form 10-K or Form 10-Q of TDC containing a balance sheet showing less than $5 million of cash, cash equivalents and short-term and long-term investments. In addition, ALZA has the right, for 90 days after expiration of the Purchase Option, to license any or all TDC Products which have not yet been licensed, on a product-by-product and country-by-country basis. ALZA is under no obligation to exercise the Purchase Option or the License Option with respect to any TDC Product and will do so only if ALZA determines that it is in the best interests of ALZA and its stockholders at the time the decision is made. In the event that ALZA does not exercise the Purchase Option or the License Option for all TDC Products, TDC will not have funds to continue or complete development of any remaining products. ALZA has undertaken to fund certain TDC Product development activities which will not be completed before available cash is exhausted and which are described in work plans approved by TDC. Such funding by ALZA would begin on a product-by-product basis when TDC no longer has funds available to pay for such activities. Such funding will continue only during the period prior to the expiration of the Purchase Option and the License Option when ALZA has not yet made a determination whether or not to exercise its Purchase Option or its License Option for the particular product. However, this undertaking is subject to ALZA's determination of the continued technical and commercial feasibility of the product and the compatibility of the product with ALZA's product portfolio and business objectives. The Board of Directors of TDC has initiated activities to establish a contingency plan for the continued operations of TDC in the event that ALZA chooses not to exercise the Purchase Option. Possible actions under the contingency plan, which could be implemented individually or in combination, include the sale or license of TDC Products for which ALZA has not exercised its License Option, either worldwide or for countries for which ALZA has not exercised its option; the sale of TDC's rights to future 17 payments with respect to TDC Products licensed by ALZA; and the sale of TDC's rights to future payments from ALZA with respect to the Developed Technology. TDC's Board will review the contingency plan on a regular basis. In the event that ALZA does not exercise the Purchase Option, there can be no assurance that the contingency plan will result in returns to TDC stockholders. The Board has the right, under its agreements with ALZA, to take necessary steps to cease development funding and maintain an adequate reserve to ensure TDC's ability to meet its operating cash needs through at least December 31, 1997. RESULTS OF OPERATIONS Revenues, consisting of net interest and investment income earned on invested funds and license fees, were approximately $8.2 million for the year ended December 31, 1996, as compared with $11.5 million for the year ended December 31, 1995, and $8.7 million for the year ended December 31, 1994. Revenues were approximately $34.3 million for the period from inception (November 1992) to December 31, 1996. As TDC's funds are utilized under the Development Contract, lower cash balances are available for investment and therefore net interest income continues to decrease. During the period in which products are under development and applications for regulatory approval are submitted and reviewed, TDC does not anticipate significant revenues. TDC incurred research and development expenses of approximately $100.0 million during 1996, as compared with $68.9 million during 1995, and $31.6 million during 1994. Research and development expenses have totaled approximately $205.4 million for the period from inception (November 1992) to December 31, 1996. Research and development expenditures increased in 1996 over 1995, as expected, as activities increased and as products reached later stages of development. TDC's research and development expenses are expected to continue at approximately current levels during 1997 subject, as discussed above, to the occurrence of various events which could affect the level and timing of TDC's expenditures on research and development. TDC incurred general and administrative expenses of approximately $3.0 million for the year ended December 31, 1996, as compared with $2.3 million for the year ended December 31, 1995, and $2.7 million for the year ended December 31, 1994. The increase in general and administrative expenses is due primarily to the additional activities required to support the increase in research and development activities. General and administrative expenses have totaled approximately $9.5 million for the period from inception (November 1992) to December 31, 1996. TDC incurred approximately $152,000 during 1996, $136,000 during 1995 and $206,000 during 1994 in administrative expenses under the Services Agreement with ALZA. Administrative expenses were approximately $614,000 for the period from inception (November 1992) to December 31, 1996. TDC reported a net loss of approximately $94.8 million or $12.25 per common share in the year ended December 31, 1996, as compared with $59.4 million or $7.68 per common share in the year ended December 31, 1995, and $25.7 million or $3.32 per 18 common share in the year ended December 31, 1994. TDC had a net loss of approximately $180.2 million for the period from inception (November 1992) to December 31, 1996. The increasing net loss resulted primarily from the substantial increase in development activities each year since 1994. It is anticipated that TDC will continue to record significant net losses as products enter or continue in later stages of development, if additional products are accepted by TDC for development, and as investment income decreases as funds available for investment are reduced. For the years ended December 31, 1996, 1995, and 1994, the provision for income taxes was not material. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements are filed as part of this Annual Report on Form 10-K (see Item 14). ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT TDC incorporates by reference the information concerning its directors set forth under the heading "Election of Directors" on pages 1 through 3 in TDC's definitive proxy statement dated March 27, 1997 for its Annual Meeting of Stockholders to be held May 8, 1997 (the "Proxy Statement"). Information concerning TDC's executive officers appears at the end of Part I of this report on page 14. ITEM 11. EXECUTIVE COMPENSATION TDC incorporates by reference the information ("Summary Compensation Table", "1996 Option Grants" and "1996 Aggregated Option Exercises and Fiscal Year-End Option Values") set forth under the heading "Executive Compensation" on page 4 in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT TDC incorporates by reference the information set forth under the heading "Beneficial Stock Ownership" on pages 7 through 8 in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TDC incorporates by reference the information set forth under the heading "Certain Transactions" on page 8 in the Proxy Statement. 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents filed as part of this Annual Report on Form 10-K: 1. Financial Statements (See Index to Financial Statements on page 23) 2. Financial Statement Schedules (None) 3. Exhibits: 3.1 Restated Certificate of Incorporation of Therapeutic Discovery Corporation filed with the Delaware Secretary of State on April 1, 1993. 3.2 Restated By-laws of Therapeutic Discovery Corporation dated January 26, 1994. 10.1 Technology License Agreement between Therapeutic Discovery Corporation and ALZA Corporation dated March 10, 1993. 10.2 Development Agreement between Therapeutic Discovery Corporation and ALZA Corporation dated March 10, 1993. 10.3 License Option Agreement between Therapeutic Discovery Corporation and ALZA Corporation dated March 10, 1993. 10.4 Services Agreement between Therapeutic Discovery Corporation and ALZA Corporation dated March 10, 1993. 10.5 Amended and Restated 1993 Stock Option Plan. 10.6 Executive Deferral Plan. 10.7 Agreement Regarding Certain Products and Activities and Amendment No. 1 to Development Agreement between Therapeutic Discovery Corporation and ALZA Corporation. 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter ended December 31, 1996 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 27, 1997 THERAPEUTIC DISCOVERY CORPORATION By /s/ Gary L. Neil ------------------------------ Dr. Gary L. Neil President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Gary L. Neil /s/ David R. Hoffmann - ----------------------------- --------------------------------- Dr. Gary L. Neil David R. Hoffmann President, Chief Executive Vice President, Finance Officer and Director and Principal Financial Date: March 27, 1997 and Accounting Officer Date: March 27, 1997 /s/ Allen M. Phipps /s/ William P. Sommers - ----------------------------- --------------------------------- Allen M. Phipps Dr. William P. Sommers Chairman of the Board of Director Directors Date: March 27, 1997 Date: March 27, 1997 /s/ Terrence F. Blaschke /s/ Paul D. Lairson - ----------------------------- --------------------------------- Dr. Terrence F. Blaschke Dr. Paul D. Lairson Director Director Date: March 27, 1997 Date: March 27, 1997 22 Therapeutic Discovery Corporation Index to Financial Statements (Item 14(a)) Financial Statement F Page Number - ------------------- ------------- Report of Ernst & Young LLP, Independent Auditors 1 Balance Sheet at December 31, 1996 and 1995 2 Statement of Operations for the years ended December 31, 1996, 1995, and 1994 and for the period from Inception (November 1992) to December 31, 1996 3 Statement of Stockholders' Equity for the period from Inception (November 1992) to December 31, 1993 and for the years ended December 31, 1994, 1995, and 1996 4-6 Statement of Cash Flows for the years ended December 31, 1996, 1995, and 1994 and for the period from Inception (November 1992) to December 31, 1996 7 Notes to Financial Statements 8-15 All schedules have been omitted because the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements, including the notes thereto. The above financial statements are included on the following pages F-1 through F-15. 23 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders of Therapeutic Discovery Corporation We have audited the accompanying balance sheet of Therapeutic Discovery Corporation (a development stage company) as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity and cash flows for the years ended December 31, 1996, 1995 and 1994 and for the period from inception (November 1992) to December 31, 1996. 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 Therapeutic Discovery Corporation (a development stage company) at December 31, 1996 and 1995 and the results of its operations and its cash flows for the years ended December 31, 1996, 1995 and 1994 and for the period from inception (November 1992) to December 31, 1996 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Palo Alto, California February 14, 1997 F-1 THERAPEUTIC DISCOVERY CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
ASSETS December 31, December 31, 1996 1995 ------------ ------------ Current assets: Cash and cash equivalents $ 10,597 $ 13,314 Short-term investments 74,707 163,294 Interest receivable 809 1,427 Prepaid expenses and other current assets 1,033 278 ------------ ------------ Total current assets 87,146 178,313 Long-term assets: Employee loans, long-term 300 300 Prepaid expenses and other long-term assets - 1,094 Organization costs, (net of accumulated amortization) 1,014 1,730 ------------ ------------ Total assets $ 88,460 $ 181,437 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Payable to ALZA Corporation $ 19,129 $ 16,817 Accounts payable and other liabilities 72 148 ------------ ------------ Total current liabilities 19,201 16,965 Long-term liabilities: Deferred compensation 115 - Stockholders' equity: Class A Common Stock, $.01 par value, 12,000,000 shares authorized, 7,734,424 issued and outstanding 77 77 Class B Common Stock, $.01 par value, 100 shares authorized, issued and outstanding - - Additional paid-in capital 251,650 251,650 Net unrealized losses on available-for-sale securities (1,166) (262) Deficit accumulated during development stage (180,198) (85,448) Deferred compensation (1,219) (1,545) ------------ ------------ Total stockholders' equity 69,144 164,472 ------------ ------------ Total liabilities and stockholders' equity $ 88,460 $ 181,437 ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES. F-2 THERAPEUTIC DISCOVERY CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
Period From Year Ended Year Ended Year Ended Inception December 31, December 31, December 31, (November 1992) to 1996 1995 1994 December 31, 1996 ------------ ------------ ------------ ------------------- REVENUES: Net interest and investment income $ 8,215 $ 11,540 $ 8,673 $ 34,336 and license fees EXPENSES: Research and development paid to ALZA Corporation 99,953 68,923 31,634 205,379 General and administrative 3,012 2,321 2,700 9,456 ---------- ----------- ----------- ---------- Total expenses 102,965 71,244 34,334 214,835 ---------- ----------- ----------- ---------- Loss before taxes (94,750) (59,704) (25,661) (180,499) ---------- ----------- ----------- ---------- Income tax - 301 - 301 ---------- ----------- ----------- ---------- Net loss $ (94,750) $ (59,403) $ (25,661) $ (180,198) ---------- ----------- ----------- ---------- ---------- ----------- ----------- ---------- Net loss per common share $ (12.25) $ (7.68) $ (3.32) ---------- ----------- ----------- ---------- ----------- ----------- Weighted average common shares 7,734,524 7,734,524 7,734,524 ---------- ----------- ----------- ---------- ----------- -----------
SEE ACCOMPANYING NOTES. F-3 THERAPEUTIC DISCOVERY CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
Unrealized Deficit losses on Accumulated Class A Class B Additional available- During the Total Common Common Common Paid-in for-sale Development Deferred Stockholders' Stock Stock Stock Capital securities Stage Compensation Equity -------- --------- --------- ---------- ------------ ----------- ------------ ------------- Issuance of 100 shares of Common Stock for $20 per share to ALZA Corporation in November 1992 $ - $ - $ - $ 2 $ - $ - $ - $ 2 Issuance of 7,734,424 shares of Class A Common Stock for approximately $32.32 per share to ALZA Corporation in June 1993, net of issuance costs of $222 - 77 - 249,699 - - - 249,776 Conversion by ALZA Corporation of 100 shares of Common Stock into 100 shares of Class B Common Stock in June 1993 - - - - - - - - Deferred compensation resulting from grant of options through December 31, 1993 - - - 1,686 - - (1,686) - Amortization of deferred compensation - - - - - - 80 80 Net loss - - - - - (384) - (384) ------ ------- ------- -------- --------- --------- --------- ---------- BALANCE, DECEMBER 31, 1993 - 77 - 251,387 - (384) (1,606) 249,474
SEE ACCOMPANYING NOTES. F-4 THERAPEUTIC DISCOVERY CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
Unrealized Deficit losses on Accumulated Class A Class B Additional available- During the Total Common Common Common Paid-in for-sale Development Deferred Stockholders' Stock Stock Stock Capital securities Stage Compensation Equity -------- --------- --------- ---------- ------------ ----------- ------------ ------------- Deferred compensation resulting from grant of options in the year ended December 31, 1994 - - - 261 - - (261) - Amortization of deferred compensation - - - - - - 158 158 Net change in unrealized loss on available-for-sale securities - - - - (11,393) - - (11,393) Net loss - - - - - (25,661) - (25,661) ------ ------- ------- -------- ------- ------- --------- -------- BALANCE, DECEMBER 31, 1994 - 77 - 251,648 (11,393) (26,045) (1,709) 212,578 Deferred compensation resulting from grant of options in the year ended December 31, 1995 - - - 2 - - (2) - Amortization of deferred compensation - - - - - - 166 166 Net change in unrealized loss on available-for-sale securities - - - - 11,131 - - 11,131 Net loss - - - - - - - (59,403) ------ ------- ------- -------- --------- --------- --------- ---------- BALANCE, DECEMBER 31, 1995 $ - $ 77 $ - $ 251,650 $ (262) $ (85,448) $ (1,545) $164,472
SEE ACCOMPANYING NOTES. F-5 THERAPEUTIC DISCOVERY CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
Unrealized Deficit losses on Accumulated Class A Class B Additional available- During the Total Common Common Common Paid-in for-sale Development Deferred Stockholders' Stock Stock Stock Capital securities Stage Compensation Equity -------- --------- --------- ---------- ------------ ----------- ------------ ------------- Deferred compensation resulting from grant of options in the year ended December 31, 1996 - - - - - - - - Amortization of deferred compensation - - - - - 326 326 Net change in unrealized loss on available-for-sale securities - - - - (904) - - (904) Net loss - - - - - (94,750) - (94,750) ------ ------- ------- -------- --------- --------- --------- ---------- BALANCE, DECEMBER 31, 1996 $ - $ 77 $ - $ 251,650 $ (1,166) $(180,198) $ (1,219) $ 69,144 ------ ------- ------- -------- --------- --------- --------- ---------- ------ ------- ------- -------- --------- --------- --------- ----------
SEE ACCOMPANYING NOTES. F-6 THERAPEUTIC DISCOVERY CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENT OF CASH FLOWS INCREASES (DECREASES) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
Period from Year Ended Year Ended Year Ended Inception December 31, December 31, December 31, (November 1992) to 1996 1995 1994 December 31, 1996 ------------ ------------ ------------ ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(94,750) $(59,403) $ (25,661) $ (180,198) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of organization costs 716 716 716 2,566 Amortization of deferred compensation 326 164 158 728 (Increase) decrease in assets: Interest receivable 618 1,021 127 (809) Other receivable - - (252) (252) Organization costs - - - (3,581) Prepaid expenses and other assets 339 123 130 (781) Increase (decrease) in liabilities: Payable to ALZA Corporation 2,312 9,122 5,390 19,129 Accounts payable 4 (2) (47) 5 Other current liabilities (80) (4) 52 67 Long-term liabilities 115 - - 115 -------- -------- ------- ---------- Total adjustments 4,350 11,140 6,274 17,187 -------- -------- ------- ---------- Net cash used in operating activities (90,400) (48,263) (19,387) (163,011) CASH FLOWS FROM INVESTING ACTIVITIES: Investments in available-for-sale securities (25,667) (42,863) (294,121) (1,363,067) Sale of available-for-sale securities 98,523 81,349 194,134 586,674 Maturities of available-for-sale securities 14,827 3,041 137,918 700,523 Employee loans, long-term - - - (300) -------- -------- ------- ---------- Net cash provided by (used in) investing activities 87,683 41,527 37,931 (76,170) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of Class B Common Stock - - - 2 Issuance of Class A Common Stock, net of issuance costs - - - 249,776 -------- -------- ------- ---------- Net cash provided by financing activities - - - 249,778 -------- -------- ------- ---------- Net increase (decrease) in cash and cash equivalents (2,717) (6,736) 18,544 10,597 Cash and cash equivalents at beginning of period 13,314 20,050 1,506 - -------- -------- ------- ---------- Cash and cash equivalents at end of period $ 10,597 $ 13,314 $20,050 $ 10,597 -------- -------- ------- ---------- -------- -------- ------- ----------
SEE ACCOMPANYING NOTES. F-7 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Therapeutic Discovery Corporation ("TDC") was incorporated in Delaware on November 12, 1992 and commenced operations on June 11, 1993. Since it commenced operations, TDC has been engaged in selecting and developing new human pharmaceutical products combining the proprietary drug delivery systems of ALZA Corporation ("ALZA") with various drug compounds. TDC's principal activities consist of research and development activities under its agreements with ALZA. Accordingly, TDC is considered a development stage company. TDC incurred research and development expenses of approximately $100.0 million during 1996, $68.9 million during 1995, and $31.6 million during 1994. Research and development expenses have totaled approximately $205.4 million for the period from inception (November 1992) to December 31, 1996. Based on TDC's current rate of expenditures on TDC products, it is expected that funds for product development will be exhausted in the second half of 1997 and product development funding by TDC will cease. When cash available for product development is exhausted, ALZA's purchase option with respect to all of TDC's Class A Common Stock and option to license TDC products on a product-by-product basis will be triggered, as described more fully in Note 2 below. The Board of Directors of TDC has initiated activities to establish a contingency plan for the continued operations of TDC in the event that ALZA chooses not to exercise the purchase option, and has the right, under its agreements with ALZA, to take necessary steps to cease development funding and maintain an adequate level of available funds to ensure TDC's ability to meet its operating cash needs through at least December 31, 1997. A summary of the significant accounting policies of TDC follows: USE OF ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. F-8 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 CASH AND CASH EQUIVALENTS: TDC reports all highly liquid debt instruments purchased with a maturity of three months or less as cash equivalents. The carrying amount reported on the balance sheet for cash and cash equivalents approximates their fair value. SHORT-TERM INVESTMENTS: TDC has classified its entire investment portfolio, including cash equivalents of approximately $85 million and $177 million at December 31, 1996 and 1995, respectively, as available-for-sale. TDC's investment portfolio is available for current operations and, therefore, has been classified as a current asset. Investments in the available-for-sale category are carried at fair market value with unrealized losses recorded as a separate component of stockholders' equity. At December 31, 1996, net unrealized losses on available-for-sale securities were approximately $1.2 million. At December 31, 1995, net unrealized losses on available-for-sale securities were approximately $0.3 million. Realized gains and losses for the years ended December 31, 1996 and 1995 were not material. The cost of securities when sold is based upon specific identification. The following is a summary of available-for-sale securities at December 31, 1996:
Available-for-Sale Securities ---------------------------------------------------- Estimated Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value --------- ---------- ---------- ----------- U.S. Treasury securities and obligations of U.S. government agencies $ 37,921 $ 8 $ (370) $ 37,559 Collateralized mortgage obligations and asset backed securities 22,340 4 (517) 21,827 Corporate securities 24,478 7 (298) 24,187 -------- ----- ------- --------- $ 84,739 $ 19 $(1,185) $ 83,573 -------- ----- ------- --------- -------- ----- ------- ---------
F-9 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 The following is a summary of available-for-sale securities at December 31, 1995:
Available-for-Sale Securities ---------------------------------------------------- Estimated Unrealized Unrealized Fair (in thousands) Cost Gains Losses Value --------- ---------- ---------- ----------- U.S. Treasury securities and obligations of U.S. government agencies $ 89,526 $ 288 $ (167) $ 89,647 Collateralized mortgage obligations and asset backed securities 39,061 11 (363) 38,709 Corporate securities 47,858 47 (78) 47,827 --------- -------- ------- --------- $ 176,445 $ 346 $ (608) $ 176,183 --------- -------- ------- --------- --------- -------- ------- ---------
The amortized cost and estimated fair value of debt and marketable securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Estimated Fair (in thousands) Cost Value ---------- ----------- Due in one year or less $ 36,938 $ 36,611 Due after one year through four years 40,814 40,118 Due after four years through eight years 6,987 6,844 ---------- ----------- $ 84,739 $ 83,573 ---------- ----------- ---------- ----------- F-10 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 INVESTMENT RISK: TDC invests excess cash in money market and fixed income securities of companies with strong credit ratings, from a variety of industries, and in U.S. government obligations. These securities typically bear minimal credit risk and TDC has not experienced any losses on its investments to date due to credit risk. ORGANIZATION COSTS: Organization costs totaling approximately $3.6 million were incurred in developing TDC's organizational, financial and contractual structures and are being amortized over 60 months using the straight line method. STOCK BASED COMPENSATION: The Company accounts for stock option grants in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company grants certain stock options for a fixed number of shares to employees, directors and consultants with an exercise price below the fair value at the date of grant and, accordingly, recognizes deferred compensation from the date of the grant. PER SHARE INFORMATION: Per share information is based on 7,734,524 shares (including Class A and Class B Common Stock) outstanding for the entire period from inception (November 1992) to December 31, 1996. Common equivalent shares are excluded as their effect is antidilutive. 2. ARRANGEMENTS WITH ALZA CORPORATION TDC was formed by ALZA for the purpose of selecting and developing new human pharmaceutical products combining ALZA's proprietary drug delivery technologies with various drug compounds, and commercializing such products, most likely through licensing to ALZA. In connection with the dividend discussed below, ALZA made a $250 million cash contribution to TDC's capital, which is being used primarily to fund activities under the development contract described below. F-11 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 In March 1993, ALZA announced a special dividend of units (each, a "Unit") to ALZA stockholders, each Unit consisting of one share of TDC Class A Common Stock and one warrant to purchase one-eighth of one share of ALZA Common Stock at an exercise price of $65 per share. Holders of record of ALZA Common Stock on May 28, 1993 received one Unit for every 10 shares of ALZA Common Stock held, with cash distributed in lieu of fractional Units. A total of 7,734,424 Units were distributed to ALZA stockholders on June 11, 1993. As a result of the distribution, all of the outstanding shares of TDC Class A Common Stock were distributed to ALZA stockholders. ALZA continues to hold all of the outstanding shares of TDC Class B Common Stock. In accordance with TDC's Restated Certificate of Incorporation, on June 11, 1996, the Units separated into their component securities--TDC Class A Common Stock and ALZA warrants. As a result of the separation, both securities are listed and trade independently on the Nasdaq Stock Market. The trading symbol for the TDC Class A Common Stock is "TDCA". ALZA and TDC are parties to a development agreement (the "Development Contract") pursuant to which ALZA conducts research and development activities on behalf of TDC. Under the Development Contract, products have been proposed by ALZA to TDC for development. For products approved for development by TDC, ALZA (and/or other third parties) conducts research and development activities under approved work plans and cost estimates. ALZA has granted to TDC a royalty-free, exclusive, worldwide perpetual license to use ALZA's proprietary drug delivery technology to develop and commercialize TDC products. For activities under the Development Contract, TDC incurred research and development expenses of approximately $100.0 million during 1996, as compared with $68.9 million during 1995, and $31.6 million during 1994. As development activities continue during 1997, TDC's research and development expenses are expected to continue until the funds contributed to TDC by ALZA in 1993, plus any investment income earned thereon, less organization costs and administrative expenses (including reasonable reserves for TDC operations) are utilized. ALZA has an option to license any products developed by TDC, on a country-by-country product-by-product basis. If ALZA exercises its license option for any product, ALZA will make the following payments to TDC with respect to such product: (a) if the product is sold by ALZA, royalties of up to a maximum of 5% of ALZA's net sales of the product determined as follows: (i) 1% of net sales, plus (ii) an additional 0.1% of net sales for each full $1 million of development costs of the F-12 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 product paid by TDC; and (b) if the product is sold by a third party, sublicensing fees of up to 50% of ALZA's sublicensing revenues with respect to the product, determined as follows: (i) 10% of ALZA's sublicensing revenues, plus (ii) an additional 1% of ALZA's sublicensing revenues for each full $1 million of development costs of the product paid by TDC. ALZA has an option, exercisable on a product-by-product basis, to buy out its royalty obligation to TDC by making a one-time payment that is a multiple of royalties and sublicensing fees paid in specified periods. Such option may be exercised on a country-by-country or worldwide basis. Since the beginning of 1997, ALZA has exercised its option to license TDC's second-generation transdermal testosterone product to follow ALZA's existing Testoderm-Registered Trademark- product from TDC for 12 European countries, and TDC's OROS-Registered Trademark- hydromorphone product for the entire world. ALZA also has an option, exercisable in ALZA's sole discretion, to purchase, according to a predetermined formula, all (but not less than all) of the outstanding shares of TDC Class A Common Stock (the "Purchase Option"). The Purchase Option is exercisable at any time until December 31, 1999; provided that such date may be extended for successive one year periods if, as of any June 30 beginning with June 30, 1999, TDC has not used pursuant to the Development Contract at least 90% of the cash initially contributed to TDC by ALZA plus interest earned thereon less organization costs, TDC's administrative expenses (including reasonable reserves for operations), and the costs of the distribution to ALZA's stockholders. The Purchase Option will expire, in any event, on the 60th day after TDC files with the Securities and Exchange Commission a Form 10-K or Form 10-Q containing a balance sheet showing less than an aggregate of $5 million in cash and cash equivalents, short-term investments and long-term investments. If the Purchase Option is exercised, the exercise price will be the greatest of: (a) $100 million; (b) the greater (i) of 25 times the worldwide royalties and sublicensing fees paid by ALZA to TDC during four specified calendar quarters or (ii) 100 times such royalties and sublicensing fees during a specified calendar quarter, in each case, less any amounts previously paid by ALZA to exercise a buy-out option with respect to any product; (c) the fair-market value of one million shares of ALZA Common Stock, or F-13 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 (d) $325 million less all amounts paid by TDC under the Development Contract. The purchase price may be paid in cash, in ALZA Common Stock, or any combination of the two, at the option of ALZA. Until the expiration of the Purchase Option, ALZA, as the sole holder of TDC's Class B Common Stock, will be entitled to vote separately as a class with respect to, and therefore could prevent, any merger or liquidation of TDC, the sale, lease, exchange, transfer or other disposition of any substantial asset of TDC, and any amendments to the Restated Certificate of Incorporation of TDC that would alter the Purchase Option, TDC's capitalization, or the provisions of the Restated Certificate of Incorporation concerning TDC's board of directors. ALZA performs certain administrative services for TDC under an annually renewable services agreement which is terminable at the option of TDC on 60 days' notice. Under this agreement, TDC reimburses ALZA for its fully-burdened costs. Expenses incurred by TDC for administrative services rendered under this agreement were approximately $152,000 in 1996, as compared with $136,000 in 1995, and $206,000 in 1994. The expenses incurred for the period from inception (November 1992) to December 31, 1996 were approximately $614,000. The arrangements between ALZA and TDC are complex and are incorporated in various agreements between the parties and in TDC's Restated Certificate of Incorporation. 3. STOCK OPTIONS TDC has a stock option plan under which 500,000 shares of Class A Common Stock have been reserved for issuance to employees, officers, directors and consultants. During the period from inception (November 1992) to December 31, 1993, options to purchase 341,500 shares were granted. In the year ended December 31, 1994, options to purchase 55,000 shares were granted to consultants. In the year ended December 31, 1995, options to purchase 2,000 shares were granted and options to purchase 1,500 shares were canceled. In the year ended December 31, 1996, the options to purchase 2,000 shares that were granted in 1995 were canceled. All outstanding options have an exercise price of $1.00 per share, are exercisable in four equal annual installments beginning on June 11, 1996, and expire ten years after the date of grant. As of December 31, 1996, 395,000 options were outstanding, 98,750 of which were exercisable. The weighted average remaining contractual life is 6.61 years for options outstanding at December 31, 1996. F-14 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 STOCK COMPENSATION PLAN TDC has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related Interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), requires use of option valuation models that were not developed for use in valuing employee stock options. The proforma compensation associated with the options granted in 1995 (none in 1996) is negligible. TDC has, for financial statement presentation purposes, recorded deferred compensation expense equal to the difference, at the date of grant, between the exercise price and the market value on the date of grant of the Class A Common Stock underlying options granted during the relevant periods. This deferred compensation amount is being amortized to expense over the vesting period of the options. 