-----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, QTDjx3APRpS27KO0ONVD03sekEcWDMhl645endmYJ8ZB7kWamgF3b3hL8N5HY/fr 0kjb9D1h/KOIZ3QxHxysgQ== 0000891618-99-001302.txt : 19990402 0000891618-99-001302.hdr.sgml : 19990402 ACCESSION NUMBER: 0000891618-99-001302 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXYS PHARMECUETICALS INC CENTRAL INDEX KEY: 0000913056 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 222969941 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22788 FILM NUMBER: 99581565 BUSINESS ADDRESS: STREET 1: 180 KIMBALL WAY CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 BUSINESS PHONE: 6508291000 MAIL ADDRESS: STREET 1: 180 KIMBALL WAY CITY: SOUTH SAN FRANCISCO STATE: CA ZIP: 94080 FORMER COMPANY: FORMER CONFORMED NAME: ARRIS PHARMACEUTICAL CORP/DE/ DATE OF NAME CHANGE: 19931005 10-K 1 FORM 10-K FOR PERIOD ENDED 12/31/98 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NO. 0-22788 AXYS PHARMACEUTICALS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 22-2969941 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
180 KIMBALL WAY, SOUTH SAN FRANCISCO, CALIFORNIA 94080 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 829-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK $.001 PAR VALUE PREFERRED SHARE PURCHASE RIGHTS (TITLE OF CLASS) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The approximate aggregate market value of the voting stock held by nonaffiliates of the Registrant as of February 26, 1999, based upon the last trade price of the Common Stock reported on the Nasdaq National Market on February 26, 1999, was $138,399,938.* The number of shares of Common Stock outstanding as of February 26, 1999 was 30,362,601. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement which will be filed with the Commission pursuant to Section 14a in connection with the 1999 annual meeting of stockholders are incorporated herein by reference in Part III of this report. *Excludes approximately 438,290 of the Registrant's outstanding Common Stock held by directors and officers of the Registrant at February 26, 1999. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I. ITEM 1. BUSINESS Introduction This section discusses the business of Axys Pharmaceuticals, Inc. Our objective has been to describe our business in plain English. In this section we sometimes refer to Axys Pharmaceuticals, Inc. as Axys or the company. You should be aware that the following discussion of the company contains both historical information and forward-looking statements. Forward-looking statements are statements made about future events and include projections and other statements about what may or could happen in the future. You should be aware that forward-looking statements involve risks and uncertainties. Our actual results could differ significantly from those you might expect based on our forward-looking statements. There are a number of reasons that this might occur. To understand what those reasons are, you should review the section below entitled "What Factors Could Cause Our Results To Differ Materially From Those You Might Expect?" and you should also consider the additional risk factors described in the section entitled "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." On January 8, 1998, the company acquired Sequana Therapeutics Inc., a genomics company based in La Jolla, California. At the conclusion of the acquisition, we changed our name from Arris Pharmaceutical Corporation to Axys Pharmaceuticals, Inc. You will find elsewhere in this Form 10-K our financial statements and a discussion of our financial results for the twelve-month period ended December 31, 1998. For the periods prior to 1998, our financial statements reflect Arris Pharmaceutical Corporation only and do not include any information for Sequana Therapeutics, Inc. However, the discussion contained in this section reflects the combined company, Axys, and does not distinguish between what was formerly Arris' business and what was formerly Sequana's business. Business Overview Axys is a leader in the integration of life science technologies with a focus on transforming gene discoveries into drugs. We seek to build shareholder value through - a broad and diversified pipeline of drug discovery and development programs partnered with world-class pharmaceutical companies, - expansion of a non-partnered research and development franchise in oncology, and - the spin out of affiliated businesses in combinatorial chemistry, pharmacogenomics and agricultural biotechnology that leverage the company's technologies and are intended to provide capital for Axys' drug discovery and development programs. Our ADVANCED TECHNOLOGIES DIVISION runs the combinatorial chemistry business. Our subsidiary PPGX, INC. runs the pharmacogenomics business. And our other subsidiary XYRIS CORPORATION runs the agricultural biotechnology business. See Note 12 of "Notes to Consolidated Financial Statements" for Segment Information. WHAT ARE THE LIFE SCIENCE TECHNOLOGIES THAT WE HAVE INTEGRATED TO ALLOW US TO TRANSFORM GENE DISCOVERIES INTO DRUGS? In recent years, the advent of new drug discovery technologies, including genomics, bioinformatics, computational sciences, structure-based drug design, combinatorial chemistry, high throughput screening and pharmacogenomics, has offered great potential for streamlining the lengthy and expensive process of drug discovery. Axys has assembled a premier platform for drug discovery by combining and integrating these new technologies with the traditional pharmaceutical sciences, including medicinal chemistry and pharmacology. We are using these integrated technologies to identify more quickly and efficiently both novel molecular 1 3 targets associated with disease and small molecule compounds (important for oral delivery) that can be used as drugs against these targets. Drug discovery can be viewed as a step-wise process from the identification of a gene linked to a particular disease to finding a treatment for that disease, although drugs are not necessarily discovered by moving from the first step to the final step of the process. While it may in some cases be preferable to understand the entire disease progression process from gene to disease, it is not necessary to understand each step in this process in order to develop new and better drugs. Since we are focused on developing small molecule compounds, we can take advantage of discoveries we make at any of the various points along the drug discovery process to advance our development of new drugs. The entire drug discovery process runs from gene identification to the determination of gene function to lead identification to preclinical development to clinical development. The following sections describe each part of this process and the technologies that Axys employs in drug discovery. GENE IDENTIFICATION The human genome is the collection of all the genetic information needed to define a human being. This information is subsequently passed along to a person's children. Scientifically defined, the human genome consists of 23 pairs of chromosomes that contain the 100,000 or so genes that define every human's make-up. A gene is the smallest unit of an organism that is capable of passing along genetic information. These genes are made up of DNA (deoxyribonucleic acid). In humans, a DNA molecule resembles a twisted ladder and consists of two strands -- a double helix -- whose carbohydrate-like sides are connected by pairs of nitrogen-containing chemicals called bases which form the rungs of the ladder. There are four different bases which appear at each end of a rung, known by the initials A, T, C and G. The particular order of the bases is called the DNA sequence. In total, there are approximately 3 billion base pairs of DNA comprising all of the chromosomes in the human genome. However, scientists estimate that individuals differ in only about 0.1% of the 3 billion base pairs. Much effort has been devoted by various governments, research institutions and companies to mapping out the exact location of each gene on each chromosome and to determine the complete DNA sequence of the 3 billion DNA bases. To date, much of the mapping of the genes on the chromosomes has been completed. Sequencing the 3 billion DNA base pairs of the chromosomes is a much bigger task. There are two basic approaches to this task: random sequencing and positional cloning. Generally, random sequencing uses rapid gene sequencing techniques (including the use of silicon DNA chips and massive parallel processing with computers) with various samples, regardless of what role the gene plays or its medical importance. Rather than randomly sequencing large numbers of genes with unknown and perhaps irrelevant functions, the focus of our gene identification process is on the identification and characterization of specific genes associated with common diseases. This is known as positional cloning and it is a technique in which Axys was a pioneer. Positional cloning begins with the collection of DNA (usually blood samples) from families or groups that have a high incidence of a particular disease. By comparing the DNA samples from healthy people and people who have a particular disease, we can pinpoint the region on a particular chromosome or chromosomes that may contain the gene or genes involved in a particular disease. As a pioneer in positional cloning, Axys developed a network of academic researchers, clinicians and health care providers all over the world. Axys has obtained exclusive access to certain DNA samples from population groups in isolated geographic regions who have higher incidence rates of diseases, such as asthma and cancer. To support our gene discovery programs, the company currently has access to approximately 45,000 DNA samples. We believe that we employ some of the best gene identification technologies available. However, we continue to evaluate whether it makes sense from a cost and efficiency standpoint to redesign and improve our systems, analytical techniques and tools. 2 4 GENE FUNCTION Finding and sequencing a gene is not enough. We also need to know what biological processes that gene plays a role in. The term "functional genomics" refers to a variety of scientific disciplines that examine gene function and identify disease pathways resulting from a gene or genes that are not functioning properly. A great deal of work may have to be done to arrive at a final conclusion about the role of a particular gene in protein production and any associated disease process. The job of determining the functions of a gene -- and its protein products -- requires testing in systems that approximate human systems. We use many such systems at Axys, including the C. elegans (nematode worm) system, the Drosophila (fruit fly) system and a DNA gene array system. Axys is a leader in the use of C. elegans, a microscopic multicellular round worm, as a tool to determine gene function. This nematode is the most thoroughly understood multicellular animal in terms of cellular development, anatomy and genetic content. In fact, its DNA has been completely sequenced. C. elegans is quite useful as a research tool because as many as 70% of the currently known human disease genes possess a highly significant homolog (sister gene) in the nematode. Nematode genetic studies have led to major advances in the understanding of several disease pathways. By using our nematode technology, we are able to study the function of nematode genes as a model system for a number of important human diseases. In addition to nematodes, we also use other model systems such as fruit flies, yeast and mice to test the function of genes. Rounding out our functional genomics technologies is the use of gene "microarray" technology. Using technology licensed from Molecular Dynamics-Amersham, very small arrays are built on glass slides to study the expression levels of thousands of genes at the same time. Gene expression is the extent to which a gene causes a protein to be emitted from a cell. With the information generated from these arrays, we can compare differences in gene expression between normal and diseased or genetically manipulated cells. This is known as gene expression profiling and is a valuable tool for identifying the levels of genetic messages that change in a disease state. By combining gene expression data with information about genetic relationships gained from model systems and studying human populations, we are better able to identify points in biological pathways that may be the best route for therapeutic intervention. In the course of our gene function research, we have identified several target disease genes and are currently attempting to identify the corresponding mutations responsible for the applicable diseases. Among other gene discoveries, Axys, together with the National Cancer Institute, identified a gene and a corresponding mutation associated with hereditary melanoma in January 1996. In addition, the company, in collaboration with The Jackson Laboratory, discovered TULP 1, a gene associated with obesity in mice, in early 1996. Subsequently, the company was issued a patent covering the full length sequence of the TULP1 gene (tubby) and its protein product. LEAD IDENTIFICATION Once we have identified the gene and its function in a disease, we need to find a way to chemically regulate the protein product of that gene. The first step in that process is to find lead chemical compounds which may be further developed later if they pass certain tests. Lead candidates in our drug discovery programs are identified using a broad range of technologies, including crystallography, structural biology, medicinal chemistry, combinatorial chemistry and high-throughput screening. Where molecular structures of protein targets can be determined, we can utilize our computational science capabilities; where structural information is limited, we can utilize our combinatorial chemistry and high-throughput screening to identify lead candidates. Axys uses a broad range of scientific capabilities to study the basic structure of molecules (X-ray crystallography) and advanced chemistry that uses the knowledge gained from crystallography and structural biology. These technologies can speed research by enabling an understanding of the precise structure of a target molecule associated with a disease. Using these technologies, we have the ability to determine the exact three-dimensional structure of a protein molecule. Then, we bring additional computational science capabilities into play. Axys has its own software program that is a rapid, flexible molecular docking model that can be 3 5 used to test compounds for binding without actually doing the work in the chemistry lab. This software allows us to look for a natural or synthetic "inhibitor" that can bind to the molecule and change the way it will perform in the body. By using structure-based design, we have the ability to rapidly create lead compounds that are less likely to cause side effects, be toxic or result in lengthy delays in drug development due to failed safety studies. The X-ray crystallography and structural biology efforts at Axys have produced significant results by identifying many important structures. Medicinal chemistry is an important part of our lead identification efforts. We have approximately 50 medicinal chemists at Axys, many of whom are involved in lead identification. Using the information gathered from X-ray crystallography and structural biology, medicinal chemists make custom drug-like compounds and then are able to fine tune them using data from various tests. Traditional medicinal development has been described as carefully selecting one bullet at a time and carrying out extensive laboratory experiments to fine-tune the capability of the bullet to hit the target. In contrast, combinatorial chemistry is more like shooting thousands of bullets at a target all at once and then finding the bullets that hit the target. The combinatorial chemists in our Advanced Technologies Division are able to rapidly create libraries of drug-like compounds, consisting of large collections of different compounds. To