4. INCOME TAXES Significant components of TDC's deferred tax assets for federal and state income taxes for the two years ended December 31, 1996 and, 1995 are as follows: (in thousands) 1996 1995 ---------- --------- Net deferred tax assets: Capitalized research expenses $ 64,696 $ 28,337 Capital loss carryover 1,434 1,454 SFAS 115 unrealized losses 479 108 Other (39) (39) ---------- --------- Total deferred tax assets 66,570 29,860 Less: valuation allowance (66,570) (29,860) ---------- --------- Net deferred tax assets $ - $ - ---------- --------- ---------- --------- Because of the Company's lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $36,710 in 1996 as compared with 1995 and by $14,719 in 1995 as compared with 1994, and by $14,695 in 1994 as compared with 1993. F-15 Therapeutic Discovery Corporation (a development stage company) December 31, 1996 EXHIBIT INDEX EXHIBIT 3.1 Restated Certificate of Incorporation of Therapeutic Discovery Corporation filed with the Delaware Secretary of State on April 1, 1993. 3.2 Restated By-laws of Therapeutic Discovery Corporation dated January 26, 1994. 10.1 Technology License Agreement between Therapeutic Discovery Corporation and ALZA Corporation dated March 10, 1993. 10.2 Development Agreement between Therapeutic Discovery Corporation and ALZA Corporation dated March 10, 1993. 10.3 License Option Agreement between Therapeutic Discovery Corporation and ALZA Corporation dated March 10, 1993. 10.4 Services Agreement between Therapeutic Discovery Corporation and ALZA Corporation dated March 10, 1993. 10.5 Amended and Restated 1993 Stock Option Plan. 10.6 Executive Deferral Plan. 10.7 Agreement Regarding Certain Products and Activities and Amendment No. 1 to Development Agreement between Therapeutic Discovery Corporation and ALZA Corporation. 27 Financial Data Schedule EX-3.1 2 EXH 3.1 RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF THERAPEUTIC DISCOVERY CORPORATION (ORIGINALLY INCORPORATED ON NOVEMBER 12, 1992) FIRST: NAME. The name of this corporation is Therapeutic Discovery Corporation (the "corporation"). SECOND: REGISTERED OFFICE; REGISTERED AGENT. The address of the registered office of this corporation in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of the registered agent of this corporation at such address is Corporation Service Company. THIRD: PURPOSE. The purpose of this corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: AUTHORIZED CAPITAL STOCK. (A) This corporation is authorized to issue two classes of shares, which shall be known as Class A Common Stock and Class B Common Stock. The total number of shares of stock of all classes that this corporation is authorized to issue is 12,000,100. The total number of shares of Class A Common Stock which this corporation is authorized to issue is 12,000,000. The total number of shares of Class B Common Stock which this corporation is authorized to issue is 100. Each share of Class A Common Stock and Class B Common Stock shall have a par value of $0.01. Effective immediately upon the filing of this Restated Certificate of Incorporation, each share of Common Stock, par value $1.00 per share, of this corporation outstanding immediately prior to such filing shall be converted into and reclassified as one share of Class B Common Stock. (B) The powers, designations, preferences, and relative, participating, optional or other special rights granted to, and the qualifications, limitations and restrictions imposed upon, the Class A Common Stock and Class B Common Stock and the respective holders thereof are as follows: (1) REDEMPTION. The shares of Class A Common Stock are redeemable and may be redeemed as provided in (but only as provided in) ARTICLE FIFTH, Section (F). (2) DIVIDENDS. The holders of shares of Class A Common Stock and Class B Common Stock shall be entitled to receive per share and without preference such dividends as may be declared by the Board of Directors from time to time out of funds legally available therefor. No dividend may be declared on the Class A Common Stock unless the same per share dividend is declared on the Class B Common Stock, and no dividend may be declared on the Class B Common Stock unless the same per share dividend is declared on the Class A Common Stock. Dividends may not be declared, nor may shares of Class A Common Stock or Class B Common Stock be repurchased or redeemed (other than pursuant to Section (F) of Article FIFTH) if, after payment of such dividend, or after effecting such repurchase or redemption, the amount of this corporation's cash, cash equivalents, short and long term investments would be less than the amount of Available Funds as of the date of such dividend, repurchase or redemption. (3) LIQUIDATION. In the event of voluntary or involuntary liquidation of this corporation, the holders of the Class A Common Stock and Class B Common Stock of the corporation shall be entitled to receive, on a pro rata per share basis and without preference, all of the remaining assets of this corporation available for distribution to its stockholders. (4) VOTING RIGHTS. Except as otherwise required by law or provided herein, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class. Each holder of Class A Common Stock and Class B Common Stock shall have one vote for each share standing in his or her name on all matters submitted to a vote of holders of the common shares. At any meeting of the stockholders of this corporation, the determination of a quorum shall be based upon the presence of shares of Class A Common Stock and Class B Common Stock representing a majority of the voting power of all of the shares of Class A Common Stock and Class B Common Stock. This corporation shall not, without the affirmative vote of the holders of a majority of the issued and outstanding shares of Class B Common Stock, voting separately and as a class, (a) alter or change the powers, designations, preferences and relative, participating, optional or other special rights granted to, or the qualifications, limitations and restrictions imposed upon, the Class A Common Stock or the Class B Common Stock, (b) alter or change Articles FOURTH, FIFTH, SIXTH, SEVENTH or EIGHTH of this Restated Certificate of Incorporation, (c) authorize the creation or issuance of any additional class or series of stock, or otherwise make any amendment to this Certificate of Incorporation that would alter the rights of the holders of the Class B Common Stock, (d) undertake the voluntary dissolution, liquidation or winding up of this corporation, (e) merge or consolidate this corporation with or into any other corporation or entity, (f) sell, lease, exchange, transfer or otherwise dispose of any substantial asset of this corporation or (g) alter the bylaws of this corporation in a manner -2- described in the last sentence of ARTICLE EIGHTH. Furthermore, from and after the Purchase Option Exercise Date, as defined in Article FIFTH, (i) the board of directors of this corporation shall cease to be classified; (ii) the number of directors of this corporation shall be increased to a number equal to (a) two times the maximum number of authorized directors (counting for this purpose both directors in office and vacant directorships), PLUS (b) one; and (iii) the holders of the Class B Common Stock shall have the sole right to elect the directors of this corporation, including directors to fill the new directorships created pursuant to clause (ii). No vacancy created as a result of the increase in the size of the board of directors pursuant to the preceding sentence shall be filled other than by the holders of the Class B Common Stock. (5) CONVERSION. The Class B Common Stock shall automatically convert into fully paid and non-assessable shares of Class A Common Stock of this corporation at 12:01 a.m. New York time on the day immediately following the expiration of the Purchase Option granted in Article FIFTH. The Class B Common Stock shall convert into Class A Common Stock at the rate of one share of Class A Common Stock for each share of Class B Common Stock. (6) TRANSFER OF CLASS A COMMON STOCK. Until the first to occur of (i) the third anniversary of the date (the "Distribution Date") upon which certificates representing Units comprised in part of shares of Class A Common Stock are distributed by ALZA Corporation (together with its successors and assigns, "ALZA") to the holders of ALZA's Class A Common Stock or (ii) the Purchase Option Exercise Date, the Class A Common Stock may be transferred only as part of Units. Each "Unit" consists of one share of Class A Common Stock and one warrant to acquire one-eighth of one share of ALZA Common Stock. FIFTH. PURCHASE OPTION. (A) DEFINITIONS. For purposes of this Restated Certificate of Incorporation, the following terms shall have the following definitions: (1) ALZA COMMON STOCK means the Class A Common Stock of ALZA or, if such Class A Common Stock is converted into or exchanged for another class or series of stock of ALZA or any other corporation, such other class or series of stock. (2) AVAILABLE FUNDS means, as of any date of determination, the sum of (a) $250 million (contributed by ALZA in or about March 1993), PLUS (b) interest and other income earned through investment of such funds until their expenditure pursuant to the Development Contract through the date of -3- determination, LESS (c) reasonable ongoing administrative expenses of this corporation, including legal and accounting expenses, incurred through the date of determination, LESS (d) the costs associated with the distribution to ALZA's stockholders of the Units. (3) DEVELOPMENT CONTRACT means the Development Agreement dated as of March 10, 1993 between ALZA and this corporation, as such contract may be amended or modified from time to time by amendments approved by ALZA and the board of directors of this corporation. (4) FAIR MARKET VALUE means, with reference to ALZA Common Stock, (a) if ALZA Common Stock is listed on the New York Stock Exchange or any other securities exchange reporting closing sales prices (including without limitation the NASDAQ National Market System), the average of the closing sales price of ALZA Common Stock on such exchange (which shall be the New York Stock Exchange or, if ALZA Common Stock is not then traded on such exchange, on the principal exchange on which ALZA Common Stock is then traded), for the five trading days ending with the trading day that is two trading days prior to the date of determination, (b) if ALZA Common Stock is not listed on any securities exchange described in clause (a) but is quoted on NASDAQ or another quotation system providing bid prices, the average (over the five day period described in clause (a)) of the bid prices for each day in such period on NASDAQ (or, if ALZA Common Stock is not then quoted on NASDAQ, the largest quotation system on which ALZA Common Stock is then quoted), and (c) if ALZA Common Stock is not listed on any exchange or quoted on any quotation system, the value thereof as determined in good faith by ALZA's board of directors. (5) FINAL PURCHASE OPTION EXERCISE PRICE means the Purchase Option Exercise Price MINUS (a) the amount by which this corporation's Liabilities existing at the Purchase Option Exercise Date (other than liabilities pursuant to the Development Contract) exceed the aggregate of this corporation's then existing cash, cash equivalents and short-term and long-term investments (but excluding from such cash, cash equivalents and short-term and long-term investments the amount of Available Funds determined as of the Purchase Option Exercise Date which had not, as of such date, been paid by this corporation in accordance with the Development Contract); and MINUS (b), if the Purchase Option Exercise Price was determined based upon the provisions of clause (c) of Section (A)(10) of this Article FIFTH, any additional amounts paid by this corporation pursuant to the Development Contract from the date of the last report of such expenditures provided by this corporation to ALZA pursuant to the Development Contract to the Purchase Option Exercise Date. (6) LIABILITIES means, with respect to this corporation, (a) all liabilities required to be reflected or -4- reserved against in this corporation's financial statements under generally accepted accounting principles consistently applied ("GAAP"), (b) any guaranty of any indebtedness of another person and (c) any reimbursement or similar obligation with respect to any letter of credit issued for the account of this corporation or as to which this corporation is otherwise liable. Liabilities of the type described in (b) and (c) shall be valued at the full amount of the potential liability of the corporation thereon. (7) LICENSE AGREEMENT means any License Agreement between ALZA and this corporation entered into upon the exercise by ALZA of the license option granted to it pursuant to the License Option Agreement. (8) LICENSE OPTION AGREEMENT means the License Option Agreement between ALZA and this corporation dated as of March 10, 1993, as such agreement may be amended or modified from time to time by amendments approved by ALZA and the board of directors of this corporation. (9) PURCHASE OPTION EXERCISE DATE means the date upon which ALZA notifies this corporation in writing of its exercise of the Purchase option as provided in Section (C) of this Article FIFTH. (10) PURCHASE OPTION EXERCISE PRICE means the greatest of the following: (a) the greater of (i) 25 times the Royalties paid by or due from ALZA to this corporation, PLUS 25 times any Royalties that would have been paid by or due from ALZA to this corporation if ALZA had not exercised its right to buy out its obligation to pay any such Royalties as provided in Section 7.5 of the Development Contract or Section 3.4 of any License Agreement, in each case determined with reference to the most recent four complete calendar quarters preceding the Purchase Option Exercise Date for which such Royalties were paid by or due from ALZA or would have been paid by or due from ALZA, or (ii) 100 times such Royalties paid by or due from ALZA to this corporation during the most recent complete calendar quarter for which such Royalties were paid or due; PROVIDED, that in the case of either (i) or (ii) the amount so determined shall be reduced by any amounts previously paid by ALZA to this corporation to buy out any obligation to pay Royalties as provided in the Development Contract or any License Agreement; (b) the Fair Market Value of one million shares of ALZA Common Stock (which number of shares shall be proportionately adjusted for any stock dividend, split-up, combination or reclassification of the ALZA Common Stock) determined as of the Purchase Option Exercise Date; -5- (c) $325 million LESS the total amount paid by this corporation under the Development Contract as last reported by this corporation to ALZA through the Purchase Option Exercise Date; and (d) $100 million. (11) PURCHASE OPTION EXPIRATION TIME means 11:59 p.m. New York time on December 31, 1999; provided that such date will be extended for successive one year periods if, as of any June 30 beginning with June 30, 1999, this corporation has not paid at least 90% of all Available Funds pursuant to the Development Contract. Notwithstanding the foregoing sentence, the Purchase Option Expiration Time will in no event occur later than 11:59 p.m. New York time on the 60th day after the later of (a) the date of filing with the Securities and Exchange Commission or (b) the due date of this corporation's Annual Report on Form 10-K or Quarterly Report on Form 10-Q containing a balance sheet showing that this corporation has less than an aggregate of $5 million in cash, cash equivalents, and short-term and long-term investments. (12) ROYALTIES means (a) royalties paid or other payments made by ALZA to this corporation under a License Agreement in respect of any product licensed by ALZA from this corporation pursuant to the License Option Agreement and (b) payments made by ALZA under Section 7.4 of the Development Contract. In determining the amount of Royalties for purposes of Article FIFTH, Section (A)(10)(a), all Special Royalty Payments are to be amortized equally over a period of 28 calendar quarters beginning with the calendar quarter in which such Special Royalty Payment is made, regardless of the treatment of such Special Royalty Payments in determining Royalties actually paid under any License Agreement or the Development Contract. (13) SPECIAL ROYALTY PAYMENT means front-end distribution fees, prepaid royalties and similar one-time, infrequent or special payments. (14) STATUS STATEMENT means, as of any date, a balance sheet dated as of such date, together with (a) a statement and brief description of all other liabilities of this corporation constituting Total Liabilities as of such date not reflected on such balance sheet, (b) a statement of the amount of Available Funds remaining as of such date, and (c) a statement of the total amounts paid by this corporation pursuant to the Development Contract through such date. (15) TOTAL LIABILITIES means, with respect to this corporation, (a) all Liabilities and (b) any other debts, liabilities or obligations, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including all costs and expenses relating thereto, and including those debts, liabilities -6- and obligations arising under law, rule or regulation, or under any pending or threatened action, suit or proceeding, or any order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. (B) GRANT OF OPTION. ALZA is hereby granted an exclusive irrevocable purchase option to purchase all issued and outstanding shares of Class A Common Stock of this corporation for the Final Purchase Option Exercise Price (the "Purchase Option"). The Purchase Option, if exercised, must be exercised as to all, but not less than all, issued and outstanding shares of Class A Common Stock and may be exercised at any time at or prior to the Purchase Option Expiration Time. ALZA shall elect, at the time of exercise of the Purchase Option, to pay all or any portion of the Final Purchase Option Exercise Price in cash, ALZA Common Stock (valued at its Fair Market Value determined as of the Purchase Option Exercise Date), or any combination thereof. The Purchase Option may, at ALZA's option, be assigned or otherwise transferred to any person or entity, including this corporation. (C) MANNER OF EXERCISE. The Purchase Option shall be exercised at or before the Purchase Option Expiration Time by written notice (the "Exercise Notice") from ALZA to this corporation stating that the Purchase Option is being exercised and setting forth (1) the Purchase Option Exercise Price; (2) the portion, if any, of the Purchase Option Exercise Price to be paid in cash and the portion, if any, of the Purchase Option Exercise Price to be paid in ALZA Common Stock, and if any portion of the Purchase Option Exercise Price is to be paid in ALZA Common Stock, stating the Fair Market Value of such ALZA Common Stock determined as of the Purchase Option Exercise Date, and (3) a closing date (the "Closing Date") on which all of the issued and outstanding shares of Class A Common Stock will be purchased. The Purchase Option shall be deemed to be exercised as of the date of mailing by first class mail of the Exercise Notice to this corporation. (D) CLOSING. (1) CLOSING DATE; COOPERATION. Except as set forth below, the Closing Date shall be the date specified as such in the Exercise Notice, which date specified shall be no later than 90 days after the Purchase Option Exercise Date. The Closing Date may be extended by ALZA if, in the judgment of ALZA, an extension of the Closing Date is necessary to obtain any governmental or third party consent to the purchase of the Class A Common Stock, to permit any necessary registration statement or similar filing to be declared effective, or to permit the expiration prior to the Closing Date of any statutory or regulatory waiting period. ALZA may extend the Closing Date for the reasons set forth in the preceding sentence by delivering written notice of such extension to this corporation on or prior -7- to the previously scheduled Closing Date. This corporation shall cooperate with ALZA to effect the closing of the Purchase Option, including without limitation seeking any required third-party or governmental consents, and filing any applications, notifications, registration statements or the like which may be necessary to effect the closing. (2) CERTAIN RESTRICTIONS FOLLOWING PURCHASE OPTION EXERCISE DATE. From the Purchase Option Exercise Date until the Closing Date, this corporation will not take any of the following actions (or permit any such actions to be taken on its behalf) except with the prior written consent of ALZA: (a) borrow money, or mortgage, remortgage, pledge, hypothecate or otherwise encumber any of its assets; (b) sell, lease, lend, exchange or otherwise dispose of any of its assets, other than sales of inventory in the ordinary course of business; (c) pay or declare any dividends or make any distributions on or in respect of any shares of its capital stock; (d) default in its obligations under any material contract, agreement, commitment or undertaking of any kind or enter into any material contract, agreement, purchase order or other commitment; or (e) enter into any other transaction or agreement or arrangement, or incur any liabilities, not in the ordinary course of this corporation's business. (3) DETERMINATION OF FINAL PURCHASE OPTION EXERCISE PRICE. Not later than 15 business days following the Purchase Option Exercise Date, this corporation shall deliver a final Status Statement to ALZA prepared as of the Purchase Option Exercise Date. Following receipt of such Status Statement and completion of any other investigation as ALZA shall deem necessary or appropriate, and prior to the Closing Date, ALZA shall determine the Final Purchase Option Exercise Price by making the adjustments to the Purchase Option Exercise Price contemplated by Section (A)(5) of this Article FIFTH and shall notify this corporation of such determination. (4) PAYMENT OF FINAL PURCHASE OPTION EXERCISE PRICE. On or before the Closing Date, ALZA shall deposit the full amount of the Final Purchase Option Exercise Price with a bank or banks or similar entities designated by ALZA (which may include ALZA's transfer agent if shares of ALZA Common Stock are being delivered) to pay, on ALZA's behalf, the Final Purchase Option Exercise Price (the "Payment Agent"). Funds, if any, and ALZA Common Stock, if any, deposited with the Payment Agent shall be delivered in trust for the benefit of the holders of Class A -8- Common Stock, and ALZA shall provide the Payment Agent with irrevocable instructions to pay, on or after the Closing Date, the Final Purchase Option Exercise Price for the shares of Class A Common Stock to the holders of record thereof determined as of the Closing Date. Payment for shares of Class A Common Stock shall be mailed to each holder at the address set forth in this corporation's records or at the address provided by each holder or, if no address is set forth in this corporation's records for a holder or provided by such holder, to such holder at the address of this corporation. At ALZA's request, this corporation shall provide, or shall cause its transfer agent to provide, to ALZA or to the Payment Agent, free of charge, a complete list of the record holders of shares of Class A Common Stock, including the number of shares of Class A Common Stock held of record and the address of each record holder. (E) TRANSFER OF TITLE. Transfer of title to all of the issued and outstanding shares of Class A Common Stock shall be deemed to occur automatically on the Closing Date and thereafter this corporation shall be entitled to treat ALZA as the sole holder of all of the issued and outstanding shares of its Class A Common Stock, notwithstanding the failure of any holder of Class A Common Stock to tender the certificates representing such shares to the Payment Agent. This corporation shall instruct its transfer agent not to accept any shares of Class A Common Stock for transfer on and after the Closing Date, except for the shares of Class A Common Stock transferred to ALZA. This corporation shall take all actions reasonably requested by ALZA to assist in effectuating the transfer of shares of Class A Common Stock in accordance with this Article FIFTH. (F) REDEMPTION OF CLASS A COMMON STOCK. At ALZA's election (which election may be made at any time, provided it is made, by delivery of written notice thereof to this corporation, not less than five days prior to the Closing Date), this corporation shall, subject to applicable restrictions in the Delaware General Corporation Law, redeem on the Closing Date all issued and outstanding shares of Class A Common Stock for an aggregate redemption price equal to the Final Purchase Option Exercise Price. SIXTH. PROTECTIVE PROVISIONS. (A) LEGEND. Certificates evidencing shares of Class A Common Stock issued by or on behalf of this corporation shall bear a legend in substantially the following form: "The shares of Therapeutic Discovery Corporation evidenced hereby are subject to an option in favor of ALZA Corporation, its successors and assigns, as described in the Restated Certificate of Incorporation of Therapeutic Discovery Corporation to purchase such shares at a purchase price determined in accordance with Article FIFTH thereof exercisable -9- by notice delivered to this Corporation at or prior to the Purchase Option Expiration Time (as defined in the Restated Certificate of Incorporation of Therapeutic Discovery Corporation). Copies of the Restated Certificate of Incorporation of Therapeutic Discovery Corporation are available at the principal place of business of Therapeutic Discovery Corporation at 1290 Page Mill Road, P.0. Box 10950, Palo Alto, California 94303-0860 and will be furnished to any stockholder on request and without cost." (B) NO CONFLICTING ACTION. This corporation shall not take, nor permit any other person or entity within its control to take, any action inconsistent with ALZA's rights under Article FIFTH. This corporation shall not enter into any arrangement, agreement or understanding, whether oral or in writing, that is inconsistent with or limits or impairs the rights of ALZA and the obligations of this corporation hereunder, including without limitation any arrangement, agreement or understanding which imposes any obligation upon this corporation, or deprives this corporation of any material rights, as a consequence of the exercise of the Purchase Option or the acquisition of the outstanding Class A Common Stock pursuant thereto. (C) INSPECTION AND VISITATION RIGHTS; STATUS STATEMENTS. ALZA shall have the right to inspect and copy, on reasonable notice and during regular business hours, the books and records of this corporation. ALZA shall also have the right to request from time to time (but not more frequently than monthly) a Status Statement as of such date as ALZA may request. Each Status Statement shall be sent within seven days of request by ALZA. ALZA shall also have the right to send a non-voting representative to attend all meetings of this corporation's board of directors and any committees thereof. Such representative shall receive notice of all meetings of this corporation's board of directors and each committee thereof, as well as copies of all documents and other materials provided to any directors of this corporation in connection with any such meeting not later than the time such materials are provided to other directors. Such representative shall also be provided with copies of all resolutions adopted or proposed to be adopted by unanimous written consent not later than the time such resolutions are provided to other directors. SEVENTH: BOARD OF DIRECTORS. (A) The number of directors which shall constitute the whole Board of Directors of this corporation shall initially be three, but may be increased or decreased from time to time by a resolution duly adopted by the Board of Directors. (B) Nomination of candidates for election to the Board of Directors shall be made as provided in the bylaws of this corporation. Election of directors need not be by written ballot. -10- (C) The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1994; each initial director in Class II shall hold office until the annual meeting of stockholders in 1995; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1996. Notwithstanding the foregoing provisions of this Article, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. (D) In the event of any increase or decrease in the authorized number of directors, the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal as possible. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. (E) Except as otherwise provided in Article FOURTH, Section (B)(4), newly created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office (and not by stockholders), even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. (F) The name and mailing address of each person who is to serve as a director until the annual meeting of the stockholders entitled to vote for the class or until a successor is elected and qualified are as follows: NAME MAILING ADDRESS CLASS Dr. Pieter P. Bonsen 950 Page Mill Road, I Palo Alto, CA 94303 Adrian M. Gerber 950 Page Mill Road, II Palo Alto, CA 94303 Dr. Felix Theeuwes 950 Page Mill Road, III Palo Alto, CA 94303 (G) The board of directors of this corporation shall cease to be classified as provided in this Article SEVENTH from -11- and after the Purchase Option Exercise Date. From and after such date all directors shall be elected to one year terms; provided the term of any director then in office shall not be reduced. EIGHTH: BYLAWS. In furtherance and not in limitation of the powers conferred by statute, and subject to the next sentence, the Board of Directors and the stockholders of this corporation are each expressly authorized to adopt, amend or repeal the bylaws of this corporation subject to any particular provisions concerning amendments set forth in this Certificate of Incorporation or the bylaws of this corporation. No amendment to the bylaws may be adopted by the stockholders without the approval of holders of a majority of the Class B Common Stock voting separately as a class if such amendment would affect the classification of the Board of Directors, or would otherwise regulate the conduct of the Board's affairs or the manner in which it may act. NINTH: STOCKHOLDER MEETINGS. (A) SPECIAL MEETINGS. Special meetings of the stockholders for any purpose or purposes whatsoever may be called at any time only by the Board of Directors, the Chairman of the Board or the President of this corporation. (B) NO ACTION WITHOUT MEETING. At any time when this corporation has more than one stockholder of any class of capital stock, no action required to be taken or which may be taken at any annual or special meeting of the stockholders may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Notwithstanding the foregoing, the holder or holders of the Class B Common Stock may take any action permitted to be taken by such holders as a class by written consent without a meeting. TENTH: LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS. (A) ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS. No director of this corporation shall be personally liable to this corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to this corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived an improper, personal benefit. (B) INDEMNIFICATION AND INSURANCE. 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is -12- involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), because he or she, or a person of whom he or she is the legal representative, is or was a director or officer of this corporation or is or was serving at the request of this corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise (including service with respect to employee benefit plans), whether the basis of the proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by this corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits this corporation to provide broader indemnification rights than that law permitted this corporation to provide before such amendment), against all expense, liability and loss (including attorney's fees, judgments, penalties, fines, Employee Retirement Income Security Act of 1974 excise taxes or penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith; provided, however, that this corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if the proceeding (or part thereof) was authorized by the Board of Directors of this corporation. Such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators. The right to indemnification conferred by this Section shall be a contract right which may not be retroactively amended and shall include the right to be paid by this corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service with respect to an employee benefit plan) in advance of the final disposition of the proceeding, such payment shall be made only upon delivery to this corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if ultimately it shall be determined that such director or officer is not entitled to be indemnified under this section or otherwise. This corporation may, by action of its Board of Directors, provide indemnification to employees and agents of this corporation with the same scope and effect as the indemnification of directors and officer 2. NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any -13- person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation, bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. 