screen these libraries, Axys uses automated robotics systems. These robots test the binding activity of thousands of compounds against a disease target, usually a protein. This binding activity is a measure of the compound's ability to inhibit or potentiate the activity of the protein. The primary role of the technology is to detect active compounds and supply directions for their optimization using other techniques. Given the variety and size of chemical libraries available today, and the need to compare the results from multiple screenings, data collection and management of information are critical elements of high throughput screening. Axys maintains data bases of structures, assays performed, screening results and other similar information in relational data bases, which can be queried from any number of research parameters. Many of the leads being pursued by the company are protease inhibitors. Proteases are enzymes which play a critical role in virtually every biological process, and their over or under regulation is often associated with a disease. The company believes the ability to develop inhibitors of proteases is therefore important. Axys also has a number of other early research programs aimed at identifying potential biological targets among serine and cysteine proteases, two classes of proteases. Using sophisticated genetic mapping techniques, the company believes it is able to gain proprietary knowledge about how proteases contribute to key biological events, in particular, those that play a role in physiological disorders, such as cancer and inflammatory diseases. PRECLINICAL AND CLINICAL DEVELOPMENT Once a drug compound succeeds in winning out against tens of thousands of competing compounds in a series of critical tests, whether it was developed through structure-based drug design or was the product of our combinatorial or medicinal chemistry efforts, we must still refine it to meet rigorous safety and clinical criteria before it can be tested in humans. This is also where traditional medicinal chemistry comes into play. We believe we are unique in having an in-house medicinal chemistry group of the size and scope usually found in large pharmaceutical companies. We use our medicinal chemistry capabilities to fine-tune, or optimize, the drug-like compounds to become lead candidates and potential new drugs. Medicinal chemistry is a process used to improve the potency, selectivity (won't bind to wrong target), oral bioavailability (compound can be absorbed by the body when taken orally as a pill), metabolic stability (how rapidly the body breaks down the compound), and biological half-life (how long the effects of the drug will last) of a drug candidate. Among our own medicinal chemistry tools is our patented Delta Technology, which enhances the ability of lead compounds to act against some proteases implicated in a broad range of diseases. In December 1997, the United States Patent and Trademark Office issued a patent providing broad protection of the company's Delta Technology. The patent pertains to technology useful in research for the discovery of unique protease inhibitors. Delta Technology enables researchers to take a common element that is always in the blood -- zinc -- and use it to increase the binding potency of a drug candidate. Many of the company's collaborations use the Delta Technology. 4 6 Before qualifying for evaluation in human trials, compounds must pass extensive safety and effectiveness tests. In further tests, Axys uses models of human disease to provide important information on how long the drug effects last or the duration of action of a potential drug, as well as how it is absorbed by the body or metabolized. On-site studies take advantage of advanced technologies, such as mass spectrometry (a sensitive analytical method to identify a compound and the products into which it is broken down), to evaluate hundreds of samples, indicating not only drug concentrations but also the pharmacodynamic (what the drug does to the body) and the pharmacokinetic (what the body does to the drug) characteristics of compounds nearing human clinical trials. In addition, we are using our genomics-derived assets and capabilities in the field of pharmacogenomics in our preclinical and clinical development efforts. Pharmacogenomics is the use of genetic and genomic information to predict the response of individual patients and patient populations to drugs. Through our PPGx subsidiary we have developed and are continuing to develop our bioinformatics platform and computer-based tools to link genetic data from drug development and medical practice with worldwide genomic databases. These tools allow us to better determine which patients will respond to the compounds being tested, as well as eliminate those who may be at risk of adverse reactions. We believe that pharmacogenomics will revolutionize clinical trials, improve the success rate of clinical development and reduce development time and cost. Finally, while some of our collaborative partners provide clinical development expertise, we also have an in-house clinical development group. With extensive prior experience in managing clinical trials, satisfying regulatory requirements, ensuring manufacturing quality control and quality assurance, this group is taking our products forward into human testing. WHAT DRUG DISCOVERY PARTNERSHIPS WITH WORLD-CLASS PHARMACEUTICAL PARTNERS DOES AXYS HAVE? PARTNERED PIPELINE
GENE GENE LEAD IDENTIFICATION FUNCTION IDENTIFICATION PRECLINICAL CLINICAL -------------- -------- -------------- ----------- -------- Bayer -- Asthma........................................................................................ X -- Psoriasis.................................................................................... X -- IBD.......................................................................................... X Merck -- Osteoporosis.................................................................... X Bristol-Myers Squibb -- Hepatitis C...................................................... X Rhone-Poulnec Rorer -- Inflammation...................................................... X Pharmacia & Upjohn (to be repartnered) -- Factor Xa...................................... X Amgen -- Hematology..................................................... X Pharmacia & Upjohn -- Endocrinology..................................... X Roche Bioscience -- CNS disorder............................. X Parke-Davis -- Schizophrenia/Bipolar......... X Boehringer Ingelheim -- Asthma............... X
Bayer AG (Tryptase Inhibitors/Asthma/Clinical Phase) In 1994 we entered into an agreement with Bayer AG for the research and development of tryptase inhibitors for the treatment of asthma. Tryptase is a serine protease that has been shown to regulate inflammation. Tryptase is released by mast cells as part of an immune response to allergens such as pollen, mold or grasses and contributes to several biological events which result in inflammation. Axys' tryptase inhibitors are designed to slow or halt the inflammatory process at an early stage, in an attempt to provide safe and effective therapies for the treatment of the underlying cause of disease, rather than the symptoms. Asthma is characterized by generalized airway inflammation and tightness in the lungs (bronchoconstriction) which makes breathing difficult. Five percent of the United States population, or approximately 13 million people, are estimated to suffer from some form of asthma. The exact causes of asthma are not well 5 7 understood, and current treatments for asthma are limited to controlling inflammation through the use of inhaled steroids or treating airway constriction through the use of bronchodilators. In our collaboration with Bayer, we have established (in previous Phase II clinical studies) that inhibiting tryptase resulted in improved breathing (reduction in late airway response) in asthmatics. In December 1998, Bayer selected an oral tryptase inhibitor compound for clinical development and is now moving forward with the development of that compound. Bayer AG (Tryptase Inhibitors/Psoriasis/Clinical Phase) In July 1997, we modified our 1994 research and development agreement with Bayer to re-acquire the rights to develop tryptase inhibitors for the treatment of psoriasis, which, like asthma, is a mast cell regulated inflammatory disease. Psoriasis is a skin disorder characterized by excessive skin cell reproduction. The disease has several different clinical presentations that are most often characterized by raised, inflamed sores covered with a scaly white buildup of dead skin cells. Nearly seven million people in the U.S. suffer from various forms of psoriasis, however, none of the current treatments, including topical steroids or systemic chemotherapeutics, offer consistent relief. In the second half of 1997, we started preclinical development of a tryptase inhibitor (APC 2059) as a potential treatment for this disease. APC 2059 is a compound developed by Axys and is a member of a class of compounds designed to inhibit tryptase. In December 1998 we started Phase Ia safety clinical studies on a topical cream formulation of APC 2059 for the treatment of psoriasis. We successfully completed that Phase Ia (single dose per subject) clinical study and in February 1999 started a Phase Ib (multiple doses per subject) clinical study of APC-2059 as a topical cream formulation for the treatment of psoriasis. Upon the conclusion of Phase II (studying the effects of varying doses of a drug to establish that it works in patients) clinical studies for this indication, Bayer has the ability to reacquire from Axys the rights to further develop APC 2059 for this indication. If Bayer decides to re-acquire this compound, Bayer would reimburse Axys for development expenses incurred to date and make other additional payments to Axys. Bayer AG (Tryptase Inhibitors/Inflammatory Bowel Disease/Clinical Phase) In July 1997, we also modified our 1994 research and development agreement with Bayer to re-acquire the rights to develop tryptase inhibitors for the treatment of inflammatory bowel disease, which, like asthma, is a another mast cell regulated inflammatory disease. Inflammatory bowel disease generally refers to two diseases: Crohn's disease and ulcerative colitis. Over 500,000 people in the U.S. suffer from inflammatory bowel disease. Current therapies, which include the use of corticosteroids and immunosuppressants such as cyclosporine and methotrexate, expose patients to significant side effects. In the second half of 1997, we also initiated preclinical development of the same Axys-developed compound, APC 2059 (in a different formulation), as a potential treatment for this disease. In December 1998 we commenced Phase Ia safety clinical studies on an injectable formulation of APC 2059 for the treatment of inflammatory bowel disease. We successfully completed that Phase Ia clinical study and in February 1999 we initiated a Phase Ib clinical study of an injectable formulation of APC-2059 for the treatment of inflammatory bowel disease. Upon the conclusion of Phase II clinical studies for this indication, Bayer has the ability to reacquire from Axys the rights to further develop APC 2059 for this indication. If Bayer does decide to re-acquire this compound, Bayer would reimburse Axys for development expenses incurred to date and make other additional payments to Axys. Merck (Cathepsin K Inhibitors/Osteoporosis/Preclinical) In November 1996 we entered into a research and development collaboration with Merck & Co. to develop small molecule inhibitors of cathepsin K for the treatment of osteoporosis. Osteoporosis is a disease of 6 8 the bones that results in weakened bones which leads to more bone breaks. This condition mainly affects elderly women. Cathepsin K belongs to a class of enzymes called cysteine proteases. It is known to be secreted in excessive amounts by osteoclasts. In the healthy human body, osteoblast cells are responsible for bone-building while osteoclasts are responsible for bone degradation. By maintaining a careful balance in each type of cell's activity, normal bone remodeling and skeletal integrity is achieved. However, when the rate at which bone is destroyed by the osteoclasts exceeds the rate at which new bone is produced by osteoblasts, the result is excessive bone degradation (bone resorption) -- a condition that results in brittle bones and is characteristic of osteoporosis. In February 1997, we announced the first ever solution of the three-dimensional crystal structure of cathepsin K. Although the research and development relationship was originally schedule to end after two years, we agreed with Merck in December 1998 to extend this collaboration for an additional year until early November, 1999. Bristol-Myers Squibb (Protease Inhibitors/Hepatitis C/Preclinical) In December 1997, the company entered into an agreement with Bristol-Myers Squibb to develop protease inhibitors to prevent the growth and spread of the hepatitis C virus, also known as HCV. In relation to this agreement, both Axys and Bristol-Myers Squibb entered into agreements with Chiron Corporation to obtain non-exclusive licenses under its hepatitis C virus patents for protease inhibitor research. These licenses allow both companies to collaborate in their research under Chiron's patents with respect to the use of HCV NS3 protease in protease inhibitor research activities. As many as seven viruses are known to cause hepatitis, which is characterized by the damage of liver cells, and is a leading cause of liver disease. Different types of hepatitis cause acute as well as chronic infection, in addition to cirrhosis of the liver and jaundice. Differentiated by letters of the alphabet, the viruses which cause hepatitis are transmitted through various modes and have varying degrees of severity. In the 1960's, the first viral agent was identified which causes hepatitis (hepatitis B). Hepatitis A was isolated in 1973. Despite these early discoveries, chronic and severe cases of hepatitis spread with no known cause. These cases were referred to as Non-A, Non-B hepatitis. Hepatitis C, the major cause of Non-A and Non-B hepatitis, was finally discovered in 1987. As many as four million Americans and 60 million people worldwide are infected with hepatitis C virus. HCV infection is more serious than hepatitis A or B, and is more likely to result in chronic liver disease. Liver damage due to HCV is the leading reason for liver transplants in the U.S. The virus may be sexually transmitted or acquired through I.V. drug use or by blood transfusions prior to 1990. In September 1998 we announced the receipt of a milestone payment from Bristol-Myers Squibb in this collaboration based on the attainment of certain drug discovery goals making use of our chemistry. Research under this collaboration is on-going and the research program extends through December 2000. Rhone-Poulenc Rorer (Cathepsin S inhibitors/Inflammatory Diseases/Preclinical) In December 1998 we entered into a collaborative research and development agreement with Rhone-Poulenc Rorer (RPR). The objective of the collaboration is the discovery and development of small molecule therapeutics that inhibit cathepsin S, a human cysteine protease associated with certain inflammatory diseases. The collaboration is for two years and may be extended by RPR for two additional one-year periods. Cathepsin S is a cysteine protease found in antigen-presenting cells of the immune system. Unlike many other proteases, it is rarely found in other types of cells. Cathepsin S is believed to function in a pathway that regulates the body's ability to fight off these foreign antigens, leading to an inflammatory reaction. As a result, it may be possible to use inhibitors of cathepsin S to block the pathway and consequently protect the body from certain inflammatory diseases and perhaps autoimmune disorders. Our researchers were the first to solve the three-dimensional X-ray crystal structure of cathepsin S, as reported in June 1998 in Protein Science. 7 9 Cathepsin S is associated with some inflammatory diseases, including arthritis, asthma, atherosclerosis and a variety of autoimmune diseases. Under the terms of the agreement, RPR has exclusive development and marketing rights to cathepsin S protease inhibitors for respiratory diseases, atherosclerosis and related conditions and rheumatoid arthritis. Rheumatoid arthritis affects approximately 2.5 million Americans. Coronary heart disease is caused by the atherosclerotic narrowing of the coronary arteries and is the number one cause of death in United States with approximately 500,000 deaths occurring annually. Stroke is the third leading cause of death in the United States, with approximately 160,000 deaths occurring annually. Pharmacia & Upjohn (Factors Xa & VIIa & Thrombin Inhibitors/Blood Clotting Disorders/Preclinical) In September 1995, we signed a collaboration agreement with the company that is now known as Pharmacia & Upjohn, Inc. to develop oral therapeutics for blood clotting disorders, such as deep vein thrombosis, stroke, and myocardial infarction. More specifically, we have been using our Delta technology and other technologies to discover inhibitors of Factors Xa and VIIa and thrombin, all of which are serine proteases. In July 1998 the research support for this collaboration ended and in February 1999 we formally agreed to end this collaboration. We are, however, continuing our research efforts and are actively seeking a new partner for this program. Factor Xa, factor VIIa and thrombin are three enzymes involved in the blood clotting process. All three are serine proteases that have been acknowledged as targets for a host of disorders related to abnormal clotting. Annually, more than 2 million people are hospitalized in the United States for deep vein Thombosis, acute myocardial infarction and unstable angina. In 1996 and 1997, we designed and tested a variety of compounds based on our Delta technology and, with our partner, Pharmacia & Upjohn, we identified six families of Delta compounds for study in clotting and pharmacokinetic (what the body does to the drug) tests. Throughout 1998, we continued to work on the development of compounds which could be nominated as a clinical candidates. Amgen (EPO Mimetics/Hematology/Lead Identification) In May 1993 we entered into an agreement with Amgen to develop synthetic, small molecule mimetics of erthropoietin (EPO). The collaboration funding ended in February 1997 and all research activities were then transferred to Amgen. Amgen is obligated to continue further research in this area. In October 1998 joint team of researchers from Axys and Amgen published the three dimensional X-ray crystal structure of EPO bound to its receptor. The structure as determined offers important insight into how human EPO is involved in stem cell growth and red blood cell production. Pharmacia & Upjohn (Endocrinology/hGH/Lead Identification) In March, 1993, we entered into a research and development agreement with Pharmacia & Upjohn to develop synthetic, small molecule mimetics of human growth factor, initially focusing on human growth hormone. The collaboration funding concluded at the end of 1997 and all research activities were transferred to P&U. P&U is obligated to continue further research in this area. Concurrent with the signing of the initial agreement, P&U made a $5.4 million equity investment in Axys. Axys received research funding during the term of the research collaboration, will receive benchmark payments if mutually agreed upon milestones are reached, and royalties upon P&U's sales of any licensed products. Roche Bioscience (Nematode Research/CNS Disorders/Gene Function) In June 1998 we entered into an agreement with Roche Bioscience to establish a partnership based on the functional genomics capabilities of Axys. The alliance is focusing on evaluating the function of genes provided by Roche Bioscience that may serve as drug targets in the development of therapies for pain and other conditions involving peripheral nervous system disorders. Roche Bioscience is providing us with a set of unique genes to which we are applying our functional genomic technologies involving the nematode. The initial research term is 15 months. Roche Bioscience may, however, extend the agreement through June 2000. 8 10 Parke-Davis (Gene Research/Schizophrenia & Bipolar Disorder/Gene Identification) In November 1997, the Company entered into a broad-based genomics alliance with the Parke-Davis Pharmaceutical Research Division of Warner-Lambert Company to develop unique therapeutic products for the treatment of schizophrenia and bipolar disorder. The alliance combines our capabilities in gene discovery, functional genomics, bioinformatics, screening with Parke-Davis' research, development and clinical expertise in the central nervous systems area. The research term of the alliance is five years, but may be extended in one-year increments to a period of eight years with additional increases in research funding. By October 1998 we had achieved two milestones in this research collaboration. One research milestone was achieved by making significant progress in our psychiatric genomics research. Another was reached by completing certain technology development on our own bioinformatics platform and transferring that technology to Parke-Davis. Boehringer Ingelheim (Gene Research/Asthma/Gene Identification) In June 1995, we entered into a five-year collaborative research agreement with Boehringer Ingelheim aimed at identifying genetic causes of asthma and developing new therapeutics based on those findings. In May 1997, we agreed to expand the program with a doubling of the research support for the collaboration. Also in May 1997 we announced the discovery of a gene related to asthma and the receipt of an associated milestone payment. Effective January 1, 1999, we agreed to reduce the number of funded researchers in this program and we are continuing to have discussions with Boehringer Ingelheim about the future direction of this collaboration. OTHER AGREEMENTS/RELATIONSHIPS Memorial Sloan-Kettering (Gene Research/Oncology/Gene Identification) In January 1997, the company and Memorial Sloan-Kettering Cancer Center formed a joint venture known as Genos Biosciences, Inc. Genos' focus is the identification of genes and related genetic information that will be of value in the prognosis, diagnosis and possible treatment of three of the most common cancers, specifically, prostate, breast, and colon cancer, which collectively account for a significant percentage of all new cancer cases. These types of cancer are usually caused by "somatic" mutations -- non-hereditary changes occurring in the genes of certain cells that increase the risk for developing cancer. Perkin-Elmer (Gene Sequencing/Liver Cancer/Gene Identification) In 1997 the company entered into an agreement with PE Applied Biosystems, a division of The Perkin-Elmer Corporation, to form a broad-based DNA-sequencing joint venture in Shanghai, China called GeneCore. In October 1997, the joint venture was expanded to include SiniWest Holdings, Inc. (a 5% equity holder). In October 1997, the joint venture was awarded a research contract from China's State Science & Technology Commission to sequence human genes involved in liver cancer. Under the contract, GeneCore is applying high throughput genomic sequencing and related technologies to a targeted region of the human genome believed to contain a gene responsible for the disease. Identification and isolation of this gene is expected to provide potential new targets for improved diagnostic and therapeutic products. Corange International (Osteoporosis) In May 1995, we entered into a strategic alliance with Corange International, Ltd., the parent company of Boehringer Mannheim ("Corange"), to identify the genes involved in osteoporosis. The goal of the program was to identify specific genetic regions linked to bone metabolism within the human genome, as a successor to the work already done with primates. In March 1998, we agreed to expand the resources devoted to the program in order to accelerate the research. However, when research priorities were changed following Roche Group's acquisition of Corange, Corange exercised its right to end this research program as of February 1999. We are seeking to partner this research. 9 11 Glaxo-Wellcome (Type II Diabetes) In July 1994 we entered into a strategic partnership with Glaxo-Wellcome to discover genes associated with type II diabetes or non-insulin dependent diabetes mellitus (NIDDM). In February 1996, Glaxo expanded its strategic alliance with the company in the area of type II diabetes to include the study of human obesity. In September 1997, as a result of this study which involved genetic analyses of more than 5,000 individuals from diabetic families, the company and Glaxo identified specific regions of DNA which we both believe contain genes associated with NIDDM, for which we received a milestone payment from Glaxo. In January 1997, Axys announced the signing of an agreement between NemaPharm and Glaxo to apply Axys' nematode technology to evaluate the function of certain genes provided by Glaxo and identify targets for the discovery of novel therapeutics. In May 1998, following a review of our relationship, we agreed to discontinue the collaboration on type II diabetes and obesity. Under the terms of the dissolution agreement, we received exclusive rights to all obesity family samples and data and non-exclusive rights to some type II diabetes samples and data. In addition, the nematode research has been concluded and the rights to the information and technology developed during the collaboration have been divided between the company and Glaxo. We are seeking to partner this research. Additional Program In February 1998 we announced the discovery we made with the Jackson Laboratory of a human gene related to the mouse obesity gene known as "tubby" which is responsible for a form of an inherited blindness disorder, commonly known as retinitis pigmentosa (RP). The U.S. Patent and Trademark Office has issued to Axys a patent relating to TULP2, a second tubby-like protein sequence identified by the Axys/Jackson Laboratory team and linked to ocular disease. We are seeking to partner this research. For additional information about the terms of the agreements discussed above, we refer you to Item 7 of this Form 10-K entitled "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the subsection entitled "Overview in Item 7." WHAT DOES AXYS' NON-PARTNERED RESEARCH AND DEVELOPMENT FRANCHISE IN ONCOLOGY LOOK LIKE? PROPRIETARY PIPELINE -- ONCOLOGY
GENE GENE LEAD IDENTIFICATION FUNCTION IDENTIFICATION PRECLINICAL CLINICAL -------------- -------- -------------- ----------- -------- Urokinase -- Agiogenesis......................................................... X Cathepsin B -- Solid Tumor Metastasis........................... X Prostate Specific Antigen -- Prostate Cancer.................... X Axys Serine Protease (ASP) 05 -- Insulin-like Growth Factor (IGF) pathway................................................. X Cathepsin U, V, W, Axys Serine Protease (ASP) 07 -- various cancers.................................... X Hypoxia, Metastasis, Angiogenesis.... X Prostate, Breast, Colon cancers...... X
In early 1999 we announced our strategy to focus our unpartnered resources on the development of small molecule therapeutics for the treatment of cancer. We believe that there is a significant market opportunity to meet current and future medical needs associated with many different types of cancer. The worldwide market for cancer therapeutics was estimated at $4.8 billion in 1996. That market is projected to grow to $13.3 billion by 2005 and $18.8 billion by 2010. One of the factors contributing to this growth is the aging of the world's population. As people live longer, cancer becomes more prevalent. Our decision to focus our resources on cancer therapeutics was also partly based on the improving regulatory environment for approval of cancer therapeutics. In recent years the FDA has established a 10 12 regulatory "fast track" for some cancer therapeutics reviews. In addition, surrogate markers such as tumor shrinkage have been increasingly accepted as research endpoints. The use of surrogate markers substantially shortens the length of the necessary clinical research studies. Further, there are a number of emerging treatment methods which we believe we can or may be able to use our technologies on, such as protease inhibition, to develop small molecule therapeutics (essential for oral delivery). These include antiangiogenesis and metastasis inhibition. Angiogenesis is the process by which blood vessels are formed. Blood vessel formation and growth is necessary for tumor growth. Antiangiogenesis drugs are believed to be able to cut off blood vessel growth and thereby reduce the size of tumors and potentially maintain them in a non-growth state. Metastasis is the process by which cancer spreads. Drugs which discourage metastasis are believed to be able to stop cancer from spreading throughout the body. A final reason for this decision is that we were already actively participating in cancer research. We have had research programs underway that range from a preclincial program in angiogenesis to lead identification programs in solid tumor metastasis, prostate cancer and the insulin growth factor (IGF) pathway to cancer gene function and identification research programs. Our most advanced cancer program today is our urokinase research program. Urokinase is believed to play a role in angiogenesis and tumor metastasis and we believe it is involved in cancer progression at a relatively early stage of the cancer process. We are focused on the development of urokinase inhibitors for use in combination with other cancer therapies. Our Delta Technology is being used in the development of potent and selective inhibitors of urokinase. We anticipate we will select an urokinase inhibitor compound to move forward into clinical development in the latter half of 1999. To enhance our cancer research efforts, we reallocated our research personnel in January 1999, increasing the number of cancer researchers from approximately 50 scientists to approximately 120 scientists. In addition, we are actively seeking to license cancer treatment compounds from other biotechnology or pharmaceutical companies with an emphasis on the pre-clinical and early stage clinical product opportunities. WHY AND HOW HAVE WE LEVERAGED OUR TECHNOLOGY PLATFORM? In looking to the future we recognize that we will need additional capital in order to continue our research and development efforts. One way we believe we can raise additional capital is through the leveraging our existing technology assets. To accomplish this, we have created two new businesses (one in agricultural biotechnology and the other in pharmacogenomics) and have structured our combinatorial chemistry business to be spun out. At the same time, we are retaining the intellectual property and assets that these businesses also make use of for our own drug discovery and development purposes. In spinning out these businesses, our business model contemplates that each business should have - ACCESS TO AND OWNERSHIP (IF NECESSARY) OF OUR RELEVANT TECHNOLOGIES, so that they can continue to pursue their respective businesses independently, - INDEPENDENT MANAGEMENT focused on their business, rather than on Axys' drug discovery business, and - FUNDING FROM THIRD PARTIES so that we do not have to divert our own capital from drug discovery. While the third parties who provide capital for these businesses acquire an equity ownership position in the businesses, we would also retain a sizeable equity ownership position. Having set up these businesses, secured financing for them and provided additional business support as necessary, we have positioned ourselves to eventually ease our capital formation needs by selling some or all of our equity position in each of these businesses. This could happen in the following ways: - through a sale of our equity interest in the business in the course of a public offering of securities for that business, - through the sale of our equity interest in the business