3. INSURANCE. This corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of this corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expenses, liability or loss, whether or not this corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. -14- IN WITNESS WHEREOF, the undersigned officers have executed this Restated Certificate of Incorporation on March 30, 1993 and do hereby certify that this Restated Certificate of Incorporation, which restates and integrates, and also further amends, the provisions of this Corporation's Certificate of Incorporation, was duly adopted by the stockholders of this Corporation in accordance with Sections 242 and 245 of the Delaware General Corporation Law. THERAPEUTIC DISCOVERY CORPORATION By: /s/ Pieter P. Bonsen ---------------------------------- Dr. Pieter P. Bonsen, President, Therapeutic Discovery Corporation ATTEST: /s/ Mary M. Roensch - ----------------------------------- Mary M. Roensch, Secretary, Therapeutic Discovery Corporation -15- EX-3.2 3 EXH 3.2 RESTATED BYLAWS RESTATED BYLAWS OF THERAPEUTIC DISCOVERY CORPORATION REGISTERED OFFICE AND REGISTERED AGENT l. REGISTERED OFFICE. The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. 2. OTHER OFFICES. The corporation may also have offices at such other places, both within or without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require. MEETINGS OF STOCKHOLDERS 3. TIME AND PLACE OF MEETINGS. All meetings of the stockholders shall be held at such time and place, either within or without the State of Delaware, as shall be fixed by the Board of Directors and stated in the notice or waiver of notice of the meeting. 4. ANNUAL MEETING. An annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting, shall be held on such date and at such time and place as the Board of Directors shall each year designate. 5. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes prescribed in the notice of meeting, may be called only by the Board of Directors, 1 the Chairman of the Board or the President of the corporation. 6. NO ACTION WITHOUT MEETING. Except as otherwise provided in the Certificate of Incorporation, at any time when the corporation has more than one stockholder of any class of capital stock, no action required to be taken or which may be taken at any annual or special meeting of the stockholders of such class of capital stock of the corporation may be taken without a meeting, and the power of stockholders to consent in writing, without a meeting, to the taking of any action is specifically denied. Notwithstanding the foregoing, the holder or holders of the Class B Common Stock may take any action permitted to be taken by such holders as a class by written consent without a meeting. 7. NOTICE. (a) Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten nor more than sixty days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the corporation). (b) When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken and the adjournment is 2 not for more than thirty days; provided however, that if the date of any adjourned meeting is more than thirty days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 8. NOMINATIONS AND PROPOSALS. (a) The Board of Directors of the corporation may nominate candidates for election as directors of the corporation and may propose such other matters for approval of the stockholders as the board deems necessary or appropriate. (b) Any stockholder entitled to vote for directors may nominate candidates for election as directors of the corporation; provided, however, that so long as the corporation has more than one stockholder, no nominations for director of the corporation by any person other than the Board of Directors shall be presented to any meeting of stockholders unless the person making the nomination is a record stockholder and shall have delivered a written notice to the Secretary of the corporation no later than the close of business 60 days in advance of the stockholder meeting or ten days after the date on which notice of the meeting is first given to the stockholders, whichever is later. Such notice shall (i) set forth the name and address of the person advancing such nomination and the nominee, together with such 3 information concerning the person making the nomination and the nominee as would be required by the appropriate Rules and Regulations of the Securities and Exchange Commission to be included in a proxy statement soliciting proxies for the election of such nominee, and (ii) shall include the duly executed written consent of such nominee to serve as director if elected. (c) No proposal by any person other than the Board of Directors shall be submitted for the approval of the stockholders at any regular or special meeting of the stockholders of the corporation unless the person advancing such proposal shall have delivered a written notice to the Secretary of the corporation no later than the close of business 60 days in advance of the stockholder meeting or ten days after the date on which notice of the meeting is first given to the stockholders, whichever is later. Such notice shall set forth the name and address of the person advancing the proposal, any material interest of such person in the proposal, and such other information concerning the person making such proposal and the proposal itself as would be required by the appropriate Rules and Regulations of the Securities and Exchange Commission to be included in a proxy statement soliciting proxies for the proposal. 9. QUORUM AND REQUIRED VOTE. (a) At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote on the subject matter at the meeting, present in person or by proxy, shall constitute a quorum, unless or except to the extent that 4 the presence of a larger number may be required by law. Except as otherwise provided in these bylaws or as otherwise required by law, the affirmative vote of a majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. (b) If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time. (c) If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise provided in these bylaws or as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. 10. ORGANIZATION. The Chairman of the Board or, in his or her absence, the President of the Corporation or, in the absence of both, such person as may be designated by the Board of Directors or, if there is no such designation, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. 11. CONDUCT OF BUSINESS. The chairman of any meeting of 5 stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. 12. PROXIES AND VOTING. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedures established for the meeting. 13. STOCK LIST. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each such stockholder and the number of shares of each class registered in his or her name, 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 stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder present. BOARD OF DIRECTORS 14. POWERS. The business and affairs of the corporation shall be managed by or under the direction of its Board of Directors. 6 15. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The number of directors of the corporation who shall constitute the whole board shall be five but may be increased or decreased from time to time either by a resolution or bylaw duly adopted by the Board of Directors. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders in 1994; each initial director in Class II shall hold office until the annual meeting of stockholders in 1995; and each initial director in Class III shall hold office until the annual meeting of stockholders in 1996. Notwithstanding the foregoing, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. 16. REMOVAL. During any period when the Board of Directors is divided into classes, any director may be removed from office only with cause, and then only by the holders of a majority of the shares entitled to vote in an election of directors. 17. RESIGNATIONS. A director may resign at any time by giving written notice to the corporation. Such resignation shall be effective when given unless the director specifies a later time. The resignation shall be effective regardless of whether it is accepted by the corporation. 7 18. NEWLY-CREATED DIRECTORSHIPS AND VACANCIES. During any period when the Board of Directors is divided into classes, in the event of any increase or decrease in the authorized number of directors, any newly-created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to maintain such classes as nearly equal in number as possible. Whether or not the board is classified, no decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Except as otherwise provided in the corporation's Certificate of Incorporation, newly-created directorships resulting from any increase in the number of directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled by the affirmative vote of a majority of the remaining directors then in office (and not by stockholders), even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. 19. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A 8 notice of each regular meeting shall not be required. 20. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or any two directors. 21. NOTICE OF MEETINGS. (a) Special meetings and regular meetings not fixed as provided in these Bylaws, shall be held upon four days' notice by mail or two days' notice delivered personally or by telephone or telegraph to each director who does not waive such notice. The notice shall state the place, date and time of the meeting. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting. (b) Notice of a reconvened meeting need not be given if the place, date and time of the reconvened meeting are announced at the meeting at which the adjournment is taken and the adjournment is not for more than 24 hours. If a meeting is adjourned for more than 24 hours, notice of the reconvened meeting shall be given prior to the time of that reconvened meeting to the directors who were not present at the time of adjournment. 22. ACTION WITHOUT MEETING. Except as required by law, any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or any committee thereof, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of the 9 Board of Directors or committee. 23. MEETING BY TELEPHONE. Except as required by law, members of the Board of Directors, or of any committee thereof may participate in the meeting of the Board of Directors or committee by means of conference telephone or similar communications equipment if all persons who participate in the meeting can hear each other. Such participation shall constitute presence in person at such meeting. 24. QUORUM AND MANNER OF ACTING. At any meeting of the Board of Directors, a majority of the directors then in office shall constitute a quorum for all purposes. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Except as provided herein, the act of the majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. 25. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors, by a vote of a majority of the whole Board, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if 10 it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any committee so designated may exercise the power and authority of the Board of Directors to declare a dividend or to authorize the issuance of stock if the resolution which designates the committee or a supplemental resolution of the Board of Directors shall so provide. The principles set forth in Sections 14 through 24 of these Bylaws shall apply to committees of the Board of Directors and to actions taken by such committees. 26. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws 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 or a committee thereof and may receive fixed fees and other compensation for their services as directors. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation for such service. OFFICERS 27. TITLES. The officers of the corporation shall be chosen by the Board of Directors and shall include a Chairman of the Board or a President or both and a Secretary. The Board of Directors may also appoint a Treasurer and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers or other 11 officers. Any number of offices may be held by the same person. All officers shall perform their duties and exercise their powers subject to the Board of Directors. 28. ELECTION, TERM OF OFFICE AND VACANCIES. The officers shall be elected annually by the Board of Directors at its regular meeting following the annual meeting of the stockholders and each officer shall hold office until the next annual election of officers and until the officer's successor is elected and qualified or until the officers death, resignation or removal. Any officer may be removed at any time, with or without cause, by the Board of Directors. Any vacancy occurring in any office may be filled by the Board of Directors. 29. RESIGNATION. Any officer may resign at any time upon notice to the corporation without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. The resignation of an officer shall be effective when given unless the officer specifies a later time. The resignation shall be effective regardless of whether it is accepted by the corporation. 30. CHIEF EXECUTIVE OFFICER. The Board of Directors shall designate either the Chairman of the Board or the President as the chief executive officer and may prescribe the duties and powers of the chief executive officer. In the absence of such a designation, the Chairman of the Board shall be the chief executive officer. If there is no Chairman of the Board, the President shall be the chief executive officer. Subject to the 12 provisions of these Bylaws and to the direction of the Board of Directors, the chief executive officer shall have the responsibility for the general management and control of the business and affairs of the corporation and shall perform all duties and have all powers which are commonly incident to the office of chief executive or which are delegated to him or her by the Board of Directors. Either the Chairman of the Board or the President and such other officers as may, from time to time be expressly designated by the Board of Directors shall have the power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized. 31. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall issue all authorized notices for and shall keep minutes of all meetings of the stockholders and the Board of Directors. He or she shall have charge of the corporate books and shall perform such other duties as the Board of Directors may from time to time prescribe. At the request of the Secretary, or in the Secretary's absence or disability, any Assistant Secretary shall perform any of the duties of the Secretary and when so acting shall have all the powers of and be subject to all the restrictions upon, the Secretary. 32. OTHER OFFICERS. The other officers of the corporation, if any, shall exercise such powers and perform such duties as the Board of Directors or the chief executive officer shall prescribe. 33. COMPENSATION. The Board of Directors shall fix the 13 compensation of the chief executive officer and may fix the compensation of other employees of the corporation, including the other officers. If the Board does not fix the compensation of the other officers, the chief executive officer shall fix such compensation. 34. ACTIONS WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS. Unless otherwise directed by the Board of Directors, the Chairman of the Board, the president or any officer of the corporation authorized by the Chairman of the Board or the president, shall have power to vote and otherwise act on behalf of the corporation, in person or by proxy, at any meeting of stockholders of, or with respect to any action of stockholders of, any other corporation in which the corporation may hold securities and otherwise shall have power to exercise any and all rights and powers which the corporation may possess by reason of its ownership of securities in such other corporation. STOCK AND DIVIDENDS 35. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate signed by, or in the name of, the corporation by the Chairman, the President or a Vice President, and by the Secretary or an Assistant Secretary, or a Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be facsimile. 14 36. TRANSFERS OF STOCK. Transfers of stock shall be made only upon the transfer books of the corporation kept at an office of the corporation or by transfer agents designated to transfer shares of the stock of the corporation. Except where a certificate is issued in accordance with the next sentence of this Section, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. 37. REGULATIONS. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. RECORD DATE 38. RECORD DATE. 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 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 not be more than 60 nor 15 less than ten days before the date of such meeting, nor more than 60 days prior to any other action. If no record date is fixed, the record date (1) for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; and (2) for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. 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 reconvened meeting. WAIVER OF NOTICE 39. WAIVER OF NOTICE. Whenever notice is required to be given by law or these Bylaws, a written waiver of notice, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless so required by the Certificate of Incorporation or these Bylaws, neither the 16 business to be transacted at, nor the purpose of any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. AMENDMENTS 40. AMENDMENTS. These Bylaws may be amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors. MISCELLANEOUS 41. FISCAL YEAR. The fiscal year of the corporation shall be as fixed by the Board of Directors. 42. TIME PERIODS. In applying any provision of these Bylaws which requires that an act be done or not done within a specified number of days prior to an event, calendar days shall be used, the day of doing of the act shall be excluded, and the day of the event shall be included. 43. FACSIMILE SIGNATURES. In addition, to the provisions for use of facsimile signature elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or officers of the corporation may be used whenever and as authorized by the Board of Directors. 44. CORPORATE SEAL. The Board of Directors may provide a suitable seal, containing the name of the corporation, which seal shall be in the charge of the Secretary. Duplicates of the seal 17 may be kept and used by a Treasurer or by an Assistant Secretary or Assistant Treasurer. 45. RELIANCE UPON BOOKS, REPORTS AND RECORDS. Each director, each member of any committee designated by the Board of Directors, and each officer of the corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the corporation, including reports made to the corporation by any of its officers, by an independent certified public accountant or by an appraiser. This is to certify that these Bylaws were duly adopted by the Board of Directors of this corporation on January 26, 1994. /s/ David R. Hoffmann ---------------------- DAVID R. HOFFMANN Secretary 18 EX-10.1 4 EXH. 10.1 TECHNOLOGY LICENSE AGREEMENT TECHNOLOGY LICENSE AGREEMENT ---------------------------- This Technology License Agreement (this "Agreement") is made as of the 10th day of March, 1993 between ALZA Corporation, a Delaware corporation ("ALZA") and Therapeutic Discovery Corporation, a Delaware corporation ("TDC"). R E C I T A L S - - - - - - - - A. ALZA has proprietary rights to drug delivery technology. B. TDC proposes to undertake the development of one or more products using Alza Proprietary Rights and expects to develop or acquire certain technology in connection therewith. C. As of the date hereof, ALZA and TDC are entering into a Development Agreement. D. ALZA is willing to grant to TDC a license to practice Alza Proprietary Rights solely for the purpose of developing and commercializing Products under the circumstances hereinafter set forth. NOW THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS: 1. DEFINITIONS. For the purposes of this Agreement, the following terms shall have the respective meanings set forth below: 1.1 "Affiliate" shall mean a corporation or any other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the designated party. "Control" shall mean ownership of at least 50% of the shares of stock entitled to vote -1- for the election of directors in the case of a corporation, and at least 50% of the interests in profits in the case of a business entity other than a corporation. 1.2 "ALZA Proprietary Rights" shall mean all Proprietary Rights of ALZA (including the Developed Technology) to the extent they are owned and controlled by ALZA now or during the term of the Development Contract. 1.3 "Developed Technology" shall mean Proprietary Rights that (i) are generated, developed, conceived or first reduced to practice, as the case may be, by ALZA or others than ALZA under a Product Development Program undertaken pursuant to the Development Contract or (ii) are acquired by or otherwise obtained on behalf of TDC during the term of the Development Contract from persons other than ALZA and necessary or useful to the development or commercialization of Products. 1.4 "Development Contract" shall mean the Development Agreement dated as of the date hereof between ALZA and TDC. 1.5 "Infringing Product" shall mean any product sold by a third party which infringes or is alleged to infringe any patent or patents licensed to TDC hereunder. 1.6 "License Option Agreement" shall mean the License Option Agreement dated the date hereof between ALZA and TDC. 1.7 "Pre-Existing Rights" shall mean the rights of Ciba-Geigy Limited or one of its Affiliates under those certain agreements dated May 2, 1982 between ALZA and Ciba-Geigy Limited or one of its Affiliates. -2- 1.8 "Product" shall mean a product accepted for development under the Development Contract. Confirmation of the list of Products shall be made at any time by either party upon the reasonable request of the other. 1.9 "Proprietary Rights" shall mean data, inventions, information, processes, know-how and trade secrets, and patents or patent applications for any of the foregoing, owned or licensed to a person and which such person has the right to license. Proprietary Rights shall not include trademarks. 1.10 "Purchase Option" shall mean that certain option to purchase all of the outstanding shares of TDC Class A Common Stock that is granted to ALZA pursuant to TDC's Certificate of Incorporation, as amended. 2. LICENSE TO ALZA TECHNOLOGY. 2.1 GRANT OF LICENSE. ALZA hereby grants to TDC, on the terms and conditions of this Agreement, a worldwide, exclusive license (subject to the Pre-Existing Rights), in perpetuity, with the right to sublicense (as set forth below), to practice ALZA Proprietary Rights to develop and commercialize Products, but for no other purpose whatsoever. TDC shall not sublicense any ALZA Proprietary Rights to, or enter into other arrangements with respect to any ALZA Proprietary Rights with, any third party for any purpose, except as set forth in Sections 2.2 and 2.3. 2.2 Permitted Sublicenses. (a) Except as set forth in clause (b) below, TDC may grant sublicenses to ALZA and third parties to practice ALZA -3- Proprietary Rights solely for the purpose of conducting activities in connection with the development of Products; provided that during the term of the Development Contract, any such sublicenses shall be in accordance with the terms of the Development Contract. (b) If ALZA shall fail to exercise its License Option with respect to any Product in one or more countries, from and after termination of such License Option in any such country, TDC may sublicense ALZA Proprietary Rights in or solely to the extent necessary to complete the development of, or to make, use or sell such Product in such country, to a third party or third parties for the sole purpose of commercializing such Product in such country. 2.3 CONDITIONS OF SUBLICENSES. Each sublicensee shall sign such agreements as ALZA reasonably deems appropriate to protect ALZA Proprietary Rights and to protect ALZA's rights under all agreements between ALZA and TDC and under the Purchase Option. Each sublicensee shall have all the duties of TDC hereunder with respect to such sublicense, and each sublicensee shall acknowledge these duties to ALZA in writing. No sublicense shall have the effect of relieving TDC of any of its obligations hereunder. 2.4 PRIOR AND FUTURE GRANTS. TDC understands and acknowledges that ALZA is in the business of developing products incorporating ALZA Proprietary Rights for its own account or under arrangements with third parties, and that as a result, the license granted hereunder is limited strictly to the development and -4- commercialization of Products, and ALZA may grant third party licenses to ALZA Proprietary Rights for other purposes. 3. EFFORTS OF TDC. 3.1 DILIGENCE. TDC promptly shall commence and shall use diligent efforts to develop Products under the Development Contract. 4. PATENTS. 4.1 NOTIFICATION OF INFRINGEMENT. TDC shall notify ALZA of any infringement or alleged infringement known to TDC of any patent covering ALZA Proprietary Rights or of any unauthorized or alleged unauthorized use known to TDC of any ALZA Proprietary Rights by the manufacture, use or sale by a third party of any Infringing Product. In the event of any such alleged infringement or unauthorized use, ALZA shall have the right, at its own expense and with the right to all recoveries, to take appropriate action to restrain such alleged infringement or unauthorized use. If ALZA takes such action, TDC shall cooperate fully with ALZA in its pursuit thereof, at ALZA's expense, to the extent reasonably requested by ALZA. If (a) the Infringing Product is substantially similar to a Product (in that the Infringing Product incorporates the same drug compound or compounds as its active agent or agents as such Product and a substantially similar delivery system) for which ALZA's License Option has expired unexercised, and (b) within six months after written notice from TDC, ALZA has not commenced any action to restrain such alleged infringement or unauthorized use, and (c) if, at such time, the annualized unit sales volume of such Infringing Product in a country equals or exceeds 25% of the unit sales volume of the related Product in such country, then TDC shall have the right, at its own expense and -5- with the right to all recoveries, to take such action as it deems appropriate to restrain such alleged infringement or unauthorized use. If TDC takes any such action, ALZA shall cooperate fully with TDC in its pursuit thereof, at TDC's expense, as may reasonably be requested by TDC. TDC shall not settle any such action relating to any alleged infringement or unauthorized use which in any manner would affect ALZA Proprietary Rights without the prior written consent of ALZA. 5. CONFIDENTIALITY OF INFORMATION. 5.1 CONFIDENTIALITY. During the term of this Agreement and for a period of 10 years following its termination, TDC shall maintain in confidence all ALZA Proprietary Rights; provided, however, that nothing contained herein shall prevent TDC from disclosing any ALZA Proprietary Rights to the extent such ALZA Proprietary Rights (a) are required to be disclosed in connection with securing necessary governmental approvals for the marketing of Products, or to make, use or sell Products, (b) are required to be disclosed for the purpose of complying with governmental regulations, (c) are disclosed in connection with any sublicense permitted hereunder, (d) are known to or used by TDC prior to the date hereof as evidenced by TDC's written records, (e) are lawfully disclosed to TDC by a third party having the right to disclose such information to TDC, or (f) either before or after the time of disclosure to TDC, become known to the public other than by an unauthorized act or omission of TDC or any of TDC's employees or agents. Any disclosure of ALZA Proprietary Rights to third parties shall be made subject to similar obligations of confidentiality on the part of such third parties. The obligations pursuant to this Section 5 shall survive the termination of this -6- Agreement for any reason. Any breach of this Section 5.1 shall result in irreparable harm, and in the event of a breach, the aggrieved party shall be entitled to injunctive relief (without the need to post a bond) in addition to any other remedies available at law or in equity. 6. DISCLAIMERS. 6.1 DISCLAIMER CONCERNING ALZA PROPRIETARY RIGHTS. ALZA DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (i) THAT ANY ALZA PROPRIETARY RIGHTS, OR THE USE THEREOF, OR ANY PRODUCT CANDIDATES OR PRODUCTS INCORPORATING OR MANUFACTURED BY THE USE THEREOF, WILL BE FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF PROPRIETARY INFORMATION OF ANY THIRD PARTY OR (ii) OF THE ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR MERCHANTABILITY OF THE ALZA PROPRIETARY RIGHTS OR THEIR SUITABILITY OR FITNESS FOR ANY PURPOSE WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF PRODUCTS. ALZA DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER NATURE, EXPRESS OR IMPLIED. 7. REPORTS OF ADVERSE REACTION. 7.1 REPORTS. During the term of this Agreement, each party shall promptly inform the other party of any information that it obtains or develops regarding the efficacy or safety of a Product and shall promptly report to the other party any information or notice of adverse or unexpected reactions or side effects related to the utilization or medical administration of a Product. Further, during the term of this Agreement, each party shall promptly inform the other of any information that it obtains or develops regarding the safety of any ALZA Proprietary Rights as related to the Products and shall promptly report to the other party any information or notice of -7- adverse or unexpected reactions or side effects related to the utilization or medical administration of Product incorporating ALZA Proprietary Rights. Each party shall allow the other to comply with the adverse reaction reporting requirements of the Food, Drug and Cosmetic Act, 21 USC 321 et seq., and regulations thereunder with respect to the Products by notifying the other party in writing of any "adverse drug experience" that is considered "serious" or "unexpected" regardless of source, in a manner so that the other party shall receive such notice within three working days of the notifying party's first having "obtained or otherwise received" such "adverse drug experience...from any source" as those terms are defined in 21 CFR 314.80. Each party shall provide the other party with copies of Adverse Drug Experience Reports filed with the FDA as to the Products. The obligations under this 7.1 shall be subject to legal and contractual obligations prohibiting the disclosure of such information. TDC agrees and acknowledges that ALZA may provide information it obtains under this Section 7.1 to ALZA's other clients developing and/or marketing products incorporating the same delivery systems as are incorporated in the Products. 8. TERMINATION. 8.1 TERMINATION FOR BREACH. Either party may terminate this Agreement effective upon the giving of written notice of such termination to the other party in the event such other party: (a) breaches any of its material obligations hereunder or under the License Option Agreement and such breach continues for a period of 60 days after written notice thereof by the other party; and -8- (b) enters into any proceeding, whether voluntary or otherwise, in bankruptcy, reorganization, arrangement for the appointment of a receiver or trustee to take possession of such other party's assets or any other proceeding under any law for the relief of creditors, or makes an assignment for the benefit of such other party's creditors. This Agreement shall automatically terminate upon termination by TDC of the Development Contract other than due to a breach by ALZA, or upon termination by ALZA of the Development Contract due to a breach by TDC. 9. FORCE MAJEURE. 9.1 FORCE MAJEURE. Neither party to this Agreement shall be liable for failure or delay in the performance of any of its obligations hereunder, if such failure or delay is due to causes beyond its reasonable control, including, without limitation, acts of God, earthquakes, fires, strikes, acts of war, or intervention of any governmental authority, but any such delay or failure shall be remedied by such party as soon as possible after the removal of the cause of such failure or delay. 10. INDEMNIFICATION. 10.1 INDEMNITY. TDC shall indemnify, defend and hold ALZA harmless from and against any and all liabilities, claims, demands, damages, costs, expenses or money judgments incurred by or rendered against ALZA and its Affiliates, which arise out of the use, design, labeling or manufacture, processing, packaging, sale or commercialization of the Products by TDC, its Affiliates, subcontractors and sublicensees. ALZA shall permit TDC's attorneys, -9- at TDC's discretion and cost, to handle and control the defense of any claims or suits as to which ALZA may be entitled to indemnity hereunder, and ALZA agrees not to settle any such claims or suits without the prior written consent of TDC. 10.2 NOTICE. ALZA shall give TDC prompt notice in writing, in the manner set forth in Section 11.6 below, of any claim or demand made against ALZA for which ALZA may be entitled to indemnity under Section 10.1. ALZA shall have the right to participate, at its own expense, in the defense of any such claim or demand to the extent it so desires. 11. MISCELLANEOUS. 11.1 AMENDMENT. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. -10- 11.2 ASSIGNMENT. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to any person or entity with which ALZA is merged or consolidated or which purchases all or substantially all of the assets of ALZA. 11.3 ARBITRATION. 11.3.1 ARBITRATION. All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the City of San Francisco, State of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 11.7 of this Agreement shall be valid and sufficient. 11.3.2 ARBITRATORS. In any arbitration pursuant to this Section 11.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by TDC within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment -11- of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 11.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 11.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 11.5 GOVERNING LAW. This Agreement shall be governed by the laws of the state of California as applied to residents of that state entering into contracts to be performed in that state. 11.6 HEADINGS. The headings set forth at the beginning of the various sections of this Agreement are for reference and convenience and shall not affect the meanings of the provisions of this Agreement. 11.7 NOTICES. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by telex or facsimile and confirmed by registered or certified mail and addressed as follows: -12- If to ALZA: ALZA Corporation 950 Page Mill Road P. 0. Box 10950 Palo Alto, CA 94303-0802 Attention: Vice President, Legal If to TDC: Therapeutic Discovery Corporation 1290 Page Mill Road P.O. Box 10051 Palo Alto, CA 94303-0860 Attention: Chief Executive Officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by telex or facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 11.7. 11.8 PUBLIC DISCLOSURE. Neither party shall disclose to third parties, nor originate any publicity, news release or public announcement, written or oral, whether to the public, the press, stockholders or otherwise, referring to the existence or terms of this Agreement, the subject matter to which it relates, the performance under it or any of its specific terms and conditions, except such announcements, as in the opinion of the counsel for the party making such announcement, are required by law, including United States securities laws, rules or regulations, without the prior written consent of the other party. If a party decides to make an announcement it believes to be required by law with respect to this Agreement, it will give the other party such notice as is reasonably practicable and an opportunity to comment upon the announcement. 11.9 SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum -13- extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect; provided, however, that if a provision is stricken so as to significantly alter the economic arrangements of this Agreement, the party adversely affected may terminate this Agreement upon 60 days' prior written notice to the other party. 11.10 RELATIONSHIP OF THE PARTIES. For all purposes of this Agreement, TDC and ALZA shall be deemed to be independent contractors and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute TDC and ALZA as partners, joint venturers, co-owners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume nor shall be liable for any liabilities or obligations of the other party, whether past, present or future. 11.11 SURVIVAL. The provisions of Sections 1, 2.3, 4, 5, 6, 7, l0, 11.3, 11.5, 11.7, 11.8, 11.9, 11.10 and this Section 11.11 shall survive the termination for any reason of this Agreement. Any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. -14- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their duly authorized representatives. ALZA CORPORATION By: /s/ Jane E. Shaw ----------------------------------------- Title: President and Chief Operating Officer -------------------------------------- THERAPEUTIC DISCOVERY CORPORATION By: /s/ Pieter P. Bonsen ----------------------------------------- Title: President -------------------------------------- -15- EX-10.2 5 EXH. 10.2 DEVELOPMENT AGREEMENT DEVELOPMENT AGREEMENT BETWEEN ALZA CORPORATION AND THERAPEUTIC DISCOVERY CORPORATION DATED MARCH 10, 1993 TABLE OF CONTENTS ----------------- Page ---- SECTION 1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . 1 1.1 "Affiliate" . . . . . . . . . . . . . . . . . . . . 1 1.2 "ALZA Proprietary Rights" . . . . . . . . . . . . . 2 1.3 "Available Funds . . . . . . . . . . . . . . . . . 2 1.4 "Developed Technology" . . . . . . . . . . . . . . 2 1.5 "Development Cost(s) " . . . . . . . . . . . . . . 2 1.6 "Distribution" . . . . . . . . . . . . . . . . . . 2 l.7 "Drug" . . . . . . . . . . . . . . . . . . . . . . 3 1 8 "FDA" . . . . . . . . . . . . . . . . . . . . . . . 3 1.9 "License Option" . . . . . . . . . . . . . . . . . 3 1.10 "License Option Agreement" . . . . . . . . . . . . 3 1.11 "Major Market Country" . . . . . . . . . . . . . . 3 l 12 "Net Sales" . . . . . . . . . . . . . . . . . . . . 3 1.13 "0ther Royalty-Bearing Product" . . . . . . . . . . 4 1.14 "Product" . . . . . . . . . . . . . . . . . . . . . 4 1.15 "Product Candidate" . . . . . . . . . . . . . . . . 4 1.16 "Product Development Program" . . . . . . . . . . . 4 1.17 "Proprietary Rights" . . . . . . . . . . . . . . . 4 1.18 "Purchase Option" . . . . . . . . . . . . . . . . . 4 1.19 "Special Royalty Payments" . . . . . . . . . . . . 5 1.20 "Sublicensing Revenues" . . . . . . . . . . . . . . 5 1.21 "System" . . . . . . . . . . . . . . . . . . . . . 5 1.22 "Technology License Agreement" . . . . . . . . . . 6 SECTION 2 PRODUCT DEVELOPMENT PROGRAM . . . . . . . . . . . . 6 2.1 Product Candidate Work Plans . . . . . . . . . . . 6 2.2 Product Selection . . . . . . . . . . . . . . . . . 6 2.3 Product Development . . . . . . . . . . . . . . . . 7 2.4 Later Requests . . . . . . . . . . . . . . . . . . 8 SECTION 3 RESEARCH AND DEVELOPMENT PROGRAMS; ALZA SERVICES . . . . . . . . . . . . . . . . . . . 8 3.1 Product Development - TDC Obligations . . . . . . . 8 3.2 Product Development - ALZA Obligations; Other ALZA Activities . . . . . . . . . . . . . . 9 3.3 Work Plans and Cost Estimates . . . . . . . . . . . 9 3.4 Third Party Rights . . . . . . . . . . . . . . . . 10 3.5 Consultation . . . . . . . . . . . . . . . . . . . 10 3.6 No Use of Available Funds After License . . . . . . 10 SECTION 4 PAYMENT FOR SERVICES; TIMING OF PAYMENTS . . . . . 11 4.1 Payment of Development Costs . . . . . . . . . . . 11 4.2 Timing of Payments . . . . . . . . . . . . . . . . 11 4.3 Sufficiency of Funds . . . . . . . . . . . . . . . 11 -i- TABLE OF CONTENTS ----------------- (continued) Page ---- SECTION 5 REPORTS AND RECORDS . . . . . . . . . . . . . . . 11 5.1 Quarterly and Final Reports. . . . . . . . . . . . 11 5.2 Available Funds Report . . . . . . . . . . . . . . 12 5.3 Records . . . . . . . . . . . . . . . . . . . . . 12 SECTION 6 LICENSE OF TECHNOLOGY FOR DEVELOPMENT . . . . . . 12 6.1 License to use ALZA Proprietary Rights . . . . . . 12 6.2 Termination of License . . . . . . . . . . . . . . 13 SECTION 7 OWNERSHIP AND LICENSE OF DEVELOPED TECHNOLOGY; PATENTS . . . . . . . . . . . . . . . . . . . . . 13 7.1 ownership of Products. . . . . . . . . . . . . . . 13 7.2 Ownership of Developed Technology . . . . . . . . 13 7.3 Patents Covering Developed Technology . . . . . . 13 7.4 Royalties on Other Royalty-Bearing Products . . . 13 7.5 Buyout of Other Royalty-Bearing Product Royalties . . . . . . . . . . . . . . . . . . . 14 7.6 Reports . . . . . . . . . . . . . . . . . . . . . 15 7.7 Review by Accountants . . . . . . . . . . . . . . 15 7.8 Payments . . . . . . . . . . . . . . . . . . . . 16 7.9 Late Payments . . . . . . . . . . . . . . . . . . 17 SECTION 8 ACCESS TO INFORMATION . . . . . . . . . . . . . . 17 8.1 Access . . . . . . . . . . . . . . . . . . . . . 17 8.2 Third Parties . . . . . . . . . . . . . . . . . . 17 8.3 Confidentiality . . . . . . . . . . . . . . . . . 17 SECTION 9 DISCLAIMERS . . . . . . . . . . . . . . . . . . . 19 9.1 Disclaimer . . . . . . . . . . . . . . . . . . . 19 SECTION 10 COVENANTS . . . . . . . . . . . . . . . . . . . . 19 10.1 Use of Available Funds . . . . . . . . . . . . . 19 10.2 Negative Pledge . . . . . . . . . . . . . . . . . 20 10.3 Protection of Available Funds . . . . . . . . . . 20 10.4 No Inconsistent Agreements . . . . . . . . . . . 20 SECTION 11 TERM AND TERMINATION . . . . . . . . . . . . . . 21 11.1 Automatic Termination . . . . . . . . . . . . . . 21 11.2 Other Termination . . . . . . . . . . . . . . . . 21 SECTION 12 FORCE MAJEURE . . . . . . . . . . . . . . . . . . 21 12.1 Force Majeure . . . . . . . . . . . . . . . . . . 21 -ii- TABLE OF CONTENTS ----------------- (continued) Page ---- SECTION 13 MISCELLANEOUS . . . . . . . . . . . . . . . . . . 22 13.1 Amendment . . . . . . . . . . . . . . . . . . . . 22 13.2 Assignment . . . . . . . . . . . . . . . . . . . 22 13.4 Counterparts . . . . . . . . . . . . . . . . . . 24 13.5 Governing Law . . . . . . . . . . . . . . . . . 24 13.6 Headings . . . . . . . . . . . . . . . . . . . . 24 13.7 Notices . . . . . . . . . . . . . . . . . . . . . 24 13.8 Public Disclosure . . . . . . . . . . . . . . . . 25 13.9 Severability . . . . . . . . . . . . . . . . . . 25 13.10 Relationship of the Parties . . . . . . . . . . . 26 13.11 Survival . . . . . . . . . . . . . . . . . . . . 26 -iii- DEVELOPMENT AGREEMENT AGREEMENT made as of the 10th day of March, 1993 between ALZA Corporation, a Delaware corporation ("ALZA"), and Therapeutic Discovery Corporation, a Delaware corporation ("TDC"). R E C I T A L S - - - - - - - - A. TDC is a corporation organized for the purpose of developing and commercializing products utilizing ALZA Proprietary Rights (as defined below). B. ALZA is engaged in the business of research and development of pharmaceutical products. C. TDC desires to have ALZA perform, on behalf of TDC, research and development activities directed toward the development of Products (as defined below). NOW, THEREFORE, the parties agree as follows: SECTION 1 --------- DEFINITIONS ------------ 1.1 "Affiliate" shall mean a corporation or any other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the designated party. "Control" shall mean ownership of at least 50% of the shares of stock entitled to vote for the election of directors in the case of a corporation, and at least 50% of the interests in profits in the case of a business entity other than a corporation. 1.2 "ALZA Proprietary Rights" shall mean all Proprietary Rights of ALZA (including the Developed Technology) to the extent they are owned and controlled by ALZA now or during the term of this Agreement. 1.3 "Available Funds" shall mean the sum of (a) $250 million plus (b) interest and other income earned through temporary investment of such funds pending their application under this Agreement, minus the sum of (c) reasonable ongoing administrative expenses of TDC, including legal and administrative expenses and reasonable reserves for present and future obligations plus (d) the costs of the Distribution. 1.4 "Developed Technology" shall mean Proprietary Rights that (a) are generated, developed, conceived or first reduced to practice, as the case may be, by ALZA or others under a Product Development Program undertaken pursuant to this Agreement or (b) are in any manner acquired by, or otherwise obtained on behalf of TDC during the term of this Agreement from persons other than ALZA and necessary or useful to the development or commercialization of Products. 1.5 "Development Cost(s)" shall mean the cost of the activities undertaken pursuant to this Agreement, determined in accordance with Exhibit A hereto. 1.6 "Distribution" shall mean the distribution by ALZA of units comprising one share of TDC Class A Common Stock and one warrant to acquire one-eighth of a share of ALZA Class A Common Stock to ALZA stockholders of record on May 28, 1993. -2- 1.7 "Drug" shall mean a therapeutic compound specified in a work plan under Section 2.1 or 2.3. 1.8 "FDA" shall mean the United States Food and Drug Administration or any successor agency whose approval is necessary to market a Product in the United States. 1.9 "License Option" shall mean the option granted to ALZA under the License Option Agreement to obtain licenses to Products, on a Product by Product basis, as described in the License Option Agreement. 1.10 "License Option Agreement" shall mean the License option Agreement between ALZA and TDC dated as of the date hereof. 1.11 "Major Market Country" shall mean any of the United States, the United Kingdom, France, Germany, Italy or Japan. 1.12 "Net Sales" shall mean the total amount invoiced in United States dollars (or converted thereto in accordance with Section 7.8) on sales by ALZA and its Affiliates to independent, unrelated third parties (other than distributors or sublicensees who make payments that constitute Sublicensing Revenues) in bona fide arms' length transactions, less the following deductions, in each case related specifically to the product in question and actually allowed and taken by such third parties and not otherwise recovered by or reimbursed to ALZA or its Affiliates: (i) trade, cash and quantity discounts; (ii) taxes on sales (such as sales or use taxes) to the extent added to the sales price and set forth separately as such in the total amount invoiced; (iii) -3- freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such in the total amount invoiced; and (iv) amounts repaid or credited by reason of rejections, defects or returns or because of retroactive price reductions, or due to government laws or regulations requiring rebates. Net Sales shall not include sales between or among ALZA and its Affiliates or Sublicensing Revenues. 1.13 "Other Royalty-Bearing Product" shall mean, in any country, any human pharmaceutical product (other than a Product) covered in such country at the time of sale by an ALZA Patent covering Developed Technology. 1.14 "Product" shall mean a Product Candidate that is accepted for development pursuant to Section 2.3. 1.15 "Product Candidate" shall mean a Drug combined with a System for which a work plan is proposed by ALZA in accordance with Section 2.1. 1.16 "Product Development Program" shall mean a program to develop a Product. 1.17 "Proprietary Rights" shall mean data, inventions, information, processes, know-how and trade secrets, and patents or patent applications covering any of the foregoing, owned by or licensed to a person and which such person has the right to license. Proprietary Rights shall not include trademarks. 1.18 "Purchase Option" shall mean that certain option to purchase all of the outstanding shares of TDC Class A Common -4- Stock that is granted to ALZA pursuant to TDC's Certificate of Incorporation, as amended as of the date hereof. 1.19 "Special Royalty Payments" shall mean "front-end" distribution fees, prepaid royalties and similar one-time, infrequent or special payments. Solely for purposes of calculating a buyout price under Section 7.5, any Special Royalty Payments will be amortized over a period of 28 calendar quarters, beginning with the quarter in which such payment is made. 1.20 "Sublicensing Revenues" shall mean (a) any royalties or percentage of sales payments received by ALZA or any of its Affiliates under either (i) any sublicense for the manufacture, use or sale of the product in question or (ii) any distribution agreement entered into with a distributor who agrees to pay royalties or make percentage of sales payments to ALZA or any of its Affiliates in respect of the manufacture, use or sale of such product and (b) any Special Royalty Payments received by ALZA or its Affiliates in respect of such product, in each case excluding amounts paid to reimburse ALZA for research and development or manufacturing costs. 1.21 "System" shall mean a delivery system for the controlled release of a Drug, based upon, utilizing or arising out of ALZA Proprietary Rights. The term "System" shall include anything incorporated in or used in connection with, or which is an attribute of, a Product, other than a therapeutic agent (including anything which affects or may affect the pharmacodynamics, pharmacokinetics, stability or absorption of a -5- therapeutic agent or the formulation, stabilization or use of a therapeutic agent in the System). 1.22 "Technology License Agreement" shall mean the Technology License Agreement dated as of the date hereof between ALZA and TDC. SECTION 2 --------- PRODUCT DEVELOPMENT PROGRAM --------------------------- 2.1 PRODUCT CANDIDATE WORK PLANS. Within 60 days after the date hereof, and from time to time hereafter, ALZA shall provide TDC with a list of possible Product Candidates together with initial work plans that provide for each Product Candidate an estimate of the total Development Costs to determine the likelihood that the System included in such Product Candidate could meaningfully enhance the therapeutic value of the Drug included in such Product Candidate, and any other factors that the parties deem appropriate to determine whether to select a Product Candidate for development. Within 45 days after ALZA provides TDC with such a proposed work plan for a Product Candidate, TDC shall notify ALZA of its acceptance or rejection of such work plan. 2.2 PRODUCT SELECTION. TDC hereby hires ALZA to perform all activities under work plans approved under Section 2.1. ALZA diligently shall perform or cause to be performed the activities under each accepted work plan, as amended from time to time so as to remain a best estimate of the work to be performed to complete the work plan for each Product Candidate and of the Development Costs thereof. -6- 2.3 PRODUCT DEVELOPMENT. Within 45 days after completion of a work plan under Section 2.2 for a Product Candidate, ALZA shall provide TDC with a written report of ALZA's assessment of the technical and economic feasibility of development of such Product Candidate and, based thereon, ALZA's good faith recommendation of whether to proceed with development of such Product Candidate. If ALZA does not recommend development of a Product Candidate, TDC shall have no rights with respect to such Product Candidate; provided that ALZA may not further develop any such Product Candidate during the term of this Agreement unless it first recommends it to TDC for development in accordance with the other terms of this Agreement. If ALZA recommends development for a Product Candidate, then such report to TDC shall include initial work plans that provide for such Product Candidate an estimate of the total Development Costs for a Product Development Program through the filing for FDA approval to market the Product, milestones (including the timetable for the development of the Product), and detailed work plans and cost estimates for the first 12 months of the Product Development Program. Within 45 days after ALZA provides TDC with a proposed work plan for a Product Development Program for a Product Candidate, TDC shall notify ALZA in writing of its acceptance or rejection of such work plan. Upon written acceptance of a work plan under this Section 2.3 for a Product Candidate, such Product Candidate shall be deemed to be a "Product." ALZA and TDC shall maintain a complete list of the Products at all times. -7- 2.4 LATER REQUESTS. If TDC fails to accept a recommended Product Candidate for development as a Product within the 45 day period specified in Section 2.3, then, at any time during the term of this Agreement, TDC may request ALZA to perform a Product Development Program for such Product Candidate and ALZA shall undertake its duties with respect to such Product Development Program, all in accordance with this Section 2, unless, at the time of such request, ALZA is then undertaking the development of such Product Candidate for its own account or with a third party, or ALZA is otherwise not permitted to undertake such development hereunder because of an arrangement with a third party. SECTION 3 ---------- RESEARCH AND DEVELOPMENT PROGRAMS; ALZA SERVICES ------------- 3.1 PRODUCT DEVELOPMENT - TDC OBLIGATIONS. Once a Product is selected pursuant to Section 2.3, TDC shall use diligent efforts to develop such Product. TDC shall request that ALZA perform, or shall use diligent efforts to cause a third party to perform, the activities under each approved work plan; provided, however, that ALZA's prior written consent shall be required for a third party to perform any activities that involve ALZA Proprietary Rights or that could affect ALZA's rights under any agreement between ALZA and TDC or ALZA's rights as holder of the Class B Common Stock of TDC. TDC shall use diligent efforts to cause each contractor other than ALZA diligently to perform the activities assigned it under a work plan. -8- 3.2 PRODUCT DEVELOPMENT - ALZA OBLIGATIONS; OTHER ALZA ACTIVITIES. TDC hereby hires ALZA to perform certain research, development and experimentation activities to develop Products in accordance with the tasks assigned to ALZA under the work plans approved under Section 2.3, and to undertake such other activities as the parties may agree. ALZA diligently shall perform or cause to be performed such activities. In connection therewith, ALZA shall make available such of its scientific, engineering, manufacturing and other personnel, and shall take such steps, as it deems necessary in order to perform its obligations in accordance with the terms hereof, but ALZA is not obligated to devote any specific amount of time or resources to activities hereunder. ALZA shall have full discretion to determine from time to time the allocation of resources of ALZA (facilities, equipment and personnel) that are available to TDC for Product Development Programs, and to determine from time to time the allocation of resources of ALZA among Product Development Programs. TDC understands, acknowledges and agrees that ALZA may devote substantial time and resources to research and development activities for other persons and for its own account, and as a result, ALZA may develop and commercialize, or have commercialized, products competitive with the Products. 3.3 WORK PLANS AND COST ESTIMATES. The parties understand and acknowledge that it is difficult to predict accurately the activities that will be necessary to develop any Product, or the Development Costs thereof, and that significant uncertainties exist in any Product development effort. TDC and -9- ALZA shall cooperate in good faith with respect to mutually acceptable work plans and cost estimates for Product Development Programs and for such other activities as the parties may agree. Such work plans and cost estimates shall be subject to review and revision from time to time, at least on a semi-annual basis. Each party diligently shall execute such work plans and shall report significant deviations therefrom in a timely manner. TDC shall not be obligated to pay Development Costs in excess of those provided in approved work plans and cost estimates, and ALZA shall not be obligated to perform work which would result in Development Costs exceeding approved cost estimates. 3.4 THIRD PARTY RIGHTS. Subject to the terms and conditions of this Agreement, TDC shall have discretion to attempt to obtain, using Available Funds, any Proprietary Rights from any third party that TDC reasonably determines to be necessary or useful to conduct Product Development Programs under this Agreement. Such Proprietary Rights shall be included in the Developed Technology. 3.5 CONSULTATION. TDC shall consult with ALZA and shall review with ALZA from time to time the progress toward completion of each work plan for each Product under development, including without limitation, the status in each country for which marketing approval is being sought. 3.6 NO USE OF AVAILABLE FUNDS AFTER LICENSE. After such time as either (i) ALZA exercises the License Option for a Product in a country or (ii) such License Option expires -10- unexercised in such country, no additional Available Funds shall be expended with respect to such Product in such country. SECTION 4 --------- PAYMENT FOR SERVICES; TIMING OF PAYMENTS ---------------------------------------- 4.1 PAYMENT OF DEVELOPMENT COSTS. In consideration of the work to be carried out by ALZA hereunder, TDC shall reimburse ALZA for all of its Development Costs in accordance with approved work plans and costs estimates. 4.2 TIMING OF PAYMENTS. TDC shall pay to ALZA monthly, in arrears, all Development Costs incurred by ALZA during the preceding calendar month, within 30 days after ALZA's invoice therefor. 4.3 SUFFICIENCY OF FUNDS. Neither TDC nor ALZA makes any warranty, express or implied, that Available Funds will be sufficient to complete the development of any Product or Products. SECTION 5 --------- REPORTS AND RECORDS ------------------- 5.1 QUARTERLY AND FINAL REPORTS. Within 45 days after the end of each calendar quarter, ALZA shall provide to TDC, and TDC shall require each third party contractor to provide to TDC and to ALZA, a reasonably detailed report setting forth (a) a summary of the work performed hereunder by ALZA and any third party contractor, as appropriate, and their respective employees and agents during such quarter; and (b) the total Development Costs of such activities during such quarter and cumulatively to date, on a Product by Product basis. -11- 5.2 AVAILABLE FUNDS REPORT. Within 45 days after the end of each calendar quarter, TDC shall provide to ALZA a reasonably detailed report setting forth a reconciliation of the use of all Available Funds to the date of such request. 5.3 RECORDS. Each of TDC and ALZA shall keep and maintain, in accordance with generally accepted accounting principles, proper and complete records and books of account documenting all Development Costs. Each of TDC and ALZA shall have the right, at all reasonable times during regular business hours, and at its own expense, to examine or to have examined by a certified public accountant or similar person reasonably acceptable to the other party, pertinent books and records of one another, for the sole purpose of determining the correctness of Development Costs invoiced by ALZA hereunder and the application of Available Funds by TDC. Such examination shall take place not later than two years following the year in question, and only one examination may take place with respect to any period as to which such books and records are examined. TDC shall obtain, for itself and for ALZA, similar reasonable rights to audit the Development Costs of each third party contractor. SECTION 6 --------- LICENSE OF TECHNOLOGY FOR DEVELOPMENT ------------------------------------- 6.1 LICENSE TO USE ALZA PROPRIETARY RIGHTS. TDC hereby grants to ALZA a sublicense under the Technology License Agreement solely for the purpose of conducting the activities contemplated hereunder. -12- 6.2 TERMINATION OF LICENSE. Termination of the license granted under the Technology License Agreement automatically shall terminate the sublicense to the Licensed Technology granted to ALZA under this Agreement. SECTION 7 ---------- OWNERSHIP AND LICENSE OF DEVELOPED TECHNOLOGY; PATENTS; ROYALTIES ON OTHER ROYALTY-BEARING PRODUCTS ---------------------------------------------------- 7.1 OWNERSHIP OF PRODUCTS. TDC shall own all Products, subject to the License Option. 7.2 OWNERSHIP OF DEVELOPED TECHNOLOGY. ALZA shall own all Developed Technology. 7.3 PATENTS COVERING DEVELOPED TECHNOLOGY. ALZA shall determine whether and to what extent to seek and maintain United States and/or foreign patents with respect to any inventions included in Developed Technology. Any such patents and applications therefor shall be in ALZA's name and shall be owned by ALZA. TDC and ALZA each shall pay one-half of the costs of obtaining and maintaining any such patents during the term of this Agreement. 7.4 ROYALTIES ON OTHER ROYALTY-BEARING PRODUCTS. ALZA shall pay TDC royalties in respect of sales of each other Royalty-Bearing Product. Such royalties shall equal the sum of (a) 1% of the Net Sales in the relevant country or countries of such Other Royalty-Bearing Product; and (b) 10% of Sublicensing Revenues in the relevant country or countries with respect to such Other Royalty-Bearing Product; provided, however, that in determining payments due under this Section 7.4, Net Sales and Sublicensing Revenues shall be reduced by the dollar amount of -13- any license or similar payments due to third parties from ALZA with respect to any such sales and Sublicensing Revenues of such other Royalty-Bearing Product. Only one royalty under this Section 7.4 shall be payable by ALZA to TDC with respect to any particular Net Sales or Sublicensing Revenues of each Other Royalty-Bearing Product in any country, regardless of the number of patents covering such Other Royalty-Bearing Product in such country. 7.5 BUYOUT OF OTHER ROYALTY-BEARING PRODUCT ROYALTIES. ALZA shall have the option, in its discretion, at any time from and after the end of the twelfth full calendar quarter following the first commercial sale in each country of any Other Royalty-Bearing Product, to buy out its remaining obligation to make payments under Section 7.4 with respect to sales of such other Royalty-Bearing Product in such country. The buyout price shall be an amount equal to 15 times the payments made by or due to TDC from ALZA under Section 7.4 with respect to sales of such other Royalty-Bearing Product in such country during the four most recent calendar quarters preceding the date of exercise of the buyout option for which royalties were paid or were due in respect of such country. ALZA shall have the option, in its discretion, at any time from and after the end of the twelfth full calendar quarter following the first commercial sale of any Other Royalty-Bearing Product as to which payments are due under Section 7.4 in either the United States or two other Major Market Countries, to buy out its remaining worldwide obligations to make payments under Section 7.4 with respect to such Other -14- Royalty-Beating Product. The buyout price shall be an amount equal to 20 times the payments made by or due to TDC from ALZA under Section 7.4 during the four most recent calendar quarters preceding the date of exercise of the buyout option for which royalties were paid or were due on a worldwide basis with respect to such Other Royalty-Bearing Product under Section 7.4 (and, in addition, such payments as would have been paid by or due from ALZA to TDC if ALZA had not exercised any country-specific buyout option with respect to such Other Royalty-Bearing Product) less any amounts previously paid to exercise any country-specific buyout option with respect to such Other Royalty-Bearing Product. 7.6 REPORTS. Within 90 days after the end of each calendar quarter for which royalties are due under Section 7.4, ALZA shall render an accounting to TDC, on a country-by-country basis, with respect to all payments due for such quarter under Section 7.4. Such report shall indicate for such quarter, the quantity and dollar amount of sales of each Other Royalty-Bearing Product by ALZA and its Affiliates, and Sublicensing Revenues received by ALZA with respect to which payments are due; provided, however, that if ALZA shall not have received from any foreign sublicensee or distributor a report of its sales for such quarter, then such sales shall be included in the next quarterly report. In case no payment is due for any calendar quarter, ALZA shall so report. ALZA shall keep accurate records in sufficient detail to enable the payments due hereunder to be determined. 7.7 REVIEW BY ACCOUNTANTS. At TDC's request, ALZA shall permit an independent public accountant selected by TDC to -15- have access, once in each calendar year during regular business hours and upon reasonable notice to ALZA, to such of the records of ALZA as may be necessary to verify the accuracy of the payments and reports made under Sections 7.4 and 7.6, but said accountant shall not disclose to TDC any information except that which should have been properly contained in such reports. The right of review with respect to any quarterly accounting shall terminate two years after TDC's receipt of the royalties due with respect to such quarter. 7.8 PAYMENTS. Payments shown by each calendar quarter report to have accrued shall be due and payable on the date the report is due and shall be paid in United States dollars. Any and all taxes due or payable on such payments or with respect to the remittance thereof shall be deducted from such payments and shall be paid by ALZA to the proper taxing authorities, and proof of payment shall be secured and sent to TDC as evidence of such payment. The rate of exchange to be used in computing the amount of United States dollars due to TDC in satisfaction of payment obligations with respect to sales in foreign countries shall be calculated by converting the amount due in such foreign currency into United States dollars based on the rate for the purchase of United States dollars with such currency as published in the WALL STREET JOURNAL on the last business day of the calendar quarter for which payment is being made. If governmental regulations prevent remittance from any foreign country of any amounts due under Section 7.4 in respect of that country, ALZA shall so notify TDC in writing, and the obligation under this Agreement to -16- make payments in respect of sales in that country shall be suspended (but the amounts due but not paid shall continue to accrue) until such remittances are possible. TDC shall have the right, upon written notice to ALZA to receive payment in any such country in the local currency. 7.9 LATE PAYMENTS. Any payments due hereunder that are not made when due shall accrue interest at the lesser of 10% per annum or the maximum rate as may be allowed by law, beginning on the date when TDC notifies ALZA that such payments are overdue. SECTION 8 ---------- ACCESS TO INFORMATION --------------------- 8.1 ACCESS. Subject to the terms of this Agreement, each party shall be permitted access to the premises of the other during normal business hours, for the purpose of monitoring the progress of activities under this Agreement. Each party shall keep full and complete records and notebooks containing all experiments performed during its work under this Agreement and the results thereof. Such items and copies of all documentation shall be available during normal business hours for inspection by the other party. In addition, each party shall provide to the other such other information as reasonably may be requested. 8.2 THIRD PARTIES. TDC shall cause each third party contractor to provide access similar to that to be provided pursuant to Section 8.1, for the benefit of both TDC and ALZA. 8.3 CONFIDENTIALITY. During the term of this Agreement and for a period of 10 years following its termination, -17- each party shall maintain in confidence all Proprietary Rights of the other; provided, however, that nothing contained herein shall prevent either party from disclosing any Proprietary Rights to the extent that such Proprietary Rights (a) are required to be disclosed in connection with the development of or securing necessary governmental authorization for the marketing of Products, or to make, use and sell Products as permitted or provided in the agreements between the parties, (b) are required to be disclosed by law for the purpose of complying with governmental regulations, (c) are disclosed to sublicensees permitted under the Technology License Agreement in connection with the development, manufacturing or marketing of Products, subject to similar obligations of confidentiality on the part of such third parties as required by the Technology License Agreement, (d) are known to the recipient prior to the date hereof as evidenced by the recipient's written records; (e) are lawfully disclosed to the recipient by a third party having the right to disclose such information to the recipient; or (f) either before or after the time of disclosure to the recipient, become known to the public other than by an unauthorized act or omission of the recipient or any of the recipient's employees or agents. ALZA Proprietary Rights may be disclosed to third parties only in accordance with the provisions of Section 10.4 hereof and in accordance with the provisions of the Technology License Agreement. The obligations of each of the parties pursuant to this Section 8.3 shall survive the termination of this Agreement for any reason. Any breach of this Section 8.3 -18- shall result in irreparable harm, and in the event of a breach, the aggrieved party shall be entitled to injunctive relief (without the need to post a bond) in addition to any other remedies available at law or in equity. SECTION 9 --------- DISCLAIMERS ----------- 9.1 DISCLAIMER. ALZA DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (i) THAT ALZA PROPRIETARY RIGHTS (INCLUDING ANY DEVELOPED TECHNOLOGY), OR THE USE THEREOF, OR PRODUCT CANDIDATES OR PRODUCTS INCORPORATING OR MANUFACTURED BY THE USE THEREOF, WILL BE FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (ii) OF THE ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR MERCHANTABILITY OF ALZA PROPRIETARY RIGHTS AND DEVELOPED TECHNOLOGY OR THEIR SUITABILITY OR FITNESS FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT LIMITATION, THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF PRODUCTS. ALZA DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER NATURE, EXPRESS OR IMPLIED. SECTION 10 ---------- COVENANTS --------- 10.1 USE OF AVAILABLE FUNDS. TDC agrees to expend all Available Funds for activities undertaken pursuant to this Agreement, unless ALZA agrees otherwise. Pending application of all Available Funds as set forth above, Available Funds shall be invested in securities issued or guaranteed as to principal and interest by the United States, or by a person controlled or -19- supervised by or acting as an instrumentality of the government of the United States pursuant to authority granted by the Congress of the United States, or any certificate of deposit for any of the foregoing, or any other investment that is approved by ALZA in its sole discretion. 10.2 NEGATIVE PLEDGE. TDC shall not create, incur, assume or suffer to exist any lien upon or with respect to, or otherwise take any action with respect to, Available Funds so as to prevent or interfere with full expenditure of such funds for activities under this Agreement in accordance with Section 10.1. 10.3 PROTECTION OF AVAILABLE FUNDS. As soon as practicable following execution of this Agreement, TDC shall make arrangements satisfactory to ALZA to ensure that Available Funds will remain available for expenditure under this Agreement. 10.4 NO INCONSISTENT AGREEMENTS. Without the written consent of ALZA, TDC shall not enter into any agreement or arrangement that is in any way inconsistent with or that could adversely affect ALZA's rights under any agreement between ALZA and TDC, or that is in any way inconsistent with or that could adversely affect ALZA's rights as holder of the Class B Common Stock of TDC. TDC must include in any agreement between TDC and a third party relating to Products, Developed Technology and/or activities hereunder such provisions as ALZA reasonably deems appropriate to protect ALZA Proprietary Rights and to protect ALZA's rights under all agreements between ALZA and TDC and under the Purchase Option. -20- SECTION 11 ---------- TERM AND TERMINATION -------------------- 11.1 AUTOMATIC TERMINATION. This Agreement shall terminate upon expiration of the Purchase Option, except that ALZA's obligations to make payments to TDC with respect to Other Royalty-Bearing Products shall continue as provided in Section 7 hereof. 11.2 OTHER TERMINATION. Either party may, in its discretion, terminate this Agreement and its term in the event that the other party: (a) breaches any material obligation hereunder or under the Technology License Agreement, the License Option Agreement, or any license thereunder, and such breach continues for a period of 60 days after written notice thereof by the terminating party to the other party; or (b) enters into any proceeding, whether voluntary or otherwise, in bankruptcy, reorganization or arrangement for the appointment of a receiver or trustee to take possession of its assets or any other proceeding under any law for the relief of creditors, or makes an assignment for the benefit of its creditors. SECTION 12 ---------- FORCE MAJEURE ------------- 12.1 FORCE MAJEURE. Neither party to this Agreement shall be liable for delay in the performance of any of its obligations hereunder if such delay is due to causes beyond its reasonable control including, without limitation, acts of God, -21- fires, strikes, acts of war, or intervention of any governmental authority, but any such delay or failure shall be remedied by such party as soon as possible. SECTION 13 ---------- MISCELLANEOUS ------------- 13.1 AMENDMENT. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 13.2 ASSIGNMENT. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to any person or entity with which ALZA is -22- merged or consolidated or which purchases all or substantially all of the assets of ALZA. ALZA may subcontract all or any portion of its duties hereunder to third parties, in its sole discretion. 13.3 ARBITRATION. 13.3.1 ARBITRATION. All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the city of San Francisco, State of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 13.7 of this Agreement shall be valid and sufficient. 13.3.2 ARBITRATORS. In any arbitration pursuant to this Section 13.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by TDC within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment -23- of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 13.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 13.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 13.5 GOVERNING LAW. This Agreement shall be governed by the laws of the state of California as applied to residents of that state entering into contracts to be performed in that state. 13.6 HEADINGS. The headings set forth at the beginning of the various sections of this Agreement are for reference and convenience and shall not affect the meanings of the provisions of this Agreement. 13.7 NOTICES. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by telex or facsimile and confirmed by registered or certified mail and addressed as follows: -24- If to ALZA: ALZA Corporation 950 Page Mill Road P.0. Box 10950 Palo Alto, CA 94303-0802 Attention: Vice President, Legal If to TDC: Therapeutic Discovery Corporation 1290 Page Mill Road P.O. Box 10051 Palo Alto, CA 94303-0860 Attention: Chief Executive officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by telex or facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 13.7. 13.8 PUBLIC DISCLOSURE. Neither party shall disclose to third parties, nor originate any publicity, news release or public announcement, written or oral, whether to the public, the press, stockholders or otherwise, referring to the existence or terms of this Agreement, the subject matter to which it relates, the performance under it or any of its specific terms and conditions, except such announcements, as in the opinion of the counsel for the party making such announcement, are required by law, including United States securities laws, rules or regulations, without the prior written consent of the other party. If a party decides to make an announcement it believes to be required by law with respect to this Agreement, it will give the other party such notice as is reasonably practicable and an opportunity to comment upon the announcement. 13.9 SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or -25- unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect; provided, however, that if a provision is stricken so as to significantly alter the economic arrangements of this Agreement, the party adversely affected may terminate this Agreement upon 60 days' prior written notice to the other party. 13.l0 RELATIONSHIP OF THE PARTIES. For all purposes of this Agreement, TDC and ALZA shall be deemed to be independent entities and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute TDC and ALZA as partners, joint ventures, co-owners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume nor shall be liable for any liabilities or obligations of the other party, whether past, present or future. 13.11 SURVIVAL. The provisions of Sections 1, 5, 7, 8, 9, 11, 13.3, 13.5, 13.7, 13.8, 13.9, 13.10 and this Section 13.11 survive the termination for any reason of this Agreement. Neither party shall be liable to the other due to the -26- termination of this Agreement as provided herein, whether in loss of good will, anticipated profits or otherwise. In addition, any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. -27- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their duly authorized representatives. ALZA CORPORATION By: /s/ Jane E. Shaw ------------------------------------------ Title: President and Chief Operating Officer --------------------------------------- THERAPEUTIC DISCOVERY CORPORATION By: /s/ Pieter P. Bonsen ---------------------------- Title: President ------------------------- -28- EXHIBIT A DEVELOPMENT COSTS ----------------- Development Costs are equal to the sum of (i) Research Expenses, (ii) General and Administrative Expenses and (iii) Capital Asset Expenditures. (i) Research Expenses include both Direct Expenses and Indirect Expenses, with the cost elements outlined on Exhibit A-1. (a) Direct Expenses include Direct Research Salaries, Clinical Expenses, Supplies and other expenses incurred specifically in connection with the Program. (b) Indirect Expenses include Research Management and support costs of the research and product development organization. (Indirect Expenses are allocated to all projects and billed to clients at a fixed rate* of 160% of Direct Research Salaries.) (ii) General and Administrative Expenses include cost elements outlined on Exhibit A-2. (General and Administrative Expenses are allocated among the research and product development, manufacturing and marketing organizations. The portion allocated to the research and product development organization is then allocated to all projects and billed to clients at a fixed rate* of 80% of Direct Research Salaries.) (iii) Capital Asset Expenditures are the actual costs of new capital assets acquired specifically for the project. - ------------------------- * This fixed billing rate will not be changed prior to January 1, 1994 and, if changed on or after January 1, 1994, such changes will be limited to not more than one change per calendar year and shall be a maximum of 10% of the rate in effect at the time of the increase. EXHIBIT A-1 Research Expenses ----------------- DIRECT EXPENSES Direct Research Salaries* Project Clinical Expenses and Outside Services Project Specific Supplies Project Travel and Related Expenses Miscellaneous Project Expenses INDIRECT EXPENSES Research Management and Indirect Salaries* General Research Supplies and Materials General Research Consulting and Outside Services Facilities Expenses Telephone and Communications Equipment Depreciation, Rent, Maintenance and Services Research Travel and Related Expenses Patent and Trademark Expenses Miscellaneous Indirect Research Expenses *Salaries include Benefits EXHIBIT A-2 General and Administrative Expense ---------------------------------- Corporate Management, Administrative, and Indirect Salaries* Telephone and Communications Equipment Depreciation, Rent, Maintenance and Services Board of Directors and Corporate Consulting Annual Audit, Accounting and Legal Expenses Facilities Expenses Net Interest Expense Miscellaneous General and Administrative Expenses *Salaries include Benefits EX-10.3 6 EXH. 10.3 LICENSE OPTION AGREEMENT LICENSE OPTION AGREEMENT AGREEMENT made as of the 10th day of March, 1993 by and between ALZA Corporation, a Delaware corporation ("ALZA") and Therapeutic Discovery Corporation, a Delaware corporation ("TDC"). RECITALS A. As of the date hereof, ALZA and TDC have entered into a Technology License Agreement and a Development Contract. B. Pursuant to the Development Agreement, TDC will employ ALZA and possibly third party contractors to perform the research and development work described therein, which is anticipated to result in Products. C. In order to carry out the commercial exploitation of Products and in consideration of the agreements described above, TDC desires to grant to ALZA an option as set forth herein. NOW, THEREFORE, the parties agree as follows: l. DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings set forth below: 1.1 "Development Contract" shall mean the Development Agreement dated as of the date hereof between TDC and ALZA. 1.2 "License Agreement" shall mean an exclusive license agreement for a particular Product between ALZA and TDC in the form of Exhibit A to this Agreement. 1.3 "License Option" shall mean the option granted to ALZA, pursuant to Section 2 of this Agreement, to enter into License Agreements for Products, on a Product by Product basis. 1.4 "NDA" shall mean a new drug application as that term is defined in the Federal Food, Drug and Cosmetic Act or any successor application filed with the FDA requesting permission to market a Product. 1.5 "Product" shall mean a product accepted for development under the Development Contract. 1.6 "Purchase Option" shall mean that certain option to purchase all of the outstanding shares of TDC Class A Common Stock that is granted to ALZA pursuant to TDC's Certificate of Incorporation, as amended. 1.7 "Proprietary Rights" shall mean data, inventions, information, processes, know-how and trade secrets, and patents or patent applications covering any of the foregoing, owned by or licensed to a person and which such person has the right to license. Proprietary rights shall not include trademarks. 1.8 "Technology License Agreement" shall mean the Technology License Agreement dated as of the date hereof between ALZA and TDC. 2. LICENSE OPTION. 2.1 GRANT OF LICENSE OPTION. On the terms and subject to the conditions of this Agreement, TDC hereby grants to ALZA a License Option with respect to each Product, exercisable on a Product by Product and country-by-country basis as described in Section 2.2. ALZA agrees that, as long as TDC has Proprietary -2- Rights in a Product, ALZA will not commercialize any Product, for its own account or with a third party, except pursuant to a License Agreement executed pursuant to the terms hereof. 2.2 TIME FOR EXERCISE. ALZA may exercise the License option with respect to any Product on a country-by-country basis at any time during the period beginning on the date hereof and ending 90 days after written notification to ALZA of the earlier of (i) approval to market such Product in such country by the appropriate regulatory agency or (ii) approval to market the Product in the United States by the FDA. The License Option for any Product in any country automatically will expire if not exercised within the time periods described above. TDC will notify ALZA in writing within 10 business days of receipt of each approval to market any Product in any country. 2.3 MANNER OF EXERCISE. ALZA shall exercise its License Option by delivering to TDC, within the time period described in Section 2.2 above, a notice of exercise specifying the Product and the country or countries as to which the License Option is exercised. A License Agreement for such Product shall be deemed to be effective in such country or countries as of the date of such notice of exercise, without the necessity of any additional action by the parties. For the convenience of the parties, however, TDC shall, upon receipt of ALZA's notice, forward to ALZA two executed copies of a License Agreement dated the effective date and containing completed Attachments A and B; ALZA shall execute both copies and return one to TDC as soon as possible. Failure of either or both of the parties to execute -3- such License Agreement shall not, however, affect the effectiveness of the license granted thereby. The parties shall enter into a separate License Agreement for each Product as to which ALZA elects to exercise a License Option. For convenience, the parties shall amend Attachment B to a License Agreement to add countries in cases where a License Option is being exercised for a Product for which a License Option already has been exercised in another country or countries. 3. NO CONFLICT. TDC agrees that no license, sale or other commercial exploitation of any Product has been or shall be made or offered to any person or entity on any basis that is or will be in conflict with this Agreement or any License Agreement. 4. ACCESS TO INFORMATION. 4.1 INFORMATION AVAILABLE. TDC shall make available to ALZA, at all reasonable times, all available information relating to all Products, so as to enable ALZA to determine whether and when to exercise its License Option. 4.2 CONSULTATION. TDC shall consult with ALZA and inform ALZA on a continuing basis of development and the current state of all Products and will review from time to time with ALZA the progress towards completion of the Products. 5. TERMINATION. This Agreement shall terminate on the earlier of (a) the date of expiration of the License Option for all of the Products and (b) 90 days after expiration of the Purchase Option. -4- 6. MISCELLANEOUS. 6.1 AMENDMENT. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 6.2 ASSIGNMENT. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to any person or entity with which ALZA is merged or consolidated or which purchases all or substantially all of the assets of ALZA. -5- 6.3 ARBITRATION. 6.3.1 ARBITRATION. All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the City of San Francisco, State of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 6.7 of this Agreement shall be valid and sufficient. 6.3.2 ARBITRATORS. In any arbitration pursuant to this Section 6.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by TDC within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to -6- appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 6.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 6.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 6.5 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of California as applied to residents of that state entering into contracts wholly to be performed in that state. 6.6 HEADINGS. The section headings contained in this Agreement are included for convenience only and form no part of the Agreement between the parties. 6.7 NOTICES. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by telex or facsimile and confirmed by registered or certified mail and addressed as follows: If to ALZA: ALZA Corporation 950 Page Mill Road P. 0. Box 10950 Palo Alto, CA 94303-0802 Attention: Vice President, Legal -7- If to TDC: Therapeutic Discovery Corporation 1290 Page Mill Road P.O. Box 10051 Palo Alto, CA 94303-0860 Attention: Chief Executive Officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by telex or facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 6.7. 6.8 PUBLIC DISCLOSURE. Neither party shall disclose to third parties, nor originate any publicity, news release or public announcement, written or oral, whether to the public, the press, stockholders or otherwise, referring to the existence or terms of this Agreement, including its existence, the subject matter to which it relates, the performance under it or any of its specific terms and conditions, except such announcements, as in the opinion of the counsel for the party making such announcement, are required by law, including United States securities laws, rules or regulations, without the prior written consent of the other party. If a party decides to make an announcement it believes to be required by law with respect to this Agreement, it will give the other party such notice as is reasonably practicable and an opportunity to comment upon the announcement. 6.9 SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such -8- modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect; provided, however, that if a provision is stricken so as to significantly alter the economic arrangements of this Agreement, the party adversely affected may terminate this Agreement upon 60 days' prior written notice to the other party. 6.10 RELATIONSHIP OF THE PARTIES. For all purposes of this Agreement, TDC and ALZA shall be deemed to be independent entities and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute TDC and ALZA as partners, joint venturers, co-owners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume nor shall be liable for any liabilities or obligations of the other party, whether past, present or future. -9- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. ALZA CORPORATION By: /s/ Jane E. Shaw ----------------------------------------- Title: President and Chief Operating Officer -------------------------------------- THERAPEUTIC DISCOVERY CORPORATION By: /s/ Pieter P. Bonsen ----------------------------------------- Title: President -------------------------------------- -10- EXHIBIT A LICENSE AGREEMENT This LICENSE AGREEMENT is made this ____ day of _______________ , 19__, by and between ALZA Corporation, a Delaware corporation ("ALZA"), and Therapeutic Discovery Corporation ("TDC"), a Delaware corporation. RECITALS A. TDC and ALZA have entered into a License Option Agreement and certain other agreements dated as of March 10, 1993. B. Section 2 of the License Option Agreement provides for a license, the terms of which are to be set forth herein. NOW, THEREFORE, the parties agree as follows: l. DEFINITIONS. For purposes of this Agreement, the following terms will have the respective meanings set forth below. 1.1 "Affiliate" shall mean a corporation or any other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the designated party. "Control" shall mean ownership of at least 50% of the shares of stock entitled to vote for the election of directors in the case of a corporation, and at least 50% of the interests in profits in the case of a business entity other than a corporation. 1.2 "Developed Technology" shall mean Proprietary Rights that (a) are generated, developed, conceived or first reduced to practice, as the case may be, by ALZA or others under a product development program undertaken pursuant to the Development Contract or (b) are in any manner acquired by or otherwise obtained on behalf of TDC from persons other than ALZA and are necessary or useful to the development of the Licensed Product during the term of the Development Contract. 1.3 "Development Contract" shall mean the Development Agreement between the parties dated as of March 10, 1993. 1.4 "Development Cost(s)" shall mean the cost of the activities undertaken pursuant to the Development Contract with respect to the Licensed Product, determined in accordance with Exhibit A thereto. 1.5 "Infringing Product" shall mean any product sold by a third party, other than pursuant to a sublicense or distribution agreement with TDC or ALZA, which consists of the drug compound or compounds incorporated in the Licensed Product as the active agent or agents and a delivery system substantially similar to that incorporated in the Licensed Product, and which product infringes or is alleged to infringe any ALZA patent or patents covering the Licensed Product. 1.6 "License Option Agreement" shall mean the License Option Agreement between the parties dated as of March 10, 1993. 1.7 "Licensed Product" shall mean the product listed on Exhibit A hereto. 1.8 "Major Market Country" shall mean any of the United States, the United Kingdom, France, Germany, Italy or Japan. -2- 1.9 "Net Sales" shall mean the total amount invoiced in United States dollars (or converted thereto in accordance with section 5.2) on sales by ALZA and its Affiliates to independent, unrelated third parties (other than distributors or sublicensees who make payments that constitute Sublicensing Revenues) in bona fide arms' length transactions, less the following deductions, in each case related specifically to the product in question and actually allowed and taken by such third parties and not otherwise recovered by or reimbursed to ALZA or its Affiliates: (i) trade, cash and quantity discounts; (ii) taxes on sales (such as sales or use taxes) to the extent added to the sales price and set forth separately as such in the total amount invoiced; (iii) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such in the total amount invoiced; and (iv) amounts repaid or credited by reason of rejections, defects or returns or because of retroactive price reductions, or due to government laws or regulations requiring rebates. Net Sales shall not include sales between or among ALZA and its Affiliates or Sublicensing Revenues. 1.10 "Proprietary Rights" shall mean data, inventions, information, processes, know-how and trade secrets, and patents or patent applications covering any of the foregoing, owned by or licensed to a person and which such person has the right to license. Proprietary Rights shall not include trademarks. 1.11 "Special Royalty Payments" shall mean "front-end" distribution fees, prepaid royalties and similar one-time, -3- infrequent or special payments. Solely for purposes of calculating a buy-out price under Section 3.3 hereof, any Special Royalty Payments will be amortized over a period of 28 calendar quarters, beginning with the quarter in which such payment is made. 1.12 "Sublicensing Revenues" shall mean (a) any royalties or percentage of sales payments received by ALZA or any Affiliate under either (i) any sublicense for the manufacture, use or sale of the product in question or (ii) any distribution agreement entered into with a distributor who agrees to pay royalties or make percentage of sales payments to ALZA or any Affiliate in respect of the manufacture, use or sale of such product and (b) any Special Royalty Payments received by ALZA or its Affiliates in respect of such product, in each case excluding amounts paid to reimburse ALZA for research and development or manufacturing costs. 1.13 "Territory" shall mean the country or countries listed on Exhibit B hereto, as amended from time to time by the parties in connection with the exercise by ALZA of its option for additional countries under the License Option Agreement. 2. GRANT OF LICENSE. TDC hereby grants to ALZA the exclusive, perpetual, right and license in the Territory to develop, make, have made, use and sell the Licensed Product. ALZA (at no cost to TDC) agrees to use its reasonable efforts to complete or have completed any remaining activities necessary to complete the development of the Licensed Product in the Territory and to -4- promote the commercialization of the Licensed Product in each Major Market Country of the Territory through the manufacture and sale or the sublicensing of the Licensed Product. ALZA may use reasonable discretion in the allocation of its technological and monetary resources in performing its obligations hereunder, taking into account not only the Licensed Product but also activities for its own account and its obligations under third party agreements. 3. ROYALTIES AND OTHER PAYMENTS. 3.1 PAYMENTS. In consideration of the grant of the license, ALZA shall pay TDC royalties with respect to the Licensed Product as follows: (a) up to a maximum of 5% of Net Sales of the Licensed Product in the Territory determined as follows: 1% of such Net Sales, plus an additional 0.1% of such Net Sales for each full one million dollars of Development Costs of the Licensed Product paid by TDC; plus (b) up to a maximum of 50% of Sublicensing Revenues in respect of sales of the Licensed Product in the Territory determined as follows: 10% of such Sublicensing Revenues, plus an additional 1% of such Sublicensing Revenues for each full one million dollars of Development Costs of the Licensed Product paid by TDC. In determining payments due under this Section 3.1, Net Sales and Sublicensing Revenues shall be reduced by the dollar amount of any license or similar payments made to third parties -5- by ALZA or its Affiliates with respect to sales of such Licensed Product in the Territory. In determining payments under this Section 3.1, Development Costs shall be determined as of December 31 of each calendar year, in order to determine the rates payable for the next calendar year for all countries included in the Territory as of January 1 of such next year, and for any country added to the Territory during such next year. 3.2 TERM OF PAYMENTS. The obligation to make payments hereunder shall continue for 15 years after the date of the first commercial introduction of the Licensed Product in any Major Market Country. 3.3 BUY-OUT OF PAYMENTS. ALZA shall have the option, in its discretion, at any time from and after the end of the twelfth calendar quarter following the quarter in which the first commercial sale in any country of the Licensed Product occurs, to buy out its remaining obligations to make payments under Section 3.1 with respect to sales of such Licensed Product in such country. The buy-out price shall be an amount equal to 15 times the payments made by or due to TDC from ALZA under Section 3.1 with respect to sales of such Licensed Product in such country during the four most recent calendar quarters preceding the date of exercise of the buy-out option for which royalties were paid or were due in respect of such country. ALZA shall have the option, in its discretion, at any time from and after the end of the twelfth calendar quarter following the quarter in which the first commercial sale of any Licensed Product occurs in either the United States or two other Major -6- Market Countries to buy out its remaining worldwide obligations to make payments under Section 3.1 with respect to such Licensed Product. The buy-out price shall be an amount equal to 20 times the payments made by or due to TDC from ALZA under Section 3.1 on a worldwide basis with respect to such Licensed Product during the four most recent calendar quarters preceding the date of exercise of the buy-out option for which royalties were paid or were due (and, in addition, such payments as would have been paid by or due from ALZA to TDC if ALZA had not exercised any country specific buy-out option with respect to such Licensed Product less any amounts previously paid to exercise any country- specific buy-out option with respect to such Licensed Product. For calculating the buy-out price, any Special Royalty Payments will be amortized over a period of 28 quarters, beginning with the quarter in which such payment is made. 4. ACCOUNTING. 4.1 REPORTS. Within 90 days after the end of each calendar quarter for which royalties are due under Section 3.1, ALZA shall render an accounting to TDC, on a country-by-country basis, with respect to all payments due for such quarter under Section 3.1. Such report shall indicate for such quarter, the quantity and dollar amount of sales of the Licensed Product by ALZA, its Affiliates, sublicensees and distributors with respect to which such payments are due; provided, however, that if ALZA shall not have received from any foreign sublicensee or distributor a report of its sales for any quarter, then such sales shall be included in the next quarterly report. In case no -7- payment is due for any calendar quarter, ALZA shall so report. ALZA shall keep accurate records in sufficient detail to enable the payments due hereunder to be determined. 4.2 REVIEW BY ACCOUNTANTS. At TDC's request, ALZA shall permit an independent public accountant selected by TDC to have access, once in each calendar year during regular business hours and upon reasonable notice to ALZA, to such of the records of ALZA as may be necessary to verify the accuracy of the reports and payments made under this Agreement, but said accountant shall not disclose to TDC any information except that which should properly have been contained in such reports. The right of review with respect to any quarterly account shall terminate two years after TDC's receipt of the royalties due with respect to such quarter. 5. TIMES AND CURRENCIES OF PAYMENTS. 5.1 PAYMENTS. Payments shown by each calendar quarter report to have accrued shall be due and payable on the date such report is due and shall be paid in United States dollars. Any and all taxes due or payable on such payments or with respect to the remittance thereof shall be deducted from such payments and shall be paid by ALZA to the proper taxing authorities, and proof of payment shall be secured and sent to TDC as evidence of such payment. The rate of exchange to be used in computing the amount of the United States dollars due to TDC in satisfaction of payment obligations with respect to sales in foreign countries shall be calculated by converting the amount due in such foreign currency into United States dollars based on the rate for the -8- purchase of United States dollars with such currency as published in the WALL STREET JOURNAL on the last business day of the calendar quarter for which payment is being made. 5.2 CERTAIN FOREIGN PAYMENTS. If governmental regulations prevent remittance from any foreign country of any amounts due under Section 3.1 in respect of that country, ALZA shall so notify TDC in writing, and the obligation under this Agreement to make payments in respect of sales in that country shall be suspended (but the amounts due but not paid shall continue to accrue) until such remittances are possible. TDC shall have the right, upon written notice to ALZA, to receive payment in any such country in the local currency. 5.3 LATE PAYMENTS. Any payments due hereunder that are not made when due shall bear interest at the lesser of ten percent per annum or the maximum rate as may be allowed by law, beginning on the date when TDC has notified ALZA that such payments are overdue. 6 PATENTS. 