to a third party or - a sale of the business to the third party who has provided it with funding or to some other company. While we believe we will be successful in realizing meaningful value from these affiliated businesses, our ability to do so will depend on the success of these businesses in executing their business strategies. There can, 11 13 however, be no assurance that these affiliated business will be successful or that we will have the ability to sell all or a portion of our equity ownership in these businesses. In addition, there can be no assurance that the amount we may receive upon selling our equity ownership interest will provide significant funding so as to postpone for a meaningful time period the need to engage in other capital formation activities. HOW AND WHEN WERE THESE AFFILIATED BUSINESSES SET UP? The first affiliated business we set up in early 1998 (but have not yet spun out) was our combinatorial chemistry business which is called the Advanced Technologies Division. It has its own divisional management and handles the sales and marketing and production of its products, including combinatorial chemistry libraries and related technology. The Division is reviewed internally on a separate stand alone basis except for certain overhead allocations to the Division. In 1998 the Division was a positive contributor to our cash flows. We have not sought third party funding for the Division but are seeking other ways in which the Division would help to fund our drug discovery business. The second affiliated business, incorporated separately as Xyris Corporation, was formed in the second quarter of 1998. Xyris is applying our genomics, combinatorial chemistry and small molecule discovery technologies in the agricultural biotechnology field. Xyris is being run by Dr. Jerry Caulder, the former Chairman and CEO of Mycogen, a diversified agribusiness and biotechnology company. During his 14-years at Mycogen, Dr. Caulder guided Mycogen from a start-up venture to a leadership position in the agbiotech market. Prior to joining Mycogen, he spent over 15 years with Monsanto Company, where he managed various aspects of both the international and domestic business of Monsanto Agricultural Products Company. A San Francisco-based merchant bank and advisory partnership has provided the initial capital for the business in exchange for a minority ownership position. We currently own more than a majority of the outstanding shares of Xyris. The third affiliated business, incorporated separately as PPGx, Inc., was formed in the first quarter of 1999. PPGx is a provider of a comprehensive package of products and services to provide solutions to pharmacogenomic problems. We believe that PPGx's pharmacogenomics products and services will be of significant interest to those performing clinical trials. PPGx is being run by Dr. Jean Warner, our Vice President of Medical Affairs. Dr. Warner formerly has been involved with clinical trials for over 18 years, working with us since 1996 and with Khepri Pharmaceuticals, Syntex, Merck, Sharpe and Dohme Research Laboratories prior to then. The funding for PPGx is being initially provided by and through our minority partner, PPD, Inc. We currently own more than a majority of the outstanding shares of PPGx. In addition to funding PPGx, PPD contributed its former subsidiaries Intek Labs, Inc. and Intek Labs Ltd. to PPGx's operations. In connection with the formation of PPGx, PPD received the right to handle the marketing and sales of PPGx's pharmacogenomics products and services on an exclusive basis. WHAT DO THESE AFFILIATED BUSINESSES DO? Advanced Technologies Division The Advanced Technologies Division conceives, produces and sells large numbers of diverse combinatorial chemistry libraries of drug-like compounds, as well as more focused libraries which are more focused around a specific structure. In addition, the Advanced Technologies Division sells the protocols which provide the basis for making the libraries that are produced and also provide the basis to make other similar drug-like compounds. The customers of the Advanced Technologies Division, including the company, screen these drug-like compounds against biological targets of interest in an effort to identify lead compounds for their drug discovery programs. The Advanced Technologies Division has entered into and is performing a number of contracts, including contracts with Pharmacia & Upjohn, Parke-Davis and Rhone-Poulenc Rorer, as well as contracts with biotechnology companies such as Signal Pharmaceuticals and Protein Design Labs. In most cases, these contracts provide for the sale of libraries hundreds of thousands of non-exclusive or co-exclusive drug-like compounds over several years. In some cases the sale of these libraries is accompanied by the sale of the applicable protocols which describe how to remake the libraries. In addition, the Advanced Technologies 12 14 Division also offers a program that provides access to our combinatorial chemistry software tools and that teaches a company how to establish its own combinatorial chemistry program. Xyris Corporation Xyris is focusing its business on the creation of products for crop protection, crop improvements and animal health, as well as the development of technology for the seed industry and human nutrition. Since Xyris was created in mid-1998, it has built its staff. Towards that end, Xyris has hired as Chief Technical Officer Dr. Leo Kim, the former executive vice president and chief technical officer at Mycogen Corporation where he was responsible for Mycogen's worldwide research strategy and implementation. Xyris has also successfully assembled its Scientific Advisory Board. Xyris is now in the process of participating in our technology transfer and is also determining the initial optimal uses for our gene finding, functional genomics, bioinformatics, structural biology and combinatorial chemistry technologies. PPGx, Inc. PPGx is the first company offering a full range of products and services in pharmacogenomics. PPGx has done this by combining laboratory services, such as DNA extraction and archiving, genotyping and assay development, with genetic research capabilities, including physical mapping, gene sequencing, polymorphism identification and expression analysis, and a comprehensive informatics platform with genetic and clinical data storage, data mining and analysis capabilities. PPGx maintains laboratory facilities in the United States and the United Kingdom to provide genotyping and phenotyping services to its customers. Currently over 300 assays in 90 genes of pharmaceutical relevance are available. PPGx uses state of the art high throughput genotyping methods in a Good Laboratory Practices environment. PPGx has the capability to rapidly develop new assays in a variety of formats. Phenotyping services are also available for a number of drug metabolism enzymes. PPGx also maintains genetic research laboratories with a complete range of genetic and genomic capabilities to provide services in those cases where the genetic variant that influences drug effects is not known. These capabilities include use of microarray expression technologies, as well as physical mapping and gene sequencing technologies. In addition, PPGx is further developing its informatics platform which includes a large database containing pharmacogenomic data. Details about polymorphisms and their effects, as well as the assay methodologies and clinical data are also contained in the database. In addition, the informatics platform includes other software programs for data management and other uses in connection with clinical trials. While PPGx has developed its informatics platform for its own uses, PPGx also has the capability to customize and integrate its informatics platform in its customers' environment. WHAT FACTORS COULD CAUSE OUR RESULTS TO DIFFER SIGNIFICANTLY FROM THOSE YOU MIGHT EXPECT? THE DEVELOPMENT OF OUR PRODUCTS WILL TAKE SEVERAL YEARS, AND WE MAY NOT BE SUCCESSFUL IN DEVELOPING COMMERCIAL PRODUCTS. All of our potential products are in stages of research and development that require a great deal of additional research and development efforts before the drugs could be sold. These efforts include extensive preclinical and clinical testing and lengthy regulatory review and approval by the United States Food and Drug Administration. The development of new pharmaceutical products is highly uncertain and subject to a number of significant risks. Products that appear to be promising at early stages of development may not reach the market for a number of reasons, including the following: - We or our collaborators may not successfully complete any research and development efforts - We may not achieve necessary research milestones - Our current research may not result in the identification of disease genes - Disease genes that we identify may not lead to the development of products 13 15 - Any products we develop may be found to be ineffective or cause harmful side effects during preclinical testing or clinical trials - Any products we develop may be prevented from being commercialized due to proprietary rights of third parties - Required regulatory clearance for any products we develop may not be obtained - We may be unable to manufacture enough of any potential products at an acceptable cost and with appropriate quality - We may be unable to successfully market approved products - Consumers may not accept any of our approved products. We do not expect any of our products to be commercially availability for a number of years. WE HAVE DEPENDED HISTORICALLY ON OUR COLLABORATIVE RELATIONSHIPS, AND WE MAY HAVE TO ESTABLISH ADDITIONAL COLLABORATIONS IN THE FUTURE. Our strategy for the development, clinical testing, manufacturing and commercialization of certain of our products has in many instances included entering into collaborations with corporate partners, licensors, licensees and others. We rely on the activities of our collaborators with respect to the commercialization of potential products. In addition, a large portion of our revenues have resulted from these collaborations. If we fail to meet our contractual obligations under these arrangements, development of our products may be delayed. If we fail to extend or enter into additional collaborative relationships, we will have to consider other sources of revenue, including the need to secure additional financing. See the discussion below entitled "We may need to secure additional financing." To date we have entered into collaborations with a number of different partners, including Amgen, Bayer, Boehringer Ingelheim, Bristol-Myers Squibb, Corange International, Glaxo Wellcome, Merck, Parke-Davis, Perkin-Elmer, Pharmacia & Upjohn, Roche Bioscience, Smith-Kline Beecham and Rhone-Poulenc Rorer. The amount and timing of resources to be devoted to research, development, eventual clinical trials and commercialization activities by our collaborators are not within our control. We cannot guarantee that our partners will perform their obligations as expected. In addition, we cannot be certain that we will gain additional revenue from these arrangements beyond the minimum contractual commitments. All of our collaboration agreements may be canceled under certain circumstances. In addition, the research funding phase of several of the company's collaborations will come to an end in the next few years unless continued or extended by agreement with our collaborators. If any of our collaborators break or elect to cancel their agreements or otherwise fail to conduct their collaborative activities in a timely manner, the development or commercialization of potential products or research programs may be delayed. In that case, we may be required to devote additional resources to product development and commercialization or we may cancel certain development programs. In addition, we have entered into a number of agreements with hospitals and academic institutions in which they provide human tissue samples to the company. Some of these agreements are material to our research. If we are unable to maintain or renew these agreements, it could have a material adverse effect on our business, financial condition and results of operation. Disputes may arise in the future with regards to the ownership of rights to any technology developed with collaborators. These and other possible disagreements with collaborators, or tissue sample providers, could lead to delays in the achievement of milestones or receipt of payments or in collaborative research, development and commercialization of certain potential products. In addition, these disputes could require or result in lawsuits or arbitration. Lawsuits and arbitration are time-consuming and expensive. Even if we win, the cost of these proceedings could adversely affect our business, financial condition and results of operations. Furthermore, these proceedings could adversely affect our stock price or our business reputation and may make the process of entering into additional collaborative relationships more difficult. 14 16 In some cases our collaborators are developing products that may compete with our potential products. In addition, some of our collaborators have well established products from which they receive substantial revenue. Some of these products will compete with those being developed under collaborations. As a result, collaborators may pursue their existing or alternative technologies in preference to diagnostic or therapeutic products being developed in collaboration with us. In addition, our collaborators may not develop and market any potential products under the collaborations. WE MAY BE UNABLE TO SATISFY FDA REGULATORY REQUIREMENTS FOR CLINICAL TRIALS. Either we or our collaborators must show through preclinical studies and clinical trials that each potential product is safe and beneficial in humans for each target indication before getting regulatory clearance from the FDA for the commercial sale of the product. The failure to adequately show the safety and effectiveness of a potential product could delay or prevent regulatory approval of that potential product. The results from preclinical studies and early clinical trials are often different than the results that will be obtained in large-scale testing. We cannot be certain that we will show sufficient safety and effectiveness in our clinical trials that would allow us to obtain the needed regulatory approval. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Before starting clinical trials in humans, our collaborators or we must submit to and receive approval from the FDA of an investigational new drug application (IND). Submission of an IND does not guarantee FDA authorization to start clinical trials. Clinical testing must meet requirements for institutional review board oversight, informed consent and good clinical practice requirements and is subject to continuing FDA monitoring. We do not have extensive experience in conducting and managing the clinical testing necessary to obtain regulatory approval. Any drug is likely to produce some level of toxicity or undesirable side effects in animals and in humans when administered at sufficiently high doses and/or for a long period of time. Unacceptable toxicities or side effects may occur in the course of toxicity studies or of clinical trials of our potential products. If we observe unacceptable toxicities or side effects in toxicology studies or in clinical trials, we, our collaborators or regulatory authorities may interrupt, limit, delay or halt the development of the potential product. In addition, these unacceptable toxicities or side effects could prevent clearance by the FDA or foreign regulatory authorities for any or all targeted indications. We currently have one compound, APC 2059, in clinical trials and another compound is moving forward to clinical trails. Clinical trials are being performed to establish the safety and effectiveness of two different formulations of APC 2059 for the treatment of inflammatory bowel disease and psoriasis. There can be no assurance that we will be able to complete the clinical trials of APC 2059 successfully for either or both indications or at all. Our collaboration partner Bayer is moving forward with clinical development of a compound for the treatment of asthma that would be taken as a pill. Clinical trials are being planned to establish the safety and effectiveness of that compound in the treatment of asthma. There can be no assurance that the clinical trials of this compound will be completed successfully or at all. Finally, we cannot be certain that any other drug candidates entering clinical trials will successfully complete these trials or that we will be able to show the safety and effectiveness of such drug candidates. WE MAY BE UNABLE TO OBTAIN NECESSARY REGULATORY APPROVALS RELATED TO THE DEVELOPMENT OF DRUGS. The research, testing, manufacture and marketing of drug products are subject to extensive regulation by numerous regulatory authorities in the United States and other countries. Failure to comply with the FDA or other relevant regulatory requirements may subject us to administrative or legally imposed restrictions. These include: - warning letters - civil penalties - injunctions 15 17 - product seizure or detention - product recalls - total or partial suspension of production - FDA refusal to approve pending New Drug Applications NDAs or supplements to approved NDAs. We have not applied for or received regulatory approval in the United States or any foreign country for the commercial sale of any of our products. We cannot guarantee that the FDA will approve any of our products under development. The process of obtaining FDA and other required regulatory approvals, including foreign approvals, often takes many years and can vary a great deal based upon the type, complexity and novelty of the products involved. Furthermore, the approval process is extremely expensive and uncertainties are often involved. Delays or rejections may be encountered based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review. Similar delays also may be encountered in foreign countries. Even if regulatory approval of a product is granted, we cannot be certain that we will be able to obtain the labeling claims necessary or desirable for the promotion of those products. Even if we obtain regulatory approval, we may be required to continue clinical studies even after the product has been marketed. In addition, identification of certain side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional preclinical testing or clinical trials and changes in labeling of the product. If regulatory approval is obtained, we will also be subject to ongoing FDA obligations and continued regulatory review. In particular, we or any third party that we use to manufacturer the drug or collaborators will be required to adhere to regulations setting forth current good manufacturing practices. The regulations require that we manufacture our products and maintain our records in a particular way with respect to manufacturing, testing and quality control activities. Furthermore, we or our third party manufacturers or our collaborators must pass a preapproval inspection of its manufacturing facilities by the FDA before obtaining marketing approval. See the section below entitled "Government Regulation." THIS IS A HIGHLY COMPETITIVE BUSINESS AND MANY OF OUR COMPETITORS HAVE SUBSTANTIALLY GREATER RESOURCES THAN WE HAVE. The pharmaceutical industry is intensely competitive. Many companies, including biotechnology, chemical and pharmaceutical companies, are actively involved in the research and development of new or improved drugs to meet the same medical needs we are seeking to meet. Many of these companies have substantially greater financial, scientific, regulatory and marketing) resources than we have. In addition, some of these companies have considerably more experience in preclinical testing, clinical trials and other regulatory approval procedures than we have. Additionally, certain colleges and universities, governmental agencies and other research organizations are conducting research in the same areas in which we are working. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. These institutions also may market competitive commercial products on their own or through joint ventures. Currently, they compete with us in recruiting highly qualified scientific personnel. We are pursuing areas of product development in which there is a potential for significant technological innovation in relatively short periods of time. At the present time Bayer is proceeding with the clinical development of an oral compound for the treatment of asthma. Currently, Schering-Plough Corporation, Astra AB and Glaxo, among others, produce therapeutics for the treatment of asthma. We are proceeding with the clinical development of APC 2059 for the treatment of psoriasis and inflammatory bowel disease for which there are many competitive products from other pharmaceutical companies. Our competitors may succeed in developing technologies or products that are more effective than those we develop. Rapid technology changes or developments by others may result in our technology or potential products becoming obsolete or 16 18 noncompetitive. There can be no assurance that our competitors will not develop more effective or more affordable products, or achieve earlier product development completion, patent protection, regulatory approval or product commercialization than we will. WE MAY BE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY. Our success depends in large part on our ability to obtain patents, maintain trade secrets and operate without infringing the rights of others, both in the United States and in other countries. See the section below entitled "Patents and Proprietary Rights." Our ability to obtain patent protection on genes that we identify, or products based on such genes, is uncertain. Patents may not issue from any of our pending or future applications. Patent applications in the United States are maintained in secrecy until the patent issues. As a result, we cannot be certain that others have not filed patent applications for technology covered by our pending patent applications or that we were the first to invent the technology. In addition, an issued patent may be challenged, invalidated or maneuvered around or it may otherwise not be sufficient to protect our technology. The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions. As a result, it is difficult to predict the broadness of claims allowed in biotechnology and pharmaceutical patents or their enforceability. Moreover, there is substantial uncertainty regarding the patentability of gene fragments or genes without known function. Our commercial success also depends, in part, on not infringing patents issued to others and not breaching the technology licenses upon which any of our potential products are based. Competitors may have filed applications for, or may have received patents and may obtain additional patents and rights relating to, genes, products or processes that block or compete with ours. A number of third parties have filed patent applications or received patents in the areas of our programs. Some of these applications or patents may limit or hinder our patent applications, or conflict in certain ways with claims made under our issued patents. Furthermore, in the past we have been, and we may from time to time in the future be, notified of claims that we are infringing patents or other intellectual property rights owned by third parties. We may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office. These proceedings determine the priority of invention and the right to a patent for the technology in the U.S. In addition, lawsuits may be necessary to enforce any patents issued to us or to determine the scope and validity of the rights of third parties. Lawsuits and interference proceedings, even if they are successful, are expensive to pursue, and we could use a substantial amount of our limited financial resources in either case. An adverse outcome could subject us to significant liabilities to third parties and require us to license disputed rights from third parties or to cease using such technology. We also rely on trade secrets to protect our technology, especially where patent protection is not believed to be appropriate or obtainable. We protect our own technology and processes, in part, by confidentiality agreements with our employees, consultants and certain contractors. However, these agreements may be disregarded or breached, and we may not have adequate remedies for any breach. In addition, it is possible that our trade secrets will otherwise become known or be independently discovered by competitors. WE MAY BE UNABLE TO REALIZE SIGNIFICANT COMMERCIAL VALUE FOR OUR GENE DISCOVERIES. Our gene discovery programs currently target complex polygenic diseases. Polygenic diseases are those caused by a defect in more than one gene. We cannot be certain that our positional cloning technology and approach to gene discovery will enable us to successfully identify and characterize the specific genes that cause or predispose individuals to these diseases. Even if we successfully identify specific genes, our gene discoveries may not lead to the development of commercial products. Once we identify specific genes, we may rely upon others to complete characterization of the genes. In addition, we plan to rely on others to develop and commercialize products based upon such genes. The resources and efforts of third parties in this regard may be outside our control. These third parties may not rigorously pursue gene characterization or product development and commercialization efforts. 17 19 Our success depends, in part, upon our ability to focus research efforts on genes which may be identified and characterized through the use of positional cloning techniques. These genes should also be suitable candidates for gene-based diagnostic and therapeutic products. However, we believe the polygenic diseases that we are targeting are caused by a number of genetic as well as environmental factors. As a result, we cannot be certain that these diseases can be successfully addressed through gene-based diagnostic or therapeutic products. WE DO NOT HAVE MANUFACTURING FACILITIES OR COMMERCIAL MANUFACTURING EXPERIENCE. WE COULD EXPERIENCE MANUFACTURING DELAYS OR PROBLEMS THAT HURT OUR PRODUCT SALES. We have no manufacturing facilities for our proposed drug products, and our potential products have never been commercially manufactured. We must rely on our collaborators, including Bayer, Merck, Bristol-Myers Squibb and Rhone-Poulenc Rorer, to manufacture products created by our collaborations. We believe that our collaborators or contract manufacturers or we will be able to manufacture our compounds at a cost and in quantities necessary to make them commercially acceptable. However, we cannot be certain that this will be the case. If we or our collaborators are unable to manufacture or contract with others for a sufficient supply of our compounds on acceptable terms, we may have to delay any of the following: - our preclinical and clinical testing schedule, - our submission of products for regulatory approval - the market introduction and subsequent sales of products Any of these delays would adversely affect our financial condition and results of operations. In addition, we could face the same delays as a result of delays or difficulties in our relationships with third party manufacturers. In addition to us, our collaborators and contract manufacturers must adhere to current Good Manufacturing Practices regulations enforced by the FDA through its facilities inspection program. If these facilities cannot pass a pre-approval plant inspection, FDA approval of our products will not be granted or will be delayed. With respect to our Advanced Technologies Division, we are developing new manufacturing processes to meet the expanding demand for our combinatorial chemistry libraries. We have never had to manufacture the quantities of libraries we are committed to delivering in 1999. We have occasionally experienced problems in manufacturing in the past that have delayed some shipments of libraries and we may experience manufacturing problems in the future as we expand our manufacturing capabilities. Problems in manufacturing could delay shipments of combinatorial chemistry compounds and such delays could have a material adverse effect on our business and our financial results. WE DO NOT HAVE MARKETING EXPERIENCE OR CAPABILITIES. THIS COULD PUT OUR PRODUCTS AT A COMPETITIVE DISADVANTAGE. We currently have no sales, marketing or distribution capability. We will rely on our collaborative relationships, including those with Bayer, Merck, Bristol Myers Squibb and Rhone-Poulenc Rorer, to market certain potential products. In addition, we may enter into future collaborations in which we rely on our pharmaceutical partner to market our products. We cannot be certain that collaborators will devote sufficient resources to the marketing and sale of our products or those third parties efforts will otherwise be successful. Revenues received under existing and future collaborations will depend on the ability of our collaborators to market our products. We may also decide to market other potential products by ourselves. To market any potential products ourselves, we must develop a marketing and sales force with technical expertise and the necessary supporting distribution capability. If we are unable to develop a market and sales force, sale of any products could be adversely affected. We do not know whether we will desire to or be able to establish our own sales and distribution capabilities or whether we will be able to enter into the necessary relationships with third parties. 18 20 WE MAY BE UNABLE TO SUCCESSFULLY PRICE OUR PRODUCTS OR OBTAIN ADEQUATE REIMBURSEMENT. The business and financial condition of pharmaceutical and biotechnology companies will continue to be affected by the efforts of outside parties such as governments and third party payors (i.e. government health administrators, private health insurance companies, HMOs, etc.) to contain or reduce the cost of health care. In some foreign markets, pricing or profitability of prescription pharmaceuticals is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to install similar governmental control. In addition, an increasing emphasis on managed care in the United States has and will continue to increase the pressure on price of prescription drugs. The announcement of these proposals or efforts could adversely affect our ability to raise capital and our stock price. In addition, if these proposals or efforts adversely affect other pharmaceutical companies that are prospective collaborators with Axys, our ability to establish or maintain strategic alliances may be adversely affected. In both domestic and foreign markets, sales of our potential products will depend in part on the availability of reimbursement from third-party payors, such as government health administration authorities, private health insurers and other organizations. Third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved health care products. We cannot be certain that any of our potential products will be considered cost-effective or that adequate third-party reimbursement will be available. PHYSICIANS AND INSURERS MAY NOT ACCEPT OUR PRODUCTS. Even if any of our products are cleared for marketing, we are not certain that physicians, health insurance companies or patients will accept them. The degree of market acceptance will depend upon a number of factors, including getting regulatory approvals, showing proof in the medical community of the clinical effectiveness and safety of our product candidates and their potential advantages over existing treatment methods and reimbursement policies of government and third-party payors. There is no assurance that physicians, patients, payors or the medical community in general will accept and use any products that may be developed by the company. WE MAY BE UNABLE TO ATTRACT AND RETAIN PROFESSIONAL STAFF. We are highly dependent on the senior members of our scientific and management staff. Retaining and attracting qualified personnel, consultants and advisors is critical to our success. We face intense competition for qualified individuals from numerous pharmaceutical and biotechnology companies, universities and other research institutions. We are currently seeking, to hire additional qualified scientific personnel to perform research and development. In addition, we expect that we will need to add management personnel and develop additional expertise by existing management personnel in order to expand product development and clinical testing. We cannot be certain that we will be able to attract and retain such individuals on acceptable terms or at all. In addition, our academic collaborators are not our employees. As a result, we have limited control over their activities and can expect that only limited amounts of their time will be dedicated to our activities. These academic collaborators may also have relationships with other commercial entities, some of which could compete with Axys. WE EXPECT TO CONTINUE TO OPERATE AT A LOSS AND MAY NEVER ACHIEVE PROFITABILITY. We may never achieve and sustain profitability. We have experienced significant operating losses since the company started. We have not generated any product revenue. As of December 31, 1998, we had an accumulated deficit of approximately $230 million. We expect that we will continue to incur significant operating losses over at least the next several years as our research and development efforts and preclinical and clinical testing activities expand. 19 21 WE MAY NEED TO SECURE ADDITIONAL FINANCING. The development of our technology and potential products will require substantially more money than the company currently has. That means substantial funds will need to be committed to the company in order to conduct the costly and time-consuming research and preclinical and clinical testing activities necessary to develop products. We plan to be able to meet some of our needs for money through the sale of our interests in our affiliated businesses. However, those businesses are still in relatively early stages of development. There can be no assurance that these businesses will prove to be financially successful or that we will be able to sell our interest in these businesses for a substantial amount of money or at all. Whether we are successful in getting money for our interests in these affiliated businesses, we believe we will still need to pursue other sources of money to fund our research and development. Our future money needs will depend on many factors, including the following: - scientific progress in the research and development of our technology and drug development programs - the size and complexity of these programs - the timing, range and results of preclinical studies and clinical trials - our ability to establish new and maintain existing collaborations - our ability to achieve any milestones under such collaborations - the time and costs involved in getting regulatory approvals or in filing, enforcing or prosecuting patents We expect that our existing money resources, including research and development revenues from existing collaborations, will enable us to maintain current and planned operations for at least the next two years. However, we expect to raise substantial additional money to fund operations before the end of this period. In addition, we will need to continue to raise money until we achieve substantial product or royalty revenues, which may take a number of years to happen. We expect that we will seek additional funding through new collaborations, the extension of existing collaborations, through sale of our interests in our affiliated businesses, or through public or private equity or debt financings. Furthermore, we may obtain funds through arrangements with collaborative partners or others that require us to give up rights to technologies or products that we would otherwise seek to develop or commercialize ourselves. We cannot be certain that additional funding will be available or that the terms will be acceptable. Existing stockholders will experience dilution of their investment if additional funds are raised by a follow-on stock offering. If adequate funds are not available, we may delay, reduce or eliminate any of our research or development programs. OUR STOCK MAY EXPERIENCE SUBSTANTIAL PRICE AND VOLUME FLUCTUATIONS. Stock prices and trading volumes for biotechnology companies often fluctuate widely for reasons which may be unrelated to their businesses. Our stock price could decline as a result of many factors, including: - announcements of technological innovations or new products by Axys or our competitors - developments or disputes concerning patents or other rights - publicity regarding actual or potential medical results from products under development by Axys or our competitors - regulatory developments in both the United States and foreign countries - public concern regarding the safety of biopharmaceutical products - any shortfall in our revenues or net income from that expected by securities analysts 20 22 - changes in analyst's estimates of our financial performance, the financial performance or our competitors or the financial performance of biotechnology companies in general - sales of large blocks of our common stock - conditions in the financial markets or economy in general or the biotechnology industry in particular BECAUSE WE ARE DEVELOPING DRUG PRODUCTS, WE MAY ENCOUNTER PRODUCT LIABILITY CLAIMS. We may be exposed to liability claims resulting from the use of our products in clinical trials, or the manufacturing, marketing and the sale of any approved products. These claims may be made directly by consumers, pharmaceutical companies or others. We maintain product liability insurance coverage for claims arising from the use of our products which are still in the developmental phase. However, this insurance coverage is becoming increasingly expensive. We and our collaborative partners may not be able to obtain and maintain commercially reasonable product liability insurance. Furthermore, even if we maintain insurance, the amount may not be enough to protect us against losses due to a lawsuit. A successful product liability claim against Axys or series of claims in excess of our insurance could adversely affect our results of operations and our need for additional financing. DELAWARE LAW AND OUR CHARTER COULD MAKE AN ACQUISITION OF AXYS MORE DIFFICULT. In 1998 we adopted a shareholder rights plan, which may have the effect of delaying or preventing an unsolicited takeover of the company. Our Certificate of Incorporation and Bylaws states that any action of this nature taken by stockholders must be conducted at an annual or special meeting of stockholders and may not be conducted by written consent. Only the Board of Directors, the Chairman of the Board or the President may call special meetings of the stockholders. These and other charter provisions may discourage certain types of transactions involving an actual or potential change in control of Axys. In fact, these provisions may discourage transactions in which the stockholders might otherwise receive a premium for their shares over then current prices, and may limit the stockholders' ability to approve transactions that they think are in their best interests. WHAT OTHER MATTERS SHOULD STOCKHOLDERS CONSIDER WITH RESPECT TO THE COMPANY? Patents And Proprietary Rights We hold a number of issued United States patents relating to compositions of matter, methods of treating disease, combinatorial chemistry and computational technologies. These patents expire at various dates up to the year 2016. In addition, we have filed and there are now pending patent applications relating to compositions of matter, methods of treating disease, combinatorial chemistry, assay techniques, transgenic animal models, computational technologies and novel technology for the discovery of novel protease inhibitors. We intend to file additional patent applications, when appropriate, relating to our technology and to specific products we develop. We strategically file selected patent applications to protect technology, inventions and improvements that are important to the development of our business. That is our policy, as well as our practice. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. The patent positions of pharmaceutical and biotechnology firms, including Axys, are uncertain and involve complex legal and factual questions. In addition, the scope of the claims in a patent application can be significantly modified before the issued patent is issued. As a result, we do not know whether any of our applications will result in the issuance of patents, or if any of our issued patents will provide significant protection. We also do not know whether any of our issued patents will be invalidated. Since patent applications in the United States are maintained in secrecy until patents issue, and since publication of discoveries in the scientific or patent literature often lag behind actual discoveries, we cannot even be certain that we were the first creator of inventions covered by our pending patent applications or that we were the first to file patent applications for such inventions. 21 23 In addition, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office (PTO) to determine priority of invention. These proceedings determine the priority of invention and the right to a patent for the technology in the U.S. Such proceedings could result in substantial costs to us, even if we win. There can be no assurance that our pending patent applications, if issued, or our existing patents, will not be invalidated. An adverse outcome could subject the company to significant liabilities to third parties, require disputed rights to be licensed from third parties or require the company to stop or modify its use of such technology. The development of therapeutic products for applications in the product fields we are pursuing is intensely competitive. A number of pharmaceutical companies, biotechnology companies, universities and research institutions have filed patent applications or received patents in the areas in which we are conducting research. In addition, patent applications filed by others relating to our potential products or technologies may currently be pending. Some of these applications or patents may limit or hinder our freedom to practice and could result in a significant reduction of the coverage of our patents, or potential patents. We are aware of pending patent applications that have been filed by other companies that may pertain to certain of our technologies. If patents are issued to these or other companies containing incompatible or conflicting claims, and such claims are ultimately determined to be valid, we may be required to obtain licenses to these patents or to develop or obtain alternative technology. Furthermore, we have in the past been, and may again be, notified of claims that we may be infringing patents or other intellectual property rights owned by third parties. We have obtained licenses under several patents held by third parties. If necessary or desirable, we may seek additional licenses under other patents or intellectual property rights. There can be no assurance, however, that we will be able to obtain a license we seek on reasonable terms or even at all. As an alternative, we could decide to resort to litigation to challenge a patent or patents. Such challenges can be extremely expensive and time consuming. Consequently, they can have a material adverse effect on our business, financial condition and results of operations. Much of the unpatentable know-how important to our technology and many of its processes depends upon the knowledge, experience and skills of key scientific and technical personnel. To protect our rights to this know-how and technology, all employees, consultants, advisors and collaborators are required to enter into confidentiality agreements with the company that prohibits the disclosure of confidential information to any third party and requires disclosure to the company of ideas, developments, discoveries and inventions made by these individuals. There can be no assurance that these agreements will effectively prevent disclosure of our confidential information or that these agreements will provide meaningful protection for our confidential information if there is unauthorized use or disclosure. Our business could be adversely affected by competitors who develop substantially equivalent technology. In connection with certain research, we entered into sponsored research agreements with various researchers and universities. Generally, under these agreements we fund the research of investigators in exchange for the right or an option to a license to any patentable inventions that may result in designated areas. We are obligated to make certain payments during the terms of certain of the agreements, to pay royalties on net sales of any licensed products and, in some cases, to negotiate in good faith the business terms of any license executed upon exercise of licensing options. There can be no assurance that these agreements will not be breached or that we would have adequate remedies for any breach. Government Regulation The manufacturing and marketing of our proposed products and our research and development activities are subject to regulation for safety, effectiveness and quality by many governmental authorities in the United States and other countries. In the United States, drugs are subject to stringent regulation by the United States Food and Drug Administration (FDA). The Federal Food, Drug and Cosmetic Act and FDA regulations, as well as other federal and state laws and regulations, govern, the testing, manufacture, safety, effectiveness, package labeling, storage, record keeping, approval, advertising and promotion of our proposed products. Product development and approval takes a long time and involves the expenditure of a lot of money. If we fail 22 24 to comply with certain regulatory requirements, we could be subject to sanctions, such as warning letters, penalties, criminal prosecution, injunctions, product seizure, product recalls, total or partial suspension of production, and FDA refusal to approve pending New Drug Applications (NDA) or costly supplements to approved applications. The steps required before a drug may be marketed in the United States include (i) preclinical laboratory tests, in vivo (animal model) preclinical studies and formulation studies, (ii) the submission to the FDA of an application for human clinical testing, known as an Investigational New Drug Application (IND), which must be accepted by the FDA before human clinical trials are started, (iii) adequate and well-controlled human clinical trials to establish the safety and effectiveness of the drug, (iv) the submission of an NDA to the FDA, and (v) FDA approval of the NDA prior to any commercial sale or shipment of the drug. In addition to obtaining FDA approval for each product, each domestic drug manufacturing establishment must be registered with the FDA. Domestic drug manufacturing establishments are subject to inspections twice a year by the FDA and must comply with Good Manufacturing Practices. To supply products for use in the United States, foreign manufacturers must comply with Good Manufacturing Practices and are subject to periodic inspection by the FDA or by corresponding regulatory agencies in their country. Drug product manufacturers located in California also must be licensed by the State of California. Preclinical tests include laboratory evaluation of what is in the product and how it was made, as well as animal studies to assess the potential safety and effectiveness of the product. Preclinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practices. The results of the preclinical tests are submitted to the FDA as part of an IND and reviewed by the FDA prior to the start of human clinical trials. Unless the FDA objects, the IND will become effective 30 days following its receipt by the FDA. There can be no assurance that submission of an IND will result in FDA authorization to start clinical trials. Clinical trials involve the giving the investigational new drug to healthy volunteers and to patients, under the supervision of a qualified investigators. Clinical trials are conducted in agreement with Good Clinical Practices under instructions that detail the objectives of the study, the limits to be used to monitor safety and the effectiveness criteria to be evaluated. Instructions must be submitted to the FDA as part of the IND. Further, each clinical study must be conducted under the power of an independent Institutional Review Board ("IRB") at the site where the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects and the possible liability of the site. Clinical trials are typically conducted in three phases that go in order, but the phases may overlap. In Phase I, in which we usually give the drug to healthy subjects, the drug is tested to determine its metabolism (how the drug is absorbed by the body), pharmacokinetics (what the body does to the drug) and pharmacological actions (biological effects) in humans, the side effects associated with increasing doses and early evidence of how effective the drug is, if possible. Phase II involves studies in a limited patient population to (i) determine the effectiveness of the drug for specific, targeted indications, (ii) determine what amount of the drug works best and how much of the drug can be tolerated, and (iii) identify possible adverse effects and safety risks. If a compound is found to be effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials further evaluate the effectiveness of the drug and further test for safety in a larger group of people at many different locations. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specific time period, if at all, for any of our proposed products. Furthermore, the FDA or we may suspend or cancel clinical trials at any time if it is felt that the patients are being exposed to an unacceptable health risk or the FDA finds errors or incorrect information in the IND or due to the conduct of the investigation. Further, FDA regulations state that sponsors of clinical investigations must meet numerous regulatory requirements, including, selection of qualified investigators, proper monitoring of the investigations, recordkeeping and record retention, and ensuring that FDA and all investigators are promptly informed of significant new adverse effects or risks with respect to the drug. The results of the drug development, preclinical studies and clinical studies are submitted to the FDA in the form of an NDA, which, if accepted, would clear the way for marketing and commercial shipment of the drug. There can be no assurance that any approval will be granted by the FDA at all or, if granted, will be 23 25 granted on a timely basis. The FDA may deny an NDA if certain regulatory criteria are not satisfied, may require additional testing or information, or may require post-marketing testing and surveillance to monitor the safety of our products if the FDA does not view the NDA as containing enough evidence of the safety and effectiveness of the drug. Even if the company submits additional data, the FDA may still decide that the application does not satisfy its regulatory criteria for approval. In addition, even if regulatory clearance of a drug is granted, such approval may limit the uses for which it may be marketed. Finally, product approvals may be taken away if regulatory standards are not maintained or if problems occur following initial marketing. Among the typical conditions for NDA approval is the requirement that the proposed manufacturer's quality control and manufacturing procedures conform to Good Manufacturing Practices, which must be followed at all times. To comply with these standards, we will have to spend a large amount of time, money and effort in the area of production and quality control to ensure full technical compliance. In addition to regulations enforced by the FDA, we will also be subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other present and potential future federal, state or local regulations. Our research and development involves the controlled use of hazardous materials, chemicals and various radioactive compounds, all of which are regulated. Although we believe that our safety procedures for handling and disposing of these materials comply with the standards set by state and federal regulations, the risk of accidental contamination or injury from these materials is possible. In the event of an accident, the company could be held sued for any damages that result and any such lawsuit could exceed the insurance and resources of the company. For clinical investigation and marketing outside the United States, we are also subject to foreign regulatory requirements governing human clinical trials and marketing approval for drugs. These requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement vary widely for European countries both within, and outside, the European Union (EU). We plan to comply with the European regulatory process by identifying and using clinical investigators in the member states of the EU and other European countries to conduct clinical studies. Further, we intend to design our studies to meet FDA, EU and other European countries' standards. Within the EU, while marketing authorizations must be supported by clinical trial data of a type and to the extent set out by EU directives and guidelines, the approval process for the commencement of clinical trials is not currently harmonized by EU law and varies from country to country. As far as possible, we intend to design our studies so as to develop a regulatory package sufficient for multi-country approval in our European target markets, without the need to duplicate studies for individual country approvals. Outside the United States, our ability to market a product is based upon receiving a marketing authorization from the appropriate regulatory authority. Currently, foreign marketing authorizations are applied for at a national level, although within the EU certain registration procedures are available to companies wishing to market the product in more than one EU member state. If the regulatory authority is satisfied that enough evidence of safety, quality and effectiveness has been presented, a marketing authorization will be granted. The system for obtaining marketing authorizations within the EU changed on January 1, 1995. The current EU registration system is a dual one in which certain products, such as biotechnology and high technology products and those containing new active substances, will have access to a central regulatory system that provides registration throughout the entire EU. Other products will be registered by national authorities in individual EU member states, operating on a principle of mutual recognition. This foreign regulatory approval process includes all of the same risks involved in the FDA approval process described above. Employees As of December 31, 1998, Axys employed 427 individuals, of whom 138 hold Ph.D. or M.D. degrees and 140 hold other advanced degrees. Approximately 345 employees are involved in research and development activities, including a variety of disciplines within the areas of molecular biology and other biological sciences, medicinal chemistry, genomics and genetics, bioinformatics, computer sciences and clinical development. 24 26 Approximately 82 employees are employed in finance, corporate development and general administrative activities. In January 1999, as part of our reallocation of resources to our oncology programs, we reduced our work force by approximately 34 employees. None of the company's employees is covered by collective bargaining agreements, and management considers relations with its employees to be good. Axys also enters into part-time consulting arrangements with experienced, professional scientists and managers to supplement our work force. ITEM 2. PROPERTIES Axys currently occupies approximately 265,000 square feet of leased laboratory, support and administrative space in South San Francisco and La Jolla, California and Cambridge, Massachusetts, of which the Company's Advanced Technologies Division occupies approximately 40,000 square feet in South San Francisco. Leases expire on these facilities to October 15, 1999 with respect to approximately 12,150 square feet, December 31, 2002 with respect to the approximately 108,000 square feet, July 31, 2005 with respect to 32,700 square feet, and August 4, 2006 for the remainder of the Company's facilities. Most of these leases have additional options for extensions. In addition to the above listed facilities, the Company is subleasing approximately 39,000 square feet under two sublease agreements to unrelated third parties, with the leases and subleases expiring on July 14, 1999 and July 31, 2005. The Company's existing and planned facilities are believed to be adequate to meet its present requirements, and the Company currently believes that suitable additional space will be available to it, when needed, on commercially reasonable terms. ITEM 3. LEGAL PROCEEDINGS From time to time the Company is subject to legal proceedings or claims arising in the ordinary course of its business. While the outcome of any such proceedings or claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company's consolidated results of operations or consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1998, no matters were submitted to a vote of the stockholders. 25 27 EXECUTIVE OFFICERS OF THE REGISTRANT Listed below is biographical information on executive officers of Axys as of February 28, 1999.
NAME AGE POSITION WITH AXYS ---- --- ------------------ John P. Walker............ 50 Chairman, Chief Executive Officer and Director Daniel H. Petree, J.D. ... 43 President, Chief Operating Officer Frederick J. Ruegsegger... 43 Senior Vice President, Finance and Corporate Development and Chief Financial Officer Michael C. Venuti, 45 Senior Vice President, Preclinical Ph.D. .................. Development, Chief Technical Officer William J. Newell, 41 Vice President, General Counsel and J.D. ................... Secretary Natalie J. Warner, 51 Vice President, Medical Affairs M.D. ...................
JOHN P. WALKER Mr. Walker has been Chief Executive Officer and a director of the company since 1993 and was appointed Chairman of the Board in January 1998. From 1993 to January 1998, he was also President of the company. Prior to joining Axys, Mr. Walker was the Chairman and Chief Executive Officer of Vitaphore Corporation, a medical device company which was sold to Union Carbide in 1990, and for a period of 15 years was an executive with American Hospital Supply Corporation, most recently serving as President of the Hospital Company. Mr. Walker also serves as Chairman of Signal Pharmaceuticals, Inc. and Microcide Corporation and is on the board of directors of Geron Corporation and the Biotechnology Industry Organization. Mr. Walker received a B.A. degree from the State University of New York at Buffalo and conducted graduate business studies at Northwestern University Institute of Management. DANIEL H. PETREE, J.D. Mr. Petree has been President and Chief Operating Officer of the company since January 1998. From June 1996 until January 1998, he served as Executive Vice President, Corporate Development of the company. From August 1993 until June 1996, Mr. Petree served as the company's Vice President, Corporate Development. Mr. Petree also served as Chief Financial Officer of the company from August 1993 until December 1996. From 1992 to 1993, he was Vice President, Business Development of TSI Corporation, a biotechnology service company. Prior to that time, he was with Montgomery Securities, an investment bank, from 1987 to 1992, ultimately serving as Vice President, Health Care Group in Montgomery's corporate finance division. Mr. Petree received a J.D. degree from the University of Michigan Law School and holds a B.A. degree from Stanford University. FREDERICK J. RUEGSEGGER Mr. Ruegsegger has been the company's Senior Vice President, Finance and Corporate Development and Chief Financial Officer since January 1998. Prior to that he served as Vice President, Finance and Administration and Chief Financial Officer of the company from December 1996 until January 1998. From 1993 to 1996, he was President and Chief Executive Officer of EyeSys Technologies, Inc., a medical instrument and software company. Mr. Ruegsegger served as Chief Financial Officer, from 1986 to 1993, and President, from 1991 to 1993, of Vitaphore Corporation, a medical device company. Mr. Ruegsegger also serves as a director of SteriGenics International, Inc. Mr. Ruegsegger received a B.S. degree in Economics from the University of Illinois and a Master of Management from Northwestern University's Kellogg Graduate School of Management. MICHAEL C. VENUTI, PH.D. Dr. Venuti has been the company's Senior Vice President, Research and Preclinical Development since November 1998, and had previously served as Senior Vice President, Research, South San Francisco, Vice President, Research and Chief Technical Officer since January 1998, February 1997 and July 1996, 26 28 respectively. Dr. Venuti joined the company in November 1994 as Director of Chemistry and was promoted to Vice President of Chemistry in July 1995, where he served until February 1997. From 1993 until he joined the company, he was at Parnassus Pharmaceuticals, a start-up biotechnology company that initiated insolvency proceedings in October 1994, where he was Vice President, Chief Scientific Officer and a founder. From 1988 to 1993, Dr. Venuti was at Genentech, Inc., a biotechnology company, where he was Director of Bioorganic Chemistry, a program that he helped establish. Dr. Venuti received an A.B. in chemistry from Dartmouth College, a Ph.D. in organic chemistry from the Massachusetts Institute of Technology and was a postdoctoral fellow at the Syntex Institute of Organic Chemistry. WILLIAM J. NEWELL, J.D. Mr. Newell joined Axys as Vice President and General Counsel and Secretary in July 1998. From October 1983 to July 1998, Mr. Newell practiced at the firm of McCutchen, Doyle, Brown & Enersen, LLP (Palo Alto Office) where he had been a partner since 1990. He received his J.D. from the University of Michigan Law School and holds an A.B. from Dartmouth College. NATALIE J. WARNER, M.D. Dr. Warner has been the company's Vice President, Medical Affairs since January 1996 when she joined the company in connection with its acquisition of Khepri Pharmaceuticals, Inc., a pharmaceutical research and development company. Dr. Warner has also been Chief Executive Officer of PPGx since its inception in February 1999. From January 1993 to December 1995, she was Vice President of Medical Affairs and Drug Development at Khepri Pharmaceuticals. From 1988 to 1993, Dr. Warner worked at Syntex Corporation, a pharmaceutical products and medical diagnostic systems company, where she held a number of positions, including Vice President of Clinical Research and Vice President, Worldwide Safety, Surveillance and Reporting. Prior to joining Syntex, Dr. Warner was Director of Clinical Research at Merck, Sharp & Dohme Research Laboratories. She received a B.A. from Swarthmore College, an M.D. from Cornell Medical College and completed her fellowship and residency at Columbia University. PART II. ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Axys' Common Stock began trading on the Nasdaq National Market under the symbol "ARRS" on November 19, 1993. Prior to that date, there was no public market for the Company's Common Stock. On January 12, 1998, when the company acquired Sequana Therapeutics, Inc., the company changed its name to Axys Pharmaceuticals, Inc. and changed its ticker symbol to "AXPH". The following table sets forth, for the periods indicated, the high and low sales prices of the Common Stock reported on the Nasdaq National Market. These over-the-counter quotations reflect inter-dealer prices, without retail markup, markdown or commission, and may not necessarily represent the sales prices in actual transactions.