6.1 PATENT INFRINGEMENT. (a) If a third party infringes, by the manufacture or sale of an Infringing Product, any patent covering the Licensed Product, ALZA may, at its own expense and with the right to all recoveries, bring legal action to restrain such infringement and for damages. If ALZA fails to take the necessary steps to restrain such infringement by litigation or otherwise, and if such Infringing Product achieves a sales volume in the country of infringement equal to 25% of the sales volume -9- of the Licensed Product sold by ALZA and its Affiliates, sublicensees and distributors in such country, then TDC may institute, in its own name, at its own expense and with the right to all recoveries, such litigation or other appropriate action as it may deem necessary to terminate such infringement, provided that TDC has first given to ALZA 60 days advance notice of its intention to take such action and provided further, that ALZA has not itself taken appropriate action during such 60 day period. (b) If TDC desires to bring such action in accordance with this Section 6.1, ALZA agrees to cooperate with TDC. TDC shall indemnify ALZA against liability for any costs, damages or other amounts awarded to the third party. If the third party in any such action brings a counteraction for invalidation or misuse of a patent covering the Licensed Product, TDC promptly shall notify ALZA and ALZA may, within six months of the notification, join and participate in such action at its own expense. (c) Each party agrees not to settle any action it brings in a manner that is prejudicial to any patent or proprietary rights of the other party without the other party's prior written approval. 7. EFFECTIVE DATE AND TERM. This Agreement will become effective in accordance with Section 2.3 of the License Option Agreement and, unless terminated in accordance with any of the provisions hereof, shall remain in full force and effect thereafter; provided, however, -l0- that the obligation to make payments under Section 3 hereof shall terminate as set forth in Section 3. 8. DISCLAIMERS. TDC DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY (i) THAT THE LICENSED PRODUCT OR ANY TECHNOLOGY INCORPORATED THEREIN WILL BE FREE FROM CLAIMS OF PATENT INFRINGEMENT, INTERFERENCE OR UNLAWFUL USE OF PROPRIETARY INFORMATION OF ANY THIRD PARTY AND (ii) OF THE ACCURACY, RELIABILITY, TECHNOLOGICAL OR COMMERCIAL VALUE, COMPREHENSIVENESS OR MERCHANTABILITY OF THE LICENSED PRODUCT OR ANY TECHNOLOGY INCORPORATED THEREIN OR THEIR SUITABILITY OR FITNESS FOR ANY PURPOSE WHATSOEVER INCLUDING, WITHOUT LIMITATION, THE DESIGN, DEVELOPMENT, MANUFACTURE, USE OR SALE OF THE LICENSED PRODUCT. TDC DISCLAIMS ALL OTHER WARRANTIES OF WHATEVER NATURE, EXPRESS OR IMPLIED. 9. TERMINATION. 9.1 TERMINATION BY TDC. TDC may, in its discretion, terminate this Agreement in the event that ALZA: (a) breaches any material obligation hereunder and such breach continues for a period of 60 days after written notice thereof; or (b) enters into any proceeding, whether voluntary or otherwise, in bankruptcy, reorganization or arrangement for the appointment of a receiver or trustee to take possession of ALZA's assets or any other proceedings under any law for the relief of creditors or makes an assignment for the benefit of its creditors. -11- 9.2 TERMINATION BY ALZA. ALZA may terminate this Agreement with respect to one or more countries included in the Territory upon thirty days' prior written notice to TDC if ALZA elects for any reason to discontinue commercialization of the Licensed Product. 9.3 CONSEQUENCES OF TERMINATION. Termination of this Agreement for any reason in accordance with the terms hereof shall be without prejudice to: (a) TDC's right to receive all payments accrued under Section 3 prior to the effective date of such termination; and (b) any other remedies which either party may then or thereafter have hereunder or otherwise. If this Agreement terminates pursuant to this Section 9, ALZA shall discontinue production and sales of the Licensed Product. In the event of any termination under this Section 9, ALZA may sell its inventory in stock on the date of termination and shall remit payments to TDC in respect thereto in accordance with this Agreement. 10. MISCELLANEOUS. 10.1 AMENDMENT. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future -12- performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 10.2 ASSIGNMENT. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to any person or entity with which ALZA is merged or consolidated or which purchases all or substantially all of the assets of ALZA. 10.3 ARBITRATION. 10.3.1 ARBITRATION. All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the City of San Francisco, State of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their -13- respective addresses as provided for in Section 10.7 of this Agreement shall be valid and sufficient. 10.3.2 ARBITRATORS. In any arbitration pursuant to this Section 10.3, the award shall be rendered by a majority of the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by TDC within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 10.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 10.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall -14- be deemed to be an original and all of which when taken together shall constitute this Agreement. 10.5 GOVERNING LAW. This Agreement shall be governed by the laws of the state of California as applied to residents of that state entering into contracts to be performed in that state. 10.6 HEADINGS. The headings set forth at the beginning of the various sections of this Agreement are for reference and convenience and shall not affect the meanings of the provisions of this Agreement. 10.7 NOTICES. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by telex or facsimile and confirmed by registered or certified mail and addressed as follows: If to ALZA: ALZA Corporation 950 Page Mill Road P. 0. Box 10950 Palo Alto, CA 94303-0802 Attention: Vice President, Legal If to TDC: Therapeutic Discovery Corporation 1290 Page Mill Road P.O. Box 10051 Palo Alto, CA 94303-0860 Attention: Chief Executive Officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by telex or facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 10.7. 10.8 PUBLIC DISCLOSURE. Neither party shall disclose to third parties, nor originate any publicity, news release or public announcement, written or oral, whether to the public, the -15- press, stockholders or otherwise, referring to the existence or terms of this Agreement, the subject matter to which it relates, the performance under it or any of its specific terms and conditions, except such announcements, as in the opinion of the counsel for the party making such announcement, are required by law, including United States securities laws, rules or regulations, without the prior written consent of the other party. If a party decides to make an announcement it believes to be required by law with respect to this Agreement, it will give the other party such notice as is reasonably practicable and an opportunity to comment upon the announcement. 10.9 SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect; provided, however, that if a provision is stricken so as to significantly alter the economic arrangements of this Agreement, the party adversely affected may terminate this Agreement upon 60 days' prior written notice to the other party. 10.10 RELATIONSHIP OF THE PARTIES. For all purposes of this Agreement, TDC and ALZA shall be deemed to be independent contractors and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute TDC and ALZA as partners, joint venturers, co-owners, an association or any entity separate and apart from each party itself, nor -16- shall this Agreement constitute any party hereto an employee or agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume nor shall be liable for any liabilities or obligations of the other party, whether past, present or future. 10.11 SURVIVAL. The provisions of Sections 1, 3, 4, 5, 6, 8, 9, 10.3, 10.5, 10.7, 10.8, 10.9, 10.10, and this Section 10.11 shall survive the termination for any reason of this Agreement. Neither party shall be liable to the other due to the termination of this Agreement as provided herein, whether in loss of good will, anticipated profits or otherwise. Any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. -17- IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above. ALZA CORPORATION By: ------------------------------ Title: --------------------------- THERAPEUTIC DISCOVERY CORPORATION By: ------------------------------ Title: --------------------------- -18- EXHIBIT A LICENSED PRODUCT EXHIBIT B TERRITORY EX-10.4 7 EXH. 10.4 SERVICES AGREEMENT SERVICES AGREEMENT This Services Agreement is made as of the 10th day of March, 1993 between ALZA Corporation ("ALZA") and Therapeutic Discovery Corporation ("TDC"). RECITALS TDC desires that ALZA provide certain services to TDC and ALZA desires to provide such services, on the terms and conditions set forth herein. NOW THEREFORE THE PARTIES AGREE AS FOLLOWS: 1. SERVICES. Upon request, ALZA will supply TDC with one or several of the following services: accounting, legal, stockholder relations and similar management and administrative services as mutually agreed. Such services will be provided at reasonable times and upon reasonable notice, as mutually agreed. 2. COMPENSATION. TDC shall pay ALZA's Costs in providing such services, monthly in arrears within 30 days of the date of the invoice received by TDC from ALZA. ALZA's "Costs" shall include reimbursement for its direct expenses associated with the Distribution of Units covered by the Information Statement dated March 10, 1993, and ALZA's direct and indirect expenses as defined in Schedule A hereto, and the cost of assets purchased for use solely on behalf of TDC, the purchase of which is approved by TDC. 3. TERM AND TERMINATION. The initial term of this Agreement shall commence on the date hereof and shall terminate on December 31, 1993, unless renewed as provided herein. Thereafter, this Agreement shall automatically be renewed for successive terms of one year each unless written notice of termination is given by the terminating party to the other party at least 30 days in advance of the expiration of any term; provided, however, that in no event shall the renewal term extend past the date that is 180 days after the expiration of the Purchase Option granted to ALZA pursuant to TDC's Certificate of Incorporation. TDC may, in its discretion, terminate this Agreement at any time upon 60 days' written notice to ALZA. Either party may, in its discretion, terminate this Agreement by written notice to the other party in the event that the other party (a) breaches any materials obligation hereunder or under the Technology License Agreement, the Development Agreement, or the License Option Agreement between ALZA and TDC, or any license granted to ALZA under the License Option Agreement, which breach continues for a period of 60 days after written notice thereof, or (b) enters into any proceeding, whether voluntary or involuntary, in bankruptcy, reorganization or arrangement for the appointment of a receiver or trustee to take possession of such party's assets or any other proceeding under any law for the relief of creditors, or makes an assignment for the benefit of its creditors. -2- 4. INDEMNIFICATION OF ALZA. TDC hereby agrees to indemnify, protect and hold ALZA harmless from any and all liabilities, costs or expenses incurred by ALZA as a result of services rendered by it under this Agreement, including, without limitation, lawsuits of and claims by third parties, except for liabilities, costs or expenses resulting from ALZA's gross negligence or willful misconduct. 5. FORCE MAJEURE. ALZA shall not be liable for delay in performance of any of its obligations hereunder if such delay is due to causes beyond its reasonable control including, without limitation, acts of God, fires, strikes, acts of war, or intervention of any government or authority, but any such delay or failure shall be remedied by ALZA as soon as possible. 6. MISCELLANEOUS. 6.1 AMENDMENT. Any waiver by either party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such party. Failure of any party to require, in one or more instances, performance by the other party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and -3- agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either party. This Agreement may not be amended except in a writing signed by both parties. 6.2 ASSIGNMENT. Neither party may assign its rights and obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to any person or entity with which ALZA is merged or consolidated or which purchases all or substantially all of the assets of ALZA. ALZA may subcontract all or any portion of its duties hereunder to third parties, in its sole discretion. 6.3. ARBITRATION. 6.3.1 ARBITRATION. All disputes which may arise under, out of or in connection with this Agreement shall be settled by arbitration conducted in the City of San Francisco, State of California, in accordance with the then existing rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The parties hereby agree that service of any notices in the course of such arbitration at their respective addresses as provided for in Section 6.7 of this Agreement shall be valid and sufficient. 6.3.2 ARBITRATORS. In any arbitration pursuant to this Section 6.3, the award shall be rendered by a majority of -4- the members of a board of arbitration consisting of three members who shall be appointed by the parties jointly, or if the parties cannot agree as to three arbitrators within 30 days after the commencement of the arbitration proceeding, then one arbitrator shall be appointed by ALZA and one arbitrator shall be appointed by TDC within 60 days after the commencement of the arbitration proceeding. The third arbitrator shall be appointed by mutual agreement of such two arbitrators. In the event of failure of the two arbitrators to agree within 75 days after commencement of the arbitration proceeding upon the appointment of the third arbitrator, the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. Notwithstanding the foregoing, in the event that any party shall fail to appoint an arbitrator it is required to appoint within the specified time period, such arbitrator and the third arbitrator shall be appointed by the American Arbitration Association in accordance with its then existing rules. For purposes of this Section 6.3, the "commencement of the arbitration proceeding" shall be deemed to be the date upon which a written demand for arbitration is received by the American Arbitration Association from one of the parties. 6.4 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. -5- 6.5 GOVERNING LAW. This Agreement shall be governed by the laws of the state of California as applied to residents of that state entering into contracts to be performed in that state. 6.6 HEADINGS. The headings set forth at the beginning of the various sections of this Agreement are for reference and convenience and shall not affect the meanings of the provisions of this Agreement. 6.7 NOTICES. Notices required under this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by telex or facsimile and confirmed by registered or certified mail and addressed as follows: If to ALZA: ALZA Corporation 950 Page Mill Road P. 0. Box 10950 Palo Alto, CA 94303-0802 Attention: Vice President, Legal If to TDC: Therapeutic Discovery Corporation 1290 Page Mill Road P.O. Box 10051 Palo Alto, CA 94303-0860 Attention: Chief Executive Officer All notices shall be deemed to be effective five days after the date of mailing or upon receipt if sent by telex or facsimile (but only if followed by certified or registered confirmation). Either party may change the address at which notice is to be received by written notice pursuant to this Section 6.7. 6.8 PUBLIC DISCLOSURE. Neither party shall disclose to third parties, nor originate any publicity, news release or public announcement, written or oral, whether to the public, the press, stockholders or otherwise, referring to the existence or terms of this Agreement, including its existence, the subject -6- matter to which it relates, the performance under it or any of its specific terms and conditions, except such announcements, as in the opinion of the counsel for the party making such announcement, are required by law, including United States securities laws, rules or regulations, without the prior written consent of the other party. If a party decides to make an announcement it believes to be required by law with respect to this Agreement, it will give the other party such notice as is reasonably practicable and an opportunity to comment upon the announcement. 6.9 SEVERABILITY. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect; provided, however, that if a provision is stricken so as to significantly alter the economic arrangements of this Agreement, the party adversely affected may terminate this Agreement upon 60 days' prior written notice to the other party. 6.10 RELATIONSHIP OF THE PARTIES. For all purposes of this Agreement, TDC and ALZA shall be deemed to be independent entities and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute TDC and ALZA as partners, joint venturers, co-owners, an association or any entity separate and apart from each party itself, nor shall this Agreement constitute any party hereto an employee or -7- agent, legal or otherwise, of the other party for any purposes whatsoever. Neither party hereto is authorized to make any statements or representations on behalf of the other party or in any way obligate the other party, except as expressly authorized in writing by the other party. Anything in this Agreement to the contrary notwithstanding, no party hereto shall assume nor shall be liable for any liabilities or obligations of the other party, whether past, present or future. 6.11 SURVIVAL. The provisions of Sections 4, 6.3, 6.5, 6.7, 6.8, 6.9, 6.10 and this Section 6.11 survive the termination for any reason of this Agreement. Any payments due under this Agreement with respect to any period prior to its termination shall be made notwithstanding the termination of this Agreement. -8- IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above. ALZA CORPORATION By: /s/ Jane E. Shaw ---------------------------------------- Title: President and Chief Operating Officer -------------------------------------- THERAPEUTIC DISCOVERY CORPORATION By: /s/ Pieter P. Bonsen ---------------------------------------- Title: President -------------------------------------- -9- SCHEDULE A MANAGEMENT AND ADMINISTRATIVE SERVICES EXPENSES DIRECT EXPENSES - --------------- Direct Salaries* Temporary Help Telephone and Communications Board of Directors and Corporate Consulting Travel and Entertainment Annual Audit and Independent Accounting Equipment Expenses Data Processing Services and Expenses Corporate Legal Expense Supplies Miscellaneous General Administrative Expenses INDIRECT EXPENSES** - ----------------- Management and Administrative Salaries Equipment Depreciation, Rent, Maintenance and Services Corporate Consulting and Temporary Help Legal Expense Facilities Expense Corporate Data Processing Services and Expenses Interest Expense Miscellaneous General and Administrative Overhead - ----------------- *Salaries include benefits. **Indirect Expenses are billed at a rate of 50% of Direct Salaries. EX-10.5 8 EXH. 10.5 AMENDED AND RESTATED 1993 STOCK OP. PLAN THERAPEUTIC DISCOVERY CORPORATION AMENDED AND RESTATED 1993 STOCK OPTION PLAN 1. PURPOSE. The purpose of this Therapeutic Discovery Corporation Amended and Restated 1993 Stock Option Plan (the "Plan") is to attract, retain and motivate directors, officers, employees (including employees who are also directors), and consultants of Therapeutic Discovery Corporation (the "Company") and its subsidiaries by giving them the opportunity to acquire stock ownership in the Company. Grants under this Plan will consist of nonstatutory stock options ("options"). 2. EFFECTIVE DATE AND TERM OF PLAN. The effective date of this Plan is March 30, 1993, the date of its approval by the Company's then sole stockholder. This Plan shall terminate automatically on the earlier of (i) ten (10) years after its effective date or (ii) the date on which ALZA Corporation, a Delaware corporation ("ALZA"), exercises the Purchase Option (as described in Section 11), unless terminated earlier by the Board of Directors (the "Board") under Section 13 hereof (the "Termination Date"). No option grant shall be made after the Termination Date, but all grants made prior to the Termination Date shall remain in effect in accordance with their terms. 3. SHARES SUBJECT TO THE PLAN. (a) Number and Source of Shares. Subject to the provisions of Section 9, the total number of shares of Class A Common Stock of the Company (the "Stock") reserved for grants under this Plan is 500,000 shares of Stock. If any option terminates or expires without being exercised in full, the shares issuable under such option shall become available again for grant under this Plan. The shares to be issued hereunder may consist of authorized and unissued shares or treasury shares. (b) INDIVIDUAL LIMITATION. The Company may not grant options covering in the aggregate more than 100,000 shares of Stock (subject to adjustments and substitutions under Section 9) to any one participant in the Plan in any one-year period, except that, at the time of an offer of employment as Chief Executive Officer of the Company, the Company may grant options covering in the aggregate up to 200,000 shares of Stock (subject to adjustments and substitutions under Section 9). 4. ADMINISTRATION OF THE PLAN. This Plan shall be administered by the Board or by a committee that meets the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 as in effect from time to time (in either case, the "Administrator"). The Administrator may delegate nondiscretionary administrative duties to such employees or agents of the Company or a subsidiary as it deems proper. The Administrator may also make rules and regulations which it deems useful to administer this Plan. Any decision or action of the Administrator in connection with this Plan or any options granted or shares of Stock purchased under this Plan shall be final and binding. No member of the Board shall be liable for any decision, action or omission respecting this Plan, or any options granted or shares issued under this Plan. 2 5. ELIGIBILITY. (a) Options may be granted to directors, officers, employees (including employees who are also directors), consultants and potential employees (in contemplation of and subject to employment) of the Company or any subsidiary of the Company; provided, however, that grants to directors who are not also employees of the Company or the Chief Executive Officer of the Company may be made only in accordance with Section 5(b) below. Participants in this Plan shall be approved by the Administrator. Determination by the Administrator as to eligibility shall be conclusive. (b) Notwithstanding any other provision of this Plan, directors who are not also employees of the Company or the Chief Executive Officer of the Company (each an "Eligible Director") may receive grants under this Plan only in accordance with this Section 5(b). Automatically and in connection with the offer of directorship to an Eligible Director, and subject to that person becoming a director of the Company within the time period set forth in the offer, the Eligible Director shall be granted an option to purchase 40,000 shares of Stock; provided, however, that the grant to the Chairman of the Board shall be 60,000 shares. The exercise price for options granted on or prior to December 31, 1994 shall be $1.00; thereafter, the exercise price shall be eighty-five percent (85%) of the fair market value of the Stock on the date of grant. Such options shall vest as follows: (i) for an Eligible Director who first attends a meeting of the Board following his or her 3 election as a director (as to each Eligible Director, a "Service Date") which meeting is held on or before June 11, 1995, the option shall vest in four equal annual increments of 10,000 shares (15,000 shares for the Chairman of the Board) for each increment, beginning on June 11, 1996; and (ii) for an Eligible Director who first attends a meeting of the Board following his or her Service Date which meeting is held after June 11, 1995, the option shall vest in four equal annual increments of 10,000 shares (15,000 shares for the Chairman of the Board) for each increment, beginning on the first anniversary of his or her Service Date. All options granted pursuant to this Section 5(b) shall be exercisable until the date that is ten years after the date of grant. The Service Date for a director who is not an Eligible Director but who later becomes an Eligible Director shall, for purposes of this Section 5(b), be deemed to be the date on which such director first attends a meeting of the Board following the date on which he or she first becomes an Eligible Director. 6. OPTIONS. (a) GRANT. The Administrator may, in its discretion, grant options under this Plan at any time and from time to time before the Termination Date of this Plan. The Administrator shall specify the date of grant or, if it fails to, the date of grant shall be the date of the action taken by the Administrator to grant the option (in either case, the "Grant Date"). (b) OPTION AGREEMENTS. As soon as practicable after the Grant Date, the Company will provide the optionee a written stock 4 option agreement (the "Option Agreement"). The Option Agreement shall identify the Grant Date, the number of shares of Stock covered by the option, the option price and the terms and conditions for exercise of the option. (c) TERMS AND CONDITIONS OF OPTIONS. Options granted under this Plan shall be subject to the following additional terms and conditions and such other terms and conditions not inconsistent with this Plan as the Administrator may impose: (i) EXERCISE OF OPTION. In order to exercise all or any portion of an option which, by its terms, so requires, an optionee must remain an employee or a director of, or a consultant to, the Company or a subsidiary of the Company until the date on which the option (or portion thereof) becomes exercisable (the "Vesting Date"). An option shall be partially exercisable on or after each Vesting Date with respect to the percentage of total shares of Stock covered by the option set out in the Option Agreement. If an option (or portion thereof) is not exercised on the earliest Vesting Date on which it becomes exercisable, it may be exercised thereafter at any time prior to its expiration date. Except as otherwise provided in this Plan or in the Option Agreement evidencing the option, options granted under this Plan shall be exercisable until ten years after the Grant Date. (ii) OPTION PRICE. The option price shall be determined in good faith by the Administrator; provided, however, that for options granted prior to December 31, 1994, the exercise price shall be $1.00; and provided, further, that after December 5 31, 1994, in no event shall the exercise price be less than 85% of the fair market value of the Stock on the Grant Date. (iii) METHOD OF EXERCISE. To the extent the right to purchase shares has accrued, an option (or portion thereof) may be exercised from time to time in accordance with its terms by written notice from the optionee to the Company stating the number of shares with respect to which the option is being exercised and accompanied by payment in full of the exercise price of the shares. Payment may be made in cash, by check, or by delivery of shares of Stock (duly endorsed in favor of the Company or accompanied by a duly endorsed stock power), by a combination of the above, or any other form of consideration approved by the Administrator (including payment in accordance with a cashless exercise program as permitted under Regulation T promulgated by the Federal Reserve Board, as amended from time to time). Any shares delivered to the Company as payment upon exercise of an option shall be valued at their fair market value as of the date of exercise of the option determined in good faith by the Administrator. Options may not be exercised by any optionee by the delivery of shares of Stock more frequently than once every six (6) months. (iv) RESTRICTIONS ON OPTION SHARES. At the time it grants options under this Plan, the Company may retain for itself (or others) rights to purchase the shares acquired under the option or impose other restrictions on the shares. The terms and conditions of any such rights or other restrictions shall be set forth in the Option Agreement evidencing the option. 6 (v) NONASSIGNABILITY OF OPTION RIGHTS. No option shall be transferable other than by will or by the laws of descent and distribution or a qualified domestic relations order and, otherwise during the lifetime of an optionee, only the optionee may exercise an option. (vi) EXERCISE AFTER TERMINATION OF SERVICE OR DEATH. If for any reason other than permanent and total disability or death, an optionee ceases to be employed by, or a consultant or director to (if such relationship forms the sole basis for the grant), the Company or a subsidiary, options held at the date of such termination (to the extent then exercisable) may be exercised at any time within three (3) months after the date of such termination (but in no event after the expiration date of the option as set forth in the Option Agreement). If an optionee becomes permanently and totally disabled (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code") or dies while employed by, or a consultant or director to, the Company or a subsidiary, (or, if the optionee dies within the period that the option remains exercisable after termination of service, consultancy or directorship), options then held (to the extent then exercisable) may be exercised by the optionee, the optionee's personal representative, or by the person to whom the option is transferred by will or the laws of descent and distribution, at any time within one year after the disability or death or any lesser period specified in the Option Agreement (but 7 in no event after the expiration date of the option as set forth in the Option Agreement). 7. TAXES. (a) Regardless of the form of payment for exercise of an option, the exercise of an option shall be conditioned upon payment in cash, or provision satisfactory to the Administrator for payment to the Company, of any federal and state withholding taxes which, in the Administrator's judgment, are payable in connection therewith. (b) If and to the extent consented to by the Administrator in its sole discretion at any time after an election pursuant to this Section 7(b) is made, an optionee may elect in writing to have Stock to be obtained upon exercise of an option withheld by the Company on behalf of the optionee to pay the amount of tax required by law (as determined by the Company) to be withheld. Any such election by an optionee subject (in the view of the Company) to the "short swing" profit rules of the Securities and Exchange Commission shall be subject to the following limitations: (i) such election must be made at least six (6) months before the date that the amount of tax to be withheld in connection with such exercise is determined (the "Tax Date") and shall be irrevocable; or (ii) such election (A) must be made in (or made earlier to take effect in) any ten-day period beginning on the third business day following the date of release for publication of the Company's quarterly or annual summary statements of earnings and (B) the option must be held at least six (6) months prior to 8 the Tax Date. Any shares or other securities so withheld will be valued by the Company as of the Tax Date. The right to so withhold shares shall relate separately to each option or any increment thereof. (c) If and to the extent consented to by the Administrator in the manner described in the foregoing Section 7(b), an optionee may elect at any time to deliver previously-owned shares of Stock to satisfy the tax obligations in connection with such options. 8. COMPLIANCE WITH SECURITIES LAWS. The Company shall not be obligated to issue any shares hereunder unless the shares are at that time effectively registered or exempt from registration under federal securities laws and the offer and sale of the shares are otherwise in compliance with all applicable securities laws. The Company shall have no obligation to register the shares under federal securities laws or to take whatever other steps may be necessary to enable the shares to be offered and sold under federal or other securities laws. Upon exercise of all or any portion of an option, an optionee may be required to furnish representations or undertakings deemed appropriate by the Company to enable the offer and sale of the subject shares or subsequent transfers of any interest in the shares to comply with applicable securities laws. Stock certificates evidencing such shares shall bear any legend required by, or useful for purposes of compliance with, applicable securities laws, this Plan or the optionee's option agreement. 9 9. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. The existence of outstanding options shall not affect the Company's right to effect adjustments, recapitalizations, reorganizations, or other changes in its or any other corporation's capital structure or business, any merger or consolidation, any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Stock, the dissolution or liquidation of the Company's, or any other corporation's assets or business or any other corporate act whether similar to the events described above or otherwise. Subject to Section 10, if the number of outstanding shares of Stock is increased or decreased in number or changed into or exchanged for a different number or kind of securities of the Company or any other corporation by reason of a recapitalization, reclassification, stock split, combination of shares, stock dividend, or other event, the number and kind of securities with respect to which options may be granted under this Plan, the individual limitations under Section 3(b) hereof, the number and kind of securities as to which outstanding options may be exercised, and the option price at which outstanding options may be exercised hereunder shall be proportionately adjusted. 10. DISSOLUTION, LIQUIDATION, MERGER. In the event of a dissolution or liquidation of the Company, a merger or consolidation in which the Company is not the surviving corporation, a reverse merger in which the Company is the surviving corporation but in which more than fifty percent (50%) of the shares of its Stock outstanding before the merger are held, after 10 the merger, by holders different from those immediately prior to the merger, or a sale of more than eighty percent (80%) of the assets of the Company, the time at which each outstanding option may be exercised shall be accelerated to a time such that the optionee (upon exercise of the option) would be eligible to receive the consideration payable to holders of Stock in connection with such liquidation, dissolution, merger, consolidation, reverse merger or sale. Notwithstanding any provision of the Option Agreement to the contrary, each outstanding option shall expire on the fifth business day immediately preceding the effective date of such liquidation, dissolution, merger, consolidation, reverse merger or sale. 11. PURCHASE OPTION. All Stock issuable pursuant to the Plan is and will be subject to an option (the "Purchase Option") of ALZA as described in the Restated Certificate of Incorporation of the Company to purchase such Stock at a purchase price determined in accordance with Article Fifth thereof. Copies of the Restated Certificate of Incorporation are available at the principal place of business of the Company at 950 Page Mill Road, Palo Alto, CA, 94304 and will be furnished to any optionee on request and without cost. In the event that ALZA exercises the Purchase Option, the time at which each outstanding option may be exercised shall be accelerated to a time such that the optionee (upon exercise of the option) would be eligible to receive the consideration payable by ALZA to holders of Stock if and to the extent such option is exercised in a timely 11 manner. Notwithstanding any provision of the Option Agreement to the contrary, each outstanding option shall expire on the fifth business day immediately preceding the closing of the exercise of the Purchase Option. 12. RIGHTS AS STOCKHOLDER. An optionee shall have no rights as a stockholder with respect to any shares covered by an option until the date of exercise in accordance with the provisions of this Plan and the applicable Option Agreement. Subject to Sections 9, 10 and 11, no adjustment shall be made for dividends or other rights for which the record date is prior to the date of exercise. 13. TERMINATION OR AMENDMENT. The Board may at any time terminate or amend this Plan except that no amendment or termination of this Plan shall (i) adversely affect any rights of an optionee under the terms of an option granted before the date of such termination or amendment, (ii) increase the number of shares of Stock which may be covered by options under this Plan, except under Section 9 above or with the approval of the stockholders of the Company, or (iii) extend the Termination Date of this Plan. In addition, the Board may not otherwise amend or alter the Plan to increase materially the benefits accruing to optionees under the Plan or to modify materially the requirements as to eligibility for participation in the Plan without the approval of the stockholders of the Company if the Board deems such stockholder approval appropriate to comply with Section 16b-3 under the Securities Exchange Act of 1934 as in effect from time to time. Notwithstanding the foregoing, except as may be necessary to 12 conform with changes in the Code, the Employee Retirement Income Security Act, or the rules thereunder, the Plan shall not be amended more than once every six months if any such amendment would have the effect of amending in any way the provisions set forth in Section 5(b) of the Plan relating to automatic option grants to Eligible Directors. 14. PARENT AND SUBSIDIARY. As used in this Plan, "parent" and "subsidiary" mean any corporation in an unbroken chain of corporations which includes the Company if, at the relevant time, each of the corporations other than the last corporation in the chain owns stock possessing more than fifty percent (50%) of the total combined voting power of all classes of stock of one of the other corporations in the chain. 15. GOVERNING LAW. This Plan and the rights of all persons under this Plan shall be construed in accordance with and under applicable provisions of the Code and the laws of the State of California. * * * * * The Board and the Company's then sole stockholder adopted the Plan on March 30, 1993. The Board amended and restated the Plan (subject to stockholder approval) on March 3, 1995 and the stockholders approved the amendments to and restatement of the Plan on May 11, 1995. 13 EX-10.6 9 EXH. 10.6 EXECUTIVE DEFERRAL PLAN EXHIBIT 10.6 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- Article 1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Article 2 Eligibility . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1 Selection By Committee. . . . . . . . . . . . . . . . . . . . . 5 2.2 Plan Agreement, Election Form and Beneficiary Election Form . . 5 Article 3 Commitments, Interest and Participation . . . . . . . . . . . . 5 3.1 Participant Deferral Amount Commitment. . . . . . . . . . . . . 5 3.2 Deferral Amounts. . . . . . . . . . . . . . . . . . . . . . . . 5 3.3 Pre-Distribution Crediting Rate . . . . . . . . . . . . . . . . 6 3.4 Distribution Rate . . . . . . . . . . . . . . . . . . . . . . . 6 3.5 Termination of Participation. . . . . . . . . . . . . . . . . . 6 3.6 Unforeseeable Financial Emergency . . . . . . . . . . . . . . . 6 Article 4 7th Year Distribution . . . . . . . . . . . . . . . . . . . . . 7 4.1 7th Year Distribution . . . . . . . . . . . . . . . . . . . . . 7 4.2 Timing of Election. . . . . . . . . . . . . . . . . . . . . . . 7 4.3 Payment of Distribution . . . . . . . . . . . . . . . . . . . . 7 4.4 Secondary Account Balance . . . . . . . . . . . . . . . . . . . 7 Article 5 Retirement Benefit. . . . . . . . . . . . . . . . . . . . . . . 8 5.1 Retirement Benefit. . . . . . . . . . . . . . . . . . . . . . . 8 5.2 Rate of Interest for Retirement Benefit; Vesting. . . . . . . . 8 5.3 Commencement of Retirement Benefits . . . . . . . . . . . . . . 8 5.4 Death Prior to Completion of Retirement Benefits. . . . . . . . 8 5.5 Withdrawal Election . . . . . . . . . . . . . . . . . . . . . . 8 Article 6 Survivor Benefit. . . . . . . . . . . . . . . . . . . . . . . . 9 6.1 Survivor Benefit. . . . . . . . . . . . . . . . . . . . . . . . 9 6.2 Amount of Survivor Benefit. . . . . . . . . . . . . . . . . . . 9 6.3 Benefit Period. . . . . . . . . . . . . . . . . . . . . . . . . 9 6.4 Eligibility Requirements for Survivor Benefit . . . . . . . . . 9 - -------------------------------------------------------------------------------- -i- THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 7 Termination Benefit . . . . . . . . . . . . . . . . . . . . . . 10 7.1 Termination Benefit . . . . . . . . . . . . . . . . . . . . . . 10 7.2 Primary Account Balance . . . . . . . . . . . . . . . . . . . . 10 7.3 Secondary Account Balance . . . . . . . . . . . . . . . . . . . 10 7.4 Payment of Benefit. . . . . . . . . . . . . . . . . . . . . . . 10 Article 8 Disability Benefit. . . . . . . . . . . . . . . . . . . . . . . 11 8.1 Amount of Disability Benefit. . . . . . . . . . . . . . . . . . 11 Article 9 Beneficiary Designation . . . . . . . . . . . . . . . . . . . . 11 9.1 Beneficiary Designation . . . . . . . . . . . . . . . . . . . . 11 9.2 Change of Beneficiary Designation . . . . . . . . . . . . . . . 11 9.3 No Participant Designation. . . . . . . . . . . . . . . . . . . 11 9.4 Effect of Payment . . . . . . . . . . . . . . . . . . . . . . . 11 Article 1O Plan Termination, Amendment or Modification. . . . . . . . . . 12 10.1 Plan Termination. . . . . . . . . . . . . . . . . . . . . . . . 12 10.2 Amendment or Modification . . . . . . . . . . . . . . . . . . . 12 10.3 Change in Control . . . . . . . . . . . . . . . . . . . . . . . 12 10.4 Effect of Payment . . . . . . . . . . . . . . . . . . . . . . . 12 Article 11 Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 11.1 Establishment of the Trust; Premium . . . . . . . . . . . . . . 13 11.2 Interrelationship of the Plan and the Trust . . . . . . . . . . 13 Article 12 Claims Procedures. . . . . . . . . . . . . . . . . . . . . . . 13 12.1 Presentation of Claim . . . . . . . . . . . . . . . . . . . . . 13 12.2 Notification of Decision. . . . . . . . . . . . . . . . . . . . 13 12.3 Review of a Denied Claim. . . . . . . . . . . . . . . . . . . . 14 12.4 Decision on Review. . . . . . . . . . . . . . . . . . . . . . . 14 12.5 Legal Action. . . . . . . . . . . . . . . . . . . . . . . . . . 14 - -------------------------------------------------------------------------------- -ii- THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 13 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . 15 13.1 Unsecured General Creditor. . . . . . . . . . . . . . . . . . . 15 13.2 Nonassignability. . . . . . . . . . . . . . . . . . . . . . . . 15 13.3 Not a Contract of Employment. . . . . . . . . . . . . . . . . . 15 13.4 Protective Provisions . . . . . . . . . . . . . . . . . . . . . 15 13.5 Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 13.6 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 16 13.8 Validity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13.9 Notice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13.10 Successors. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 13.11 Spouse's Interest . . . . . . . . . . . . . . . . . . . . . . . 16 13.12 Distribution in the Event of Taxation . . . . . . . . . . . . . 17 13.13 Incompetent . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Article 14 Administration . . . . . . . . . . . . . . . . . . . . . . . . 17 14.1 Committee Duties. . . . . . . . . . . . . . . . . . . . . . . . 17 14.2 Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 14.3 Binding Effect of Decision. . . . . . . . . . . . . . . . . . . 18 14.4 Indemnity of Committee. . . . . . . . . . . . . . . . . . . . . 18 14.5 Company Information . . . . . . . . . . . . . . . . . . . . . . 18 14.6 Change in Payments. . . . . . . . . . . . . . . . . . . . . . . 18 - -------------------------------------------------------------------------------- -iii- THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THERAPEUTIC DISCOVERY CORPORATION EXECUTIVE DEFERRAL PLAN Purpose The primary purpose of the Executive Deferral Plan (the "EDP" or "Plan") of Therapeutic Discovery Corporation, a Delaware corporation ("TDC") is to help attract and maintain high caliber management. It is the intention of TDC that the Plan be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974, as amended. Article I Definitions For purposes hereof, unless otherwise clearly apparent from the context, the following phrases or terms shall have the following indicated meanings: 1.1 "Affiliate" shall mean any corporation or entity in which TDC has at least twenty-five percent (25%) of the voting control through ownership of equity securities or otherwise. 1.2 "Base Rate" shall be the greater of ten percent (10%) or Moody's Seasoned Corporate Bond Rate, measured on the November 1 prior to that Plan Year. 1.3 "Beneficiary" shall mean the person or persons, or the entity designated by a Participant to receive any benefits payable under this Plan upon the death of such Participant. 1.4 "Beneficiary Designation Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to designate one or more Beneficiaries. 1.5 "Bonus Award" shall mean any cash bonus awarded to the Participant under the provisions of any of the Company's bonus plans relating to the calendar year prior to the Plan Year. Such Bonus Award shall be credited to the Participant's EDP Account as of January 1 of the Plan Year. - -------------------------------------------------------------------------------- 1 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.6 "Change in Control" shall mean the first to occur of the following events: a) Any "person" (as that term is used in Section 13 and 14(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act")) is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act), directly or indirectly, of 50% or more of TDC's capital stock entitled to vote in the election of directors (however, the option of ALZA Corporation ("ALZA") to acquire the shares of TDC (the "Purchase Option") shall not be deemed, for purposes of this Plan, to be a "Change of Control," unless or until the Purchase Option is exercised.); b) During any period of two consecutive years, individuals who at the beginning of such period constitute the board of directors of TDC cease for any reason to constitute at least a majority thereof, unless the election or the nomination for election by TDC's stockholders of each new director was approved by a vote of at least three-quarters of the directors still in office of TDC who were directors at the beginning of the period; c) Any consolidation or merger of TDC, other than a merger of TDC in which the holders of the common stock of TDC immediately prior to the merger hold more than 50% of the common stock of the surviving corporation immediately after the merger; d) The stockholders of TDC approve any plan or proposal for the liquidation or dissolution of TDC; or e) Substantially all of the assets of TDC are sold or otherwise transferred to parties that are not within a "controlled group of corporations" (as defined in Section 1563 of the Internal Revenue Code of 1986, as amended) in which TDC is a member. 1.7 "Committee" shall mean the administrative committee appointed to manage and administer the Plan in accordance with its provisions pursuant to Article 14, which Committee shall be the Compensation Committee of the Board of Directors unless otherwise determined by the Board of Directors. 1.8 "Company" shall mean Therapeutic Discovery Corporation, a Delaware corporation, and any subsidiary or Affiliate thereof. 1.9 "Deferral Amounts" shall mean the amount of Salary and Bonus Award for a calendar year deferred by a Participant pursuant to the election made on the Election Form. - -------------------------------------------------------------------------------- 2 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.10 "Disability" shall mean a period of disability during which a Participant qualifies for benefits under the Company's group long-term disability plan or, if a Participant does not participate in such plan, a period of disability during which the Participant would have qualified for benefits under such plan had the Participant been a participant in such plan, as determined in the sole discretion of the Committee. 1.11 "EDP Account" shall mean the account comprised of the Participant's Deferral Amounts and interest credited thereon, which shall be equal to the sum of the Primary Account Balance and the Secondary Account Balance. EDP Accounts shall be maintained for each Participant. A Participant's EDP Account shall be utilized solely as a device for the measurement and determination of the amounts to be paid to the Participant pursuant to this Plan. A Participant's EDP Account shall not constitute or be treated as a trust fund. 1.12 "Election Form" shall mean the form established from time to time by the Committee that a Participant completes, signs and returns to the Committee to make an election under the Plan. 1.13 "Moody's Seasoned Corporate Bond Rate" shall mean the applicable "Seasoned Corporate Bond" rate, which is an arithmetic average of yields of representative bonds, including industrials, public utilities, Aaa, Aa, A and Baa bonds as published by Moody's Investors Service, Inc. or any successor to that service. 1.14 "Participant" shall mean directors of the Company and senior level management who are selected for participation in the Plan by the Committee and who elect to participate by executing and delivering to the Committee the Plan Agreement, the Election Form and the Beneficiary Designation Form. 1.15 "Plan" shall mean the Executive Deferral Plan of the Company, which shall be defined by this instrument and by the Plan Agreement, as may be amended from time to time. 1.16 "Plan Agreement" shall mean a written agreement, as may be amended from time to time, which is entered into by and between the Company and a Participant. Each Plan Agreement executed by a Participant shall provide for the entire benefit to which such Participant is entitled to under the Plan, and the Plan Agreement bearing the latest date of acceptance by the Committee shall govern such entitlement. 1.17 "Plan Year" shall mean calendar year 1996 and subsequent calendar years thereafter. 1.18 "Preferred Rate" shall mean 125% of the Base Rate. The Preferred Rate for the 1996 Plan Year shall be twelve and one half percent (12.5%). - -------------------------------------------------------------------------------- 3 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.19 "Primary Account Balance" shall equal the Participant's Deferral Amounts, plus compounded interest credited yearly thereon at the Standard Rate, all as determined in accordance with Section 3.3 below. 1.20 "Retirement" and "Retire" shall mean termination of employment or severance of a directorship with the Company (i) on or after the attainment of age sixty-five (65) or (ii) at a time when the sum of age at last birthday ("Rule of 70") plus Years of Service equal 70 or more. 1.21 "Salary" shall mean annual salaries and wages before 401(k) and other qualified plan reductions and amounts deferred pursuant to this Plan excluding, however, moving allowances, participation in clinical studies, income arising from stock option plans, imputed income due to fringe benefits, bonuses (including Bonus Awards) or similar items paid to the Participant. 1.22 "Secondary Account Balance" shall equal that portion of the cumulative interest on the EDP Account, determined in accordance with Section 3.3 below, that is equal to the sum of (i) the difference between the interest on the Primary Account accrued at the Preferred Rate and the interest on the Primary Account accrued at the Standard Rate, and (ii) the yearly interest at the Preferred Rate on the Secondary Account itself. 1.23 "Standard Rate" shall mean fifty percent (50%) of the Preferred Rate. The Standard Rate for the 1996 Plan Year shall be six and one quarter percent (6.25%). 1.24 "Termination of Employment" shall mean the ceasing of employment or directorship with the Company, voluntarily or involuntarily, for any reason other than Retirement, Disability, or death. If a Participant is both an employee and a Director, a Termination of Employment shall occur only upon the termination of the last position held. 1.25 "Trust" shall mean the trust that may be established by the Company, in its sole discretion, to which assets may be transferred to for the purpose of paying benefits under this Plan. 1.26 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency that is caused by an event beyond the control of the Participant that would result in severe financial hardship to the Participant resulting from (i) a sudden and unexpected illness or accident of the Participant or a dependent of the Participant, (ii) a loss of the Participant's property due to casualty, or (iii) such other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined in the sole discretion of the Committee." - -------------------------------------------------------------------------------- 4 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1.27 "Years of Service" shall mean the total number of years in which a Participant has been employed by the Company and has completed in each of those years 1,000 hours of service. For purposes of this definition only, a year of employment shall be a 365 day period (or 366 day period in the case of a leap year) that for the first year of employment commences on the employee's date of hiring and that, for any subsequent year, commences on an anniversary of that hiring date. For a non-employee Director Participant, "Years of Service" shall mean service as a Director during any part of a calendar year. Article 2 Eligibility 2.1 SELECTION BY COMMITTEE. The Committee shall have the sole discretion to determine the individuals who, in accordance with the purpose of the Plan, will be eligible to become Participants. 2.2 PLAN AGREEMENT, ELECTION FORM AND BENEFICIARY ELECTION FORM. As a condition of participation, each Participant shall complete, execute and return to the Committee prior to the commencement of the Plan Year for which the Participant is to commence participation in the Plan, a Plan Agreement, an Election Form and a Beneficiary Designation Form. In subsequent Plan Years, a Participant shall complete, execute and return to the Committee an Election Form. Article 3 Commitments, Interest and Participation 3.1 PARTICIPANT DEFERRAL AMOUNT COMMITMENT. Pursuant to the Election Form delivered to the Committee prior to the commencement of a Plan Year, the Participant may elect for each Plan Year to defer up to fifty percent (50%) of his/her Salary and up to one hundred percent (100%), in each case in full percentage points, of his/her Bonus Award, subject to the limitations of Section 3.2 below. 3.2 DEFERRAL AMOUNTS. If Salary is deferred by a Participant, the minimum rate of deferral shall be $200 per month ($2,400/calendar year) Deferral Amounts must be in increments of one hundred dollars ($100). Bonus Awards may be deferred independently of Salary deferrals. - -------------------------------------------------------------------------------- 5 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 3.3 PRE-DISTRIBUTION CREDITING RATE. Subject to the provisions and limitations of the Plan, interest shall be credited at the Preferred Rate on the EDP Account balance annually on the last day of each Plan Year as though all Deferral Amounts, if any, for that Plan Year were made on July 1 of the Plan Year. Despite the foregoing, in the event of a Participants death, Retirement or Termination of Employment prior to the last day of a Plan Year, interest for that Plan Year shall be credited on the EDP Account balance up to the day prior to the Participant's death, Retirement or Termination of Employment as though all Deferral Amounts, if any, for that Plan Year were made on January 1 of the Plan Year. 3.4 DISTRIBUTION RATE. If, pursuant to the terms of the Plan, a Participant or Beneficiary is entitled to receive his or her benefit (other than the 7th Year Distribution) in installments, the crediting rate on the undistributed portion of the benefits for all periods following the last day of the month prior to the date upon which the Participant is no longer an employee or Director shall be one of two fixed rates as specified in the Plan. The "Preferred Distribution Rate" shall be composed of the average Preferred Rate for the last five (5) Plan Years prior to the commencement of the installment payments, including the Plan Year in which the Participant terminates employment, or if the Participant has participated in the Plan for less than five (5) Plan Years, the average of such rates for the number of Plan Years that the Participant has participated in the Plan. The "Standard Distribution Rate" shall be composed of the average Standard Rate for the last five (5) Plan Years prior to the commencement of the installment payments, including the Plan Year in which the Participant terminates employment, or if the Participant has participated in the Plan for less than five (5) Plan Years, the average of such rates for the number of Plan Years that the Participant has participated in the Plan. 3.5 TERMINATION OF PARTICIPATION. A Participant who remains an employee or director of the Company may not terminate participation in the Plan for any reason other than those outlined in Section 3.6, Article 5, Article 6, Article 7, Article 8 or Section 10.1. 3.6 UNFORESEEABLE FINANCIAL EMERGENCY. In the case of Unforeseeable Financial Emergency, the Committee may, at its discretion, allow the Participant to discontinue deferrals, terminate participation or receive a payout from the Plan. The amount of such payout shall be at the discretion of the Committee, provided that such payout shall not exceed the lesser of (i) the Participant's EDP Account balance, or (ii) the amount reasonably needed to satisfy the Unforeseeable Financial Emergency. - -------------------------------------------------------------------------------- 6 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 4 7th Year Distribution 4.1 7TH YEAR DISTRIBUTION. Except as provided in this Article 4, no distribution shall be made to a Participant or his or her Beneficiary under the Plan until death, Retirement, Disability, Termination of Employment, or Unforeseeable Financial Emergency. In connection with each election to defer an annual Deferral Amount (as provided in Section 4.2 below), a Participant may elect to receive a future "7th Year Distribution" from the Plan with respect to that annual Deferral Amount. 4.2 TIMING OF ELECTION. Prior to December 31 of the Plan Year immediately preceding the Plan Year for which a deferral election is being made, the Participant shall elect to: a) receive that Deferral Amount plus interest (as specified below) as a 7th Year Distribution, or b) leave that Deferral Amount in the EDP Account until such time as distributions are required by the other provisions of the Plan. Such election shall be made on the Election Form. If the Participant chooses to receive the 7th Year Distribution, he/she shall receive from the EDP Account an amount equal to the Primary Account Balance as of the last day of the Plan Year that is seven years after the last day of the calendar year prior to the first Plan Year in which he or she commences participation in the Plan. 4.3 PAYMENT OF DISTRIBUTION. The payment shall be made in a lump sum within 90 days of the last day of the Primary Account Balance measurement date provided in Section 4.2 above. 4.4 SECONDARY ACCOUNT BALANCE. If the Primary Account Balance is fully distributed in accordance with this Article 4, the Secondary Account Balance shall constitute the entire EDP Account and shall be paid in accordance with the terms and provisions of this Plan. - -------------------------------------------------------------------------------- 7 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 5 Retirement Benefit 5.1 RETIREMENT BENEFIT. A Participant who Retires shall become eligible to receive, in accordance with this Article, his or her EDP Account (the "Retirement Benefit"). 5.2 RATE OF INTEREST FOR RETIREMENT BENEFIT; VESTING. Upon a Participant's Retirement, the interest on his/her unpaid EDP Account will be based on the Preferred Distribution Rate. If it has not already done so, a Participant's Secondary Account Balance shall vest upon his or her Retirement. 5.3 COMMENCEMENT OF RETIREMENT BENEFITS. Retirement Benefits shall be paid over a fifteen (15) year period, payable annually. Other methods of payment shall be at the sole discretion of the Committee. The initial annual Retirement Benefit payment shall commence within thirty (30) days of actual Retirement. All subsequent annual payments shall be made prior to February 28 of each calendar year thereafter until the Participant's EDP Account balance is paid in full. 5.4 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFITS. If a retired Participant dies before the applicable Retirement Benefit is paid in full, the Participant's unpaid Retirement Benefit payments shall continue and be paid to that Participant's Beneficiary. 5.5 WITHDRAWAL ELECTION. A Participant who is eligible to and is receiving a Retirement Benefit under the Plan may elect, at any time, to withdraw the then remaining unpaid portion of his or her EDP Account balance less a 10% withdrawal penalty (the net amount shall be referred to as the "Withdrawal Amount"). No partial withdrawals of that balance shall be allowed. The Participant shall make this election by giving the Committee advance written notice of the election in a form determined from time to time by the Committee. The penalty shall be equal to 10% of the Participant's remaining EDP Account Balance determined immediately prior to the withdrawal. The Participant shall be paid the Withdrawal Amount within 60 days of his or her election. Once the Withdrawal Amount is paid, the Participant's participation in the Plan shall terminate and the Participant shall not be eligible to participate in the Plan in the future. - -------------------------------------------------------------------------------- 8 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 6 Survivor Benefit 6.1 SURVIVOR BENEFIT. If a Participant dies before Retirement, Termination of Employment or a Disability, the Company will pay the benefit described in this Article (the "Survivor's Benefit") to the designated Beneficiary of the Participant, in lieu of the Retirement Benefits. 6.2 AMOUNT OF SURVIVOR BENEFIT. The Survivor Benefit shall equal the existing EDP Account Balance at the time of death. 6.3 BENEFIT PERIOD. The Survivor Benefit shall be paid in a lump sum or over a period of time not to exceed 15 years, with interest credited on the unpaid balance at the Standard Distribution Rate, as follows: Balance of EDP Account Payment ------------------------ ----------- Up to $100,000 One Lump Sum $100,001 - $250,000 5 Years $250,001 - $500,000 10 Years $500,001 or More 15 Years The Committee shall have the sole discretion to decide the number of benefit payments. The lump sum payment, or the initial installment payment, of the Survivor Benefit shall commence within ninety (90) days of the Participant's death. Any subsequent annual installment payments shall be made prior to February 28 of each calendar year thereafter until the Participant's EDP Account balance is paid in full. 6.4 ELIGIBILITY REQUIREMENTS FOR SURVIVOR BENEFIT. The obligation of the Company to pay the Survivor Benefit to any Beneficiary shall exist only if: a) at the time of death, the Participant (i) was employed by the Company or was a director of the Company, (ii) was on an authorized leave of absence, or (iii) was absent from employment due to Disability, and, in each such case, had not yet begun receiving the Retirement Benefit; and b) proof of death, in such form as reasonably deemed acceptable by the Committee, is furnished. - -------------------------------------------------------------------------------- 9 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 7 Termination Benefit 7.1 TERMINATION BENEFIT. The Participant who for any reason experiences a Termination of Employment prior to his or her Retirement, death or Disability shall be entitled to a Termination Benefit in accordance with this Article. 7.2 PRIMARY ACCOUNT BALANCE. The Participant terminating at any time shall be entitled to his or her Primary Account Balance. 7.3 SECONDARY ACCOUNT BALANCE. The terminating Participant shall be entitled to the vested portion of his or her Secondary Account Balance in accordance with the vesting schedule contained below, which describes the vesting of the accrued interest on each annual Deferral Amount: Vested Percentage of Accrued Interest With Respect to Each Annual Deferral Amount in Date of Termination Secondary Account Balance ------------------- ------------------------- Prior to the beginning of the eighth Plan Year following the Plan Year in which an Annual Deferral Amount is Deferral 0% On or after the beginning of the eighth Plan Year following the Plan Year in which an Annual Deferral Amount is Deferred 100% Unvested Secondary Account Balances are forfeited at the date of Termination of Employment. 7.4 PAYMENT OF BENEFIT. Payment of the Primary Account Balance and the Secondary Account balance shall be made in a lump sum within ninety (90) days of the Participant's Termination of Employment. - -------------------------------------------------------------------------------- 10 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 8 Disability Benefit 8.1 AMOUNT OF DISABILITY BENEFIT. In the case of the Disability of the Participant, the Committee may, at anytime during the Disability period and in its sole discretion, allow the Participant to discontinue deferrals and to continue to be eligible for benefits under Articles 4, 5, 6 or 7 (in accordance with those Articles), or terminate participation and receive a "Disability Benefit" in accordance with this Article 8. The amount of the Disability Benefit shall be equal to the Participant's existing EDP Account balance, as of the date the Committee makes a determination to terminate the Participant's participation in the Plan. The Disability Benefit payout shall be at the discretion of the Committee, provided that such payout shall begin within ninety (90) days of such determination and shall not exceed 15 years in total. The unpaid balance shall be credited with interest at the Standard Distribution Rate from the date of the determination through completion of payout. Article 9 Beneficiary Designation 9.1 BENEFICIARY DESIGNATION. Each Participant shall have the right, at any time, to designate any person or persons as Beneficiary or Beneficiaries (both principal as well as contingent) to whom benefits under this Plan shall be paid in the event of the Participant's death prior to complete distribution of the benefits due under this Plan. 9.2 CHANGE OF BENEFICIARY DESIGNATION. Any Beneficiary designation may be changed by a Participant at any time by filing a new Beneficiary Designation Form with the Committee and shall become effective only when received, accepted and acknowledged by the Company in writing. The filing and acceptance of a new Beneficiary Designation Form will cancel all Beneficiary Designations previously filed. The Committee shall be entitled to rely on the last designation filed by the Participant prior to death. Despite the foregoing, if the Participant names someone other than his or her spouse as a Beneficiary, a spousal consent, in the form designated by the Committee, must be signed by that Participant's spouse and returned to the Committee. 9.3 NO PARTICIPANT DESIGNATION. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant, or die prior to complete distribution of the Participant's benefits, then the Participant's designated Beneficiary shall be deemed to be the surviving spouse. If the Participant has no surviving spouse, the benefits remaining under the Plan shall be payable to the Participant's estate. 9.4 EFFECT OF PAYMENT. The payment of benefits under the Plan to the deemed Beneficiary shall completely discharge the Company's obligations under this Plan. - -------------------------------------------------------------------------------- 11 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 10 Plan Termination, Amendment or Modification 10.1 PLAN TERMINATION. The Company reserves the right to terminate the Plan at any time. Upon termination of the Plan, the Participants' then existing EDP Accounts, including interest earned through the date of such termination, shall be paid out as if each Participant Retired on the date of termination. Prior to a Change in Control, the Company reserves the right, at its sole discretion and notwithstanding any elections made by the Participant, to pay such benefits in a lump sum or in annual installments for up to 15 years, with interest credited on the unpaid balance using the Preferred Distribution Rate. The termination of the Plan shall not adversely affect any Participant or Beneficiary who has become entitled to the payment of any benefits under the Plan as of the date of termination; provided, however, that the Company shall have the right to pay any remaining EDP Account balance in a lump sum. 10.2 AMENDMENT OR MODIFICATION. The Company may, at any time, amend or modify the Plan in whole or in part, provided, however, that no amendment or modification shall be effective to decrease or restrict any EDP Account balance, calculated as if the Participant experienced a Termination of Employment as of the effective date of the amendment or modification, or if the Participant was eligible to Retire, the Participant had Retired as of the effective date of the amendment or modification. The amendment or modification of the Plan shall not affect any Participant or Beneficiary who has become entitled to the payment of benefits under the Plan as of the date of the amendment or modification, provided that the Committee has the right to make a lump sum payment of all remaining balances. 10.3 CHANGE IN CONTROL. If a Change in Control occurs, a Participant shall immediately become vested in his or her Secondary Account Balance. If the Change of Control is due to the exercise of the Purchase Option by ALZA and the Participant becomes an employee of ALZA in connection with the Change of Control, then the Participant will no be deemed to have "Retired" or to have a "Termination of Employment" from the Company for purposes of this Plan, and this Plan will continue, with respect to such Participant, as an ALZA plan, subject to the approval of ALZA's Board of Directors. If (i) the Participant does not become an ALZA employee upon such Change of Control or (ii) the ALZA Board of Director does not approve the continuation of this Plan as an ALZA plan, then the Participant's EDP Account shall be paid to the Participant in three equal annual installments, the first within sixty days of the decision of the ALZA Board of Directors, or the last day of employment with the Company, whichever is applicable. Interest shall accrue at the Preferred Rate on all unpaid amounts. 10.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under Articles 5, 6, 7 or 8 of the Plan shall completely discharge all obligations to a Participant and his or her Beneficiaries under this Plan and the Participant's Plan Agreement shall terminate. - -------------------------------------------------------------------------------- 12 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 11 Trust 11.1 ESTABLISHMENT OF THE TRUST; PREMIUM. The Company may establish, in its sole discretion, the Trust and, if so established, shall at least annually transfer over to the Trust such assets as the Committee determines, in its sole discretion, are necessary to provide for some or all of the Company's future liabilities under the Plan. 11.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan and each Plan Agreement shall govern the rights of a Participant to receive distributions pursuant to the Plan. The provisions of the Trust, if the Trust is established, shall govern the rights of the Company, a Participant, a Participants' Beneficiary and the Company's creditors as to the assets of the Trust. The Company shall at all times remain liable to carry out its obligations under the Plan. The Company's obligations under the Plan may be satisfied with Trust assets distributed pursuant to the terms of the Trust. Article 12 Claims Procedures 12.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased Participant (such Participant or Beneficiary being referred to below as a "Claimant") may deliver to the Committee a written claim for a determination with respect to the amounts distributable to such Claimant from the Plan. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within 60 days after such notice was received by the Claimant. All other claims must be made within 180 days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant. 12.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's claim within 60 days of receipt of that claim, and shall notify the Claimant in writing: a) that the Claimant's requested determination has been made, and that the claim has been allowed in full; or that the Committee has reached a conclusion contrary, in whole or in part, to the Claimant's requested determination, and such notice must set forth in a manner calculated to be understood by the Claimant: (i) the specific reason(s) for the denial of the claim, or any part of it; (ii) the specific reference(s) to pertinent provisions of the Plan upon which such denial was based; - -------------------------------------------------------------------------------- 13 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (iii) a description of any additional material or information necessary for the Claimant to perfect the claim, and an explanation of why such material or information is necessary; and (iv) an explanation of the claim review procedure set forth in Section 12.3 below. 12.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from the Committee that a claim has been denied, in whole or in part, a Claimant (or the Claimant's duly authorized representative) may file with the Committee a written request for a review of the denial of the claim. Thereafter, but not later than 30 days after the review procedure began, the Claimant (or the Claimant's duly authorized representative): c) may review pertinent documents; d) may submit written comments or other documents; and/or e) may request a hearing, which the Committee, in its sole discretion, may grant. 12.4 DECISION ON REVIEW. The Committee shall render its decision on review promptly, and not later than 60 days after the filing of a written request for review of the denial, unless a hearing is held or other special circumstances require additional time, in which case the Committee's decision must be rendered within 120 days after such date. Such decision must be written in a manner calculated to be understood by the Claimant, and it must contain: d) specific reasons for the decision; e) specific reference(s) to the pertinent Plan provisions upon which the decision was based; and f) such other matters as the Committee deems relevant. 12.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of this Article 12 is a mandatory prerequisite to a Claimant's right to commence any legal action with respect to any claim for benefits under this Plan. - -------------------------------------------------------------------------------- 14 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Article 13 Miscellaneous 13.1 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs and successors shall have the status of general unsecured creditors of the Company, and the Plan constitutes a mere promise by the Company to make benefit payments in the future. 13.2 NONASSIGNABILITY. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate, alienate, or convey in advance of actual receipt, the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure, attachment, garnishment or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant or any other person, nor be transferable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. 13.3 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall not be deemed to constitute a contract of employment between the Company and the Participant, and the Participant (or Beneficiary) shall have no rights against the Company except as may otherwise be specifically provided herein. Such employment is acknowledged to be an "at will" employment relationship that can be terminated at any time for any reason, with or without cause, unless expressly provided in a written employment agreement. Moreover, nothing in this Plan shall be deemed to give a Participant the right to be retained in the service of the Company or to interfere with the right of the Company to discipline or discharge him at any time. 13.4 PROTECTIVE PROVISIONS. A Participant will cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits hereunder, and by taking such physical examinations as the Company may deem necessary, and taking such other action as may be requested by the Company. 13.5 TERMS. Whenever any words are used herein in the masculine, they shall be construed as though they were used in the feminine in all cases where they would so apply; and wherever any words are used herein in the singular or in the plural, they shall be construed as though they were used in the plural or in the singular, as the case may be, in all cases where they would so apply. - -------------------------------------------------------------------------------- 15 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 13.6 CAPTIONS. The captions of the articles, sections and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 13.7 GOVERNING LAW. The provisions of this Plan shall be construed and interpreted according to the laws of the State of California. 13.8 VALIDITY. In case any provision of this Plan shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal and invalid provision had never been inserted herein. 13.9 NOTICE. Any notice or filing required or permitted to be given to the Committee under this Plan shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail or facsimile transmission, to: Therapeutic Discovery Corporation Executive Deferral Plan Committee 1375 California P.O. Box 10051 Palo Alto, CA 94303-0806 Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. 13.10 SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Company and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise, acquire all, or substantially all, of the business and assets of the Company, and successors or any such corporation or other business entity. 13.11 SPOUSE'S INTEREST. Interest in the benefits hereunder of a spouse of a Participant who has predeceased the Participant shall automatically pass to the Participant and shall not be transferable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. - -------------------------------------------------------------------------------- 16 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 13.12 DISTRIBUTION IN THE EVENT OF TAXATION. If, for any reason, all or any portion of a Participant's benefit under this Plan becomes taxable to the Participant prior to receipt, a Participant may petition the Committee for a distribution of assets sufficient to meet the Participant's tax liability (including additions to tax, penalties and interest). Upon the grant of such a petition, which grant shall not be unreasonably withheld, the Company shall distribute to the Participant funds in an amount equal to that Participant's federal, state and local tax liability associated with such taxation (which amount shall not exceed a Participant's accrued benefit under the Plan), which liability shall be measured by using that Participant's then current highest federal, state and local marginal tax rate, plus the rates or amounts for the applicable additions to tax, penalties and interest. If the petition is granted, the tax liability distribution shall be made within 90 days of the date when the Participant's petition is granted. Such a distribution shall affect and reduce the benefits to be paid under this Plan. 13.13 INCOMPETENT. In the event that it shall be found upon evidence satisfactory to the Committee that any Participant or Beneficiary to whom a benefit is payable under this Plan is unable to care for his or her affairs because of illness or accident, any payment due (unless prior claim had been made by a duly authorized guardian or other legal representative) may be paid, upon appropriate indemnification of the Committee, to the spouse of such person or any other person deemed by the Committee to have incurred expense for such Participant. Any such payment shall be a payment out of the account of the Participant and shall be a complete discharge of any liability of the Plan for such payment amount. Article 14 Administration 14.1 COMMITTEE DUTIES. This Plan shall be administered by the Committee. The Committee shall also have the authority to make, amend, interpret, and enforce all appropriate rules and regulations for the administration of this Plan and decide or resolve any and all questions including interpretations of this Plan, as may arise in connection with the Plan. 14.2 AGENTS. In the administration of this Plan, the Committee may, from time to time, employ agents and delegate to them such administrative duties as it sees fit and may from time to time consult with counsel who may be counsel to the Company. - -------------------------------------------------------------------------------- 17 THERAPEUTIC DISCOVERY CORPORATION Executive Deferral Plan (EDP) Master Plan Document - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 14.3 BINDING EFFECT OF DECISIONS. The decision or action of the Committee with respect to any question arising out of or in connection with the administration, interpretation, and application of the Plan, and the rules and regulations promulgated hereunder, shall be final and conclusive, and binding upon all persons having any interest in the Plan. 14.4 INDEMNITY OF COMMITTEE. The Company shall indemnify and hold harmless the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except in the case of willful misconduct by the Committee or any of its members. 14.5 COMPANY INFORMATION. To enable the Committee to perform its functions, the Company shall supply full and timely information to the Committee on all matters relating to the salary of all Participants, the date and circumstances of the retirement disability, death, or termination of employment of all Participants, and such other pertinent information as the Committee may reasonably require. 14.6 CHANGE IN PAYMENTS. The Committee shall have the power, at its sole discretion, to change the manner and timing of payments to be made to a Participant or Beneficiary from that which would be otherwise payable. IN WITNESS WHEREOF the Company has signed this Master Plan Document this_____day of________________,1996. Company: Therapeutic Discovery Corporation, a Delaware corporation By: /s/ Gary L. Neil -------------------------------- Its: President ------------------------------- - -------------------------------------------------------------------------------- 18 EX-10.7 10 EXH. 10.7 AGREEMENT AND AMENDMENT EXHIBIT 10.7 AGREEMENT REGARDING CERTAIN PRODUCTS AND ACTIVITIES AND AMENDMENT NO. 1 TO DEVELOPMENT AGREEMENT DATED AS OF MARCH 10, 1993 This Agreement Regarding Certain Products and Activities and Amendment No. 1 to Development Agreement dated as of March 10, 1993 (the "Agreement") is made effective as of October 25, 1994 by and between ALZA Corporation, a Delaware corporation ("ALZA"), and Therapeutic Discovery Corporation, a Delaware corporation ("TDC"). RECITALS WHEREAS, ALZA and TDC have entered into that certain Development Agreement dated as of March 10, 1993 (the "Development Contract") pursuant to which ALZA performs research and development activities on behalf of TDC directed toward the development of pharmaceutical products; and WHEREAS, ALZA is marketing, on its own behalf, a Testoderm-Registered Trademark- Testosterone Transdermal System, consisting of a multilayered patch for the delivery of testosterone ("Testoderm-Registered Trademark-"); and WHEREAS, Testoderm-Registered Trademark- has been approved in the United States by the United States Food and Drug Administration (the "FDA") for marketing only as a treatment for testosterone deficiency in hypogonadal males; and WHEREAS, TDC and ALZA desire that TDC fund a program, including further clinical testing, to be conducted by ALZA with respect to Testoderm-Registered Trademark-, with the goal of receiving clearance to market Testoderm-Registered Trademark- for the treatment of AIDS wasting syndrome (the "Testoderm-Registered Trademark- Development Program"); and WHEREAS, such an arrangement is not currently contemplated within the terms of the Development Contract; and WHEREAS, under the terms of the Development Contract, ALZA is currently performing research and development activities on behalf of TDC directed toward the development of an additional product or products for the delivery of testosterone (any such product is hereby referred to as a "Second Generation Testoderm-Registered Trademark- Product"); and WHEREAS, ALZA desires to expand the use of its drug delivery technologies to biotechnology, gene therapy and other areas and, to this end, would like to evaluate proprietary compounds without extensive business negotiations with the third party who owns the rights to such compounds before determining whether ALZA's drug delivery technologies will be useful with such compounds; and WHEREAS, TDC and ALZA desire that TDC fund such material evaluation activities, on a project-by-project basis; and WHEREAS, such an arrangement is not currently contemplated within the terms of the Development Contract: NOW, THEREFORE, in consideration of the foregoing and the agreements contained herein, ALZA and TDC hereby agree as follows: 1. FUNDING OF TESTODERM-REGISTERED TRADEMARK- DEVELOPMENT PROGRAM. In consideration of the royalty payments set forth in Section 4 of this Agreement, TDC hereby agrees to fund the Testoderm-Registered Trademark- Development Program in amounts as approved by TDC from time to time (the "Development Payments"). The Testoderm-Registered Trademark- Development Program shall be set forth in a work plan prepared by ALZA which is subject to the approval of TDC, and the parties agree to revise such work plan from time to time so that it remains a faithful best estimate of the work to be done under the Testoderm-Registered Trademark- Development Program as agreed upon by ALZA and TDC. TDC shall not be obligated to make Development Payments in excess of those expressly approved by TDC and ALZA shall not be obligated to perform work on the Testoderm-Registered Trademark- Development Program which would result in Development Payments exceeding amounts expressly approved by TDC. ALZA and TDC agree that the Development Payments shall be made on the same basis as "Development Cost" (as defined in the Development Contract) and shall constitute "Development Costs" within the meaning of Sections 4.2, 5.1 and 5.3 of the Development Contract and that the funding of the Testoderm-Registered Trademark- Development Program constitutes an activity undertaken pursuant to the Development Contract within the meaning of Section 10.1 thereof; as such, Development Payments are intended to be included as part of the "total amount paid by this corporation under the Development Contract" for purposes of Article FIFTH, Section (A)(10)(c) of the Restated Certificate of Incorporation of TDC, as part of "expenditure[s] pursuant to the Development Contract" for purposes of Article FIFTH, Section (A)(2) of the Restated Certificate of Incorporation of TDC, as part of "the total amounts paid by this corporation pursuant to the Development Contract" for purposes of Article FIFTH, Section (A)(14) of the Restated Certificate of Incorporation of TDC, and as part of "any additional amounts paid by this corporation pursuant to the Development Contract" for purposes of Article FIFTH, Section (A)(5) of the Restated Certificate of Incorporation of TDC. Notwithstanding the foregoing, TDC and ALZA confirm and agree that Testoderm-Registered Trademark- shall not be considered a "Product" within the meaning of the Development Contract, the Technology License Agreement between ALZA and TDC dated as of March 10, 1993 (the "Technology License Agreement") and the License Option Agreement between ALZA and TDC dated as of March 10, 1993 (the "License Option Agreement"). 2 2. DEVELOPMENT OF SECOND GENERATION TESTODERM-REGISTERED TRADEMARK- PRODUCT. Except with respect to the royalty payments set forth in Section 4 of this Agreement, TDC and ALZA hereby confirm that the Second Generation Testoderm-Registered Trademark- Product is being developed by ALZA for TDC under, and the relationship of the parties with respect to the Second Generation Testoderm-Registered Trademark- Product is governed by the terms of, the Development Contract, the Technology License Agreement and the License Option Agreement. 3. MATERIAL EVALUATION PROJECTS. (a) ACCEPTANCE OF MATERIAL EVALUATION PROJECTS. From time to time, ALZA will provide TDC with work plans and cost estimates for evaluations of identified proprietary compounds ("Material Evaluation Candidates"). Such evaluations will include the preparation of preliminary, abbreviated commercial assessments and an examination of technical feasibility. Within 45 days after ALZA provides TDC with such a recommendation for a Material Evaluation Candidate, TDC shall notify ALZA in writing of its acceptance or rejection of such Material Evaluation Candidate. Upon written acceptance of a Material Evaluation Candidate by TDC, such Material Evaluation Candidate shall be deemed to be a "Material Evaluation Project." (b) FUNDING OF MATERIAL EVALUATION PROJECTS. In consideration of the royalty payments set forth in Section 4 of this Agreement, TDC hereby hires ALZA to perform the Material Evaluation Projects and agrees to fund the Material Evaluation Projects in amounts to be approved by TDC from time to time (the "Project Payments"). The Material Evaluation Projects shall be set forth in work plans prepared by ALZA which are subject to the approval of TDC, and the parties agree to revise approved work plans from time to time so that they remain faithful best estimates of the work to be done under the Material Evaluation Projects as agreed upon by ALZA and TDC. TDC shall not be obligated to make Project Payments in excess of those expressly approved by TDC, and ALZA shall not be obligated to perform work on the Material Evaluation Projects which would result in Project Payments exceeding amounts expressly approved by TDC. ALZA and TDC agree that the Project Payments shall be made on the same basis as "Development Costs" (as defined in the Development Contract) and shall constitute "Development Costs" within the meaning of Sections 4.2, 5.1 and 5.3 of the Development Contract and that the funding of the Material Evaluation Projects constitutes an activity undertaken pursuant to the Development Contract within the meaning of Section 10.1 thereof; as such, Project Payments are intended to be included as part of the "total amount paid by this corporation under the Development Contract" for purposes of Article FIFTH, Section (A)(10)(c) of the Restated Certificate of Incorporation of TDC, as part of "expenditure[s] pursuant to the Development Contract" for purposes of Article FIFTH, Section (A)(2) of the Restated Certificate of Incorporation of TDC, as part of "the total amounts paid by this corporation pursuant to the Development Contract" for purposes 3 of Article FIFTH, Section (A)(14) of the Restated Certificate of Incorporation of TDC, and as part of "any additional amounts paid by this corporation pursuant to the Development Contract" for purposes of Article FIFTH, Section (A)(5) of the Restated Certificate of Incorporation of TDC. Notwithstanding the foregoing, TDC and ALZA confirm and agree that such Material Evaluation Projects are not "Products" within the meaning of the Development Contract, the Technology License Agreement and the License Option Agreement, unless and until accepted for development as a "Product" under the terms set forth in the Development Contract. 4. NEW SECTION 7.4A OF THE DEVELOPMENT CONTRACT. In consideration of the foregoing, a new Section 7.4A is hereby added to the Development Contract as follows: "7.4A ROYALTIES ON CERTAIN PRODUCTS AND ACTIVITIES. For purposes of this Section 7.4A only, capitalized terms not otherwise defined in this Agreement shall have the meanings ascribed to them in that certain Agreement Regarding Certain Products and Activities and Amendment No. 1 to Development Agreement (the "Amendment"), which Amendment is effective as of October 25, 1994. (a) TESTODERM-REGISTERED TRADEMARK-. In consideration of TDC's making Development Payments with respect to Testoderm-Registered Trademark- pursuant to the Amendment, upon receiving clearance from the FDA to market Testoderm-Registered Trademark- as a treatment for AIDS wasting syndrome, ALZA shall pay TDC royalties with respect to Testoderm-Registered Trademark- as follows: (i) up to a maximum of 5% of worldwide Net Sales of Testoderm-Registered Trademark- determined as follows: 1% of such Net Sales, plus an additional 0.1% of such Net Sales for each full one million dollars of Development Payments with respect to Testoderm-Registered Trademark- paid by TDC; plus (ii) up to a maximum of 50% of worldwide Sublicensing Revenues in respect of sales of Testoderm-Registered Trademark- determined as follows: 10% of such Sublicensing Revenues, plus an additional 1% of such Sublicensing Revenues for each full one million dollars of Development Payments with respect to Testoderm-Registered Trademark- paid by TDC. In determining payments due under this Section 7.4A(a), Net Sales and Sublicensing Revenues shall be reduced by the dollar amount of any license or similar payments made to third parties by ALZA or its Affiliates with respect to the sales of Testoderm-Registered Trademark-. In determining payments under this Section 7.4A(a) for any year, the amount of applicable Development Payments shall be determined as of December 31 of the preceding calendar year. (b) SECOND GENERATION TESTODERM-REGISTERED TRADEMARK- PRODUCT. If ALZA exercises its License Option with respect to the Second Generation 4 Testoderm-Registered Trademark- Product, ALZA shall pay TDC royalties as follows: (i) in any calendar quarter in which worldwide Net Sales of Testoderm-Registered Trademark- are greater than worldwide Net Sales of the Second Generation Testoderm-Registered Trademark- Product, then ALZA shall pay TDC royalties under the terms set forth in the License Agreement in the form attached as Exhibit A to the License Option Agreement and (ii) in any calendar quarter in which worldwide Net Sales of Testoderm-Registered Trademark- are less than worldwide Net Sales of the Second Generation Testoderm-Registered Trademark- Product, then ALZA shall pay TDC the royalties set forth in Section 7.4A(b)(i) PLUS the royalties set forth in Section 7.4A(a). Notwithstanding the terms of the License Option Agreement and the License Agreement in the form attached as Exhibit A thereto, ALZA and TDC hereby agree that any License Agreement entered into with respect to the Second Generation Testoderm-Registered Trademark- Product will reflect the foregoing revised royalty structure. (c) ROYALTIES IN CONNECTION WITH MATERIAL EVALUATION PROJECTS. In consideration of TDC making Project Payments with respect to Material Evaluation Projects pursuant to the Amendment, if any Material Evaluation Project results in an arrangement whereby the third party who holds the rights to the proprietary compound being studied funds the ongoing costs of a development program conducted by ALZA for a product incorporating such compound (a "Project Product"), ALZA shall pay TDC royalties with respect to each such Project Product as follows: (i) up to a maximum of 5% of worldwide Net Sales of such Project Product determined as follows: 2% of such Net Sales, plus an additional 0.1% of such Net Sales for each full one million dollars of Project Payments paid by TDC with respect to such Project Product; plus (ii) up to a maximum of 50% of worldwide Sublicensing Revenues with respect of sales of such Project Product determined as follows: 20% of such Sublicensing Revenues, plus an additional 1% of such Sublicensing Revenues for each full one million dollars of Project Payments paid by TDC with respect to such Project Product. If any Material Evaluation Project results in an arrangement whereby TDC funds the ongoing costs of a development program conducted by ALZA and TDC for a Project Product accepted for development as a "Product" under the terms set forth in the Development Contract, such Project Product shall in all respects be a "Product" within the meaning of the Development Contract, the Technology License Agreement and the License Option Agreement and, if ALZA exercises its License Option for such Project Product, ALZA shall pay TDC royalties for such Project Product under the terms set forth in the License Agreement in the form attached as Exhibit A to the License Option Agreement (and Project Payments with respect to such Project Product shall be included in Development Cost for purposes of 5 calculating the royalties due to TDC thereunder.) If any Material Evaluation Project results in a product development and commercialization arrangement other than an arrangement whereby either (i) the third party who owns the rights to the proprietary compound being studied, or (ii) TDC, funds the ongoing costs of a development program conducted by ALZA for a Project Product, ALZA and TDC agree to negotiate in good faith an alternative payment structure or other economic arrangement to compensate TDC for making Project Payments with respect to the Material Evaluation Project. In determining payments due under this Section 7.4A(c), Net Sales and Sublicensing Revenues shall be reduced by the dollar amount of any license or similar payments made to third parties by ALZA or its Affiliates with respect to sales of the relevant Project Product. In determining payments under this Section 7.4A(c) for any year, the amount of applicable Project Payments shall be determined as of December 31 of the preceding calendar year." ALZA and TDC hereby confirm and agree that the royalties or other payments to TDC described in Section 7.4A of the Development Contract, as amended by this Agreement, are intended to be included within the definition of "Royalties" as such term is defined in the Restated Certificate of Incorporation of TDC. 5. AMENDMENTS TO SECTIONS 7.6 OF THE DEVELOPMENT CONTRACT. Section 7.6 of the Development Contract is hereby amended so that each reference to "Section 7.4" is deleted and replaced with a reference to "Sections 7.4, 7.4A(a) and 7.4A(c)" and to add the words "Testoderm-Registered Trademark- and Project Product" after the term "Other Royalty-Bearing Product." 6. APPROVAL OF BOARDS OF DIRECTORS. ALZA and TDC represent and warrant, each to the other, that the foregoing amendments to the Development Contract have been approved by their respective Boards of Directors prior to execution of this Agreement. 7. INDEMNIFICATION. ALZA shall indemnify, defend and hold TDC harmless from and against any and all liabilities, claims, demands, damages, costs, expenses or money judgments rendered against TDC and its Affiliates (as defined in the Development Contract), which arise out of the use, design, labeling or manufacture, processing, packaging, sale or commercialization of Testoderm-Registered Trademark- by ALZA, its Affiliates (as defined in the Development Contract), subcontractors and sublicensees. TDC shall permit ALZA's attorneys, at ALZA's discretion and cost, to handle and control the defense of any claims or suits as to which TDC may be entitled to indemnity hereunder, and TDC agrees not to settle any such claims or suits without the prior written consent of ALZA. TDC shall give ALZA prompt notice in writing, in the manner set forth in Section 13.7 of the Development Contract, of any claim or 6 demand made against TDC for which TDC may be entitled to indemnity hereunder. TDC shall have the right to participate, at its own expense, in the defense of any such claim or demand to the extent it so desires. 8. MISCELLANEOUS. This Agreement shall terminate upon termination of the Development Contract. Except as otherwise expressly provided herein, the terms of the Development Contract, the Technology License Agreement and the License Option Agreement shall remain in full force and effect. This Agreement may not be amended except in a writing signed by both parties. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions remain in full force and effect; provided, however, that if a provision is stricken so as to significantly alter the economic arrangements of this Agreement, the Development Contract or the "Purchase Option" as defined in the Restated Certificate of Incorporation of TDC, the party adversely affected may terminate this Agreement upon 60 days' prior written notice to the other party. Neither party may assign its rights or obligations hereunder without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that ALZA may assign such rights and obligations hereunder to any person or entity with which ALZA is merged or consolidated or which purchases all or substantially all of the assets of ALZA. This Agreement shall be governed by the laws of the State of California as applied to residents of that state entering into contracts to be performed in that state. The headings set forth at the beginning of the various sections of this Agreement are for reference and convenience and shall not affect the meanings of the provisions of this Agreement. IN WITNESS WHEREOF, ALZA and TDC have caused this Agreement to be executed as of the date first set forth above by their duly authorized representatives. ALZA CORPORATION THERAPEUTIC DISCOVERY CORPORATION By: /s/ Peter D. Staple By: /s/ Gary L. Neil ----------------------------------- --------------------------------- Title: Vice President and General Counsel Title: President and Chief Executive Officer Date: March 27, 1996 Date: 27 March 1996 ----------------------------------- ------------------------------- 7 EX-27 11 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS INCLUDED IN ITEM I OF FORM 10-K DATED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1996 DEC-31-1996 11 75 1 0 0 87 0 0 88 19 0 0 0 0 69 88 0 8 0 0 100 0 0 (95) 0 0 0 0 0 (95) (12.25) (12.25)
-----END PRIVACY-ENHANCED MESSAGE-----