HIGH LOW ------ ------ 1997 First Quarter.............................................. $15.88 $12.13 Second Quarter............................................. 14.00 9.50 Third Quarter.............................................. 15.63 11.38 Fourth Quarter............................................. 14.00 7.50 1998 First Quarter.............................................. $10.75 $ 7.66 Second Quarter............................................. 8.75 6.50 Third Quarter.............................................. 7.75 3.38 Fourth Quarter............................................. 7.06 3.69
27 29 On March 19, 1999, the last sale price reported on the Nasdaq National Market for the Company's Common Stock was $4.13 per share. HOLDERS As of February 26, 1999 there were approximately 663 stockholders of record of the Company's Common Stock. DIVIDENDS The Company has not paid dividends on its Common Stock and currently does not plan to pay any cash dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES On December 30, 1998, Axys issued 878 shares of Common Stock, valued at approximately $4,100 to MMC/GATX Partnership No. 1, in connection with the net issuance exercise of a warrant. On December 17, 1998, Axys issued 23,700 shares of Common Stock, valued at $155,282, to 52nd Street Associates, in connection with a consulting agreement dated November 23, 1998 between Axys and McKinsey & Company, Inc. The issuance and sale of such shares was intended to be exempt from registration and prospectus delivery requirements under the Securities Act of 1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof due to, among other things, (i) the limited number of persons to whom the shares were issued, (ii) the distribution of disclosure documents to the investor, (iii) the fact that such person represented and warranted to the Company, among other things, that such person was acquiring the shares for investment only and not with a view to the resale or distribution thereof, and (iv) the fact that certificates representing the shares were issued with a legend to the effect that such shares had not been registered under the Securities Act or any state securities laws and could not be sold or transferred in the absence of such registration or an exemption therefrom. 28 30 ITEM 6. SELECTED FINANCIAL DATA AXYS PHARMACEUTICALS, INC. The data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" which is included elsewhere in this Annual Report on Form 10-K.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1994 1995(1) 1996 1997 1998(2) -------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Consolidated Statements of Operations: Revenues........................... $ 8,304 $ 16,727 $ 21,560 $ 24,814 $ 47,422 Operating costs and expenses: Cost of goods sold............... -- -- -- 1,010 2,058 Research and development......... 13,155 14,689 24,319 30,040 62,176 General and administrative....... 4,010 4,247 5,409 7,153 14,460 Acquired in-process research and development................... -- 22,514 230 -- 124,888 -------- -------- -------- -------- --------- Total operating costs and expenses......................... 17,165 41,450 29,958 38,203 203,582 -------- -------- -------- -------- --------- Operating loss..................... (8,861) (24,723) (8,398) (13,389) (156,160) Interest income (expense), net..... 522 990 2,470 2,422 3,812 Equity interest in loss of joint venture.......................... -- -- -- -- (2,281) -------- -------- -------- -------- --------- Net loss........................... $ (8,339) $(23,733) $ (5,928) $(10,967) $(156,124) ======== ======== ======== ======== ========= Net loss per share, basic and diluted.......................... $ (0.97) $ (2.71) $ (0.45) $ (0.73) $ (5.25) Weighted average number of shares used in computing basic and undiluted outstanding............ 8,570 8,745 13,177 15,025 29,758
DECEMBER 31, --------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- --------- (IN THOUSANDS) Consolidated Balance Sheet Data: Cash, cash equivalents and marketable investments........... $ 30,070 $ 31,105 $ 66,720 $ 53,408 $ 72,717 Total assets....................... 34,786 40,293 80,832 73,584 107,262 Long-term obligations.............. 7,645 16,490 10,676 15,331 16,816 Accumulated deficit................ (33,298) (56,876) (62,804) (73,771) (229,895) Total stockholders' equity......... 13,425 7,278 52,900 43,890 60,512
- --------------- (1) Includes the results of operations of Khepri Pharmaceuticals, Inc. from December 22, 1995 through December 31, 1995, including a one-time charge for acquired in-process research and development. Excluding such one-time charge, net loss and net loss per share would have been $1,219,000 and $0.14 per share, respectively. (2) Includes the results of operations of Sequana Therapeutics, Inc. from January 8, 1998 through December 31, 1998, including a one-time charge for acquired in-process research and development. Excluding such one-time charge, net loss and net loss per share would have been $31,236,000 and $1.05 per share, respectively. 29 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains both historical information and forward-looking statements that involve risks and uncertainties. Forward-looking statements include projections and other statements of events that may occur at some point in the future. The company's actual results could differ significantly from those described in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section as well as under "Item 1. Business," including, "What Factors Could Cause Our Results To Differ Significantly From Those You Might Expect". Overview Since the company's founding in 1989, Axys has devoted most of its resources to research and development programs. To date, the company's revenues have resulted from its collaborative research programs with pharmaceutical companies as part of its drug discovery business and more recently from sales of chemical compound libraries as part of its Advanced Technologies Division ("ATD") combinatorial chemistry business. The company's collaborative research programs generally contain one or more of the following sources of revenue to the company: - Research Support: Payments which are generally based on the number of researchers Axys is committing to a particular program. These revenues are recorded when earned by the company. - License Fees: Payments generally made when a collaboration agreement is signed. These revenues are recorded when the agreement is signed. - Commitment Fees: Payments made in conjunction with the company's commitment to perform certain funded research. These revenues are recorded in equal periodic amounts over the course of the research efforts. - Milestone Payments: Payments which are based on the company or its partner achieving certain technical or regulatory milestones in the collaboration. These revenues are recorded upon the achievement of mutually agreed milestones. - Royalties: Upon commercialization of products resulting from a collaboration, the company may earn royalties based on a percentage of the revenue earned by the collaboration partner. These revenues would be recorded when product sales result from the company's collaborations. The company's sales of chemical compound libraries contain one or more of the following sources of revenue to the company: - Product Sales: As chemical compound libraries are shipped to customers of the ATD, the Company records revenue based on the contracted price per compound. - License Fees: Payments made when compound supply or technology license agreements are signed. These revenues are recorded when the agreement is signed. - Commitment Fees: Payments made in conjunction with the ATD's commitment to perform certain obligations under compound supply or technology license agreements. These revenues are recorded in equal periodic amounts over the course of the relevant agreement. Although not generally a source of revenue, the collaborative research programs occasionally include the sale of stock by the Company to the pharmaceutical company sponsoring the research. These sales may involve the recognition of revenue by the Company if they are made at a premium to the prevailing price of the Company's common stock at the time of the sale. In that case, the amount of the premium is recognized as revenue at the time of the stock purchase. 30 32 A summary of the company's significant collaborative research agreements, including those of Sequana Therapeutics, Inc., since inception follows:
TERM OF COMPANY RESEARCH PHASE SUBJECT OF COLLABORATION ------- -------------- ------------------------ Bayer AG ("Bayer") November 1994 to Development of inhibitors of the regulatory enzymes November 1997 tryptase and chymase for the treatment of asthma and other inflammatory and auto-immune diseases. As of November 1997, the Company completed its obligations under the research phase of this agreement. In July 1997, the company reacquired the rights (with Bayer retaining an option to reacquire rights again) to exploit tryptase inhibitors against psoriasis and inflammatory bowel disease, which were part of the original agreement. Merck & Co. November 1996 to Development of small molecule inhibitors of ("Merck") November 1999 proteases involved in osteoporosis. In November 1998, Merck elected to extend the research phase to November 1999. Bristol-Myers Squibb December 1997 to Development of protease inhibitors to prevent the ("BMS") December 2000 growth and spread of hepatitis C virus infection. The company's obligations under the research term extend to December 2000. Rhone-Polenc Rorer December 1998 to Development of small molecule therapeutics that ("RPR") December 2000 inhibit cathepsin S, a protease associated with certain inflammatory diseases. The initial research phase of this agreement extends through December 2000. Rhone-Polenc Rorer has the option to extend the research phase to December 2002. Pharmacia & Upjohn August 1995 to Development of inhibitors of Factor Xa, Factor VIIa ("P&U") April 1998 and for the treatment of blood clotting disorders. As of April 1998 the Company completed its obligations under this agreement. Amgen, Inc. May 1993 to Development of synthetic small molecule mimetics of ("Amgen") February 1997 erythropoietin. As of February 1997 the Company completed its obligations under this agreement. P&U March 1993 to Development of certain human growth factor December 1997 mimetics, initially focusing on human growth hormones. As of December 1997 the Company completed its obligations under this agreement. Roche Bioscience June 1998 to To develop therapies for pain using functional ("RBS") September 1999 genomics. The research phase may be extended to June 2000, at the option of RBS. Parke-Davis October 1997 to Identification of genes important in the etiology Pharmaceutical October 2002 of schizophrenia and bipolar disorder. The Research Division company's obligations under the research term of Warner-Lambert extend to October 2002. Company ("PD") Boehringer Ingelheim June 1995 to Identification of genes important in the etiology International GmbH June 2000 of asthma. As of January 1, 1999 the company agreed ("BI") to reduce the number of researchers in this program and is continuing to have discussions with BI about the future direction of this collaboration. The company's current obligations under the research term extend to June 2000. Corange June 1995 to Identification of genes important in the etiology International, Ltd. February 1999 of osteoporosis. The research phase of this ("Corange") collaboration terminated in February 1999. Glaxo-Wellcome Inc. July 1994 to Genomics work in the area of type II diabetes and ("Glaxo") February 1998 human obesity. As of February 1998 the Company completed its obligations under this agreement.
With respect to the company's product sales through the ATD, the company has several outstanding agreements with pharmaceutical and biotechnology companies for the production of combinatorial chemistry 31 33 compounds, of which the following are material to the ATD: Pharmacia & Upjohn, dated March 1996, for the delivery of compounds through December 1999 and Parke-Davis Pharmaceutical Research Division of Warner-Lambert Company, dated May 1998, for the delivery of compounds over the next three years. Additionally, in December 1998, the company entered into an agreement with Rhone-Polenc Rorer for the delivery of compounds through December 2000. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND 1997 1998 Events Which Affected The Company's Operations: On January 8, 1998 the company completed the acquisition of Sequana Therapeutics, Inc. ("Sequana"), a genomics company of approximately 200 employees based in La Jolla, California. The company acquired all of the outstanding stock of Sequana in exchange for common stock of the company. The discussion below on "In Process Research and Development" sets out in further detail a description of the research programs at Sequana at the date of acquisition. In general, Sequana was a company of similar size and complexity to Axys. Sequana's revenues were primarily derived from collaborative research agreements with most of the same components as those described above for Axys. Consequently, in comparing the operating results of the company for the periods ended December 31, 1998 and 1997, Sequana contributed in large part to the doubling of all of the line items on the Statement of Operations, except "Product Revenues" and "Cost of Goods Sold," which were applicable to of Axys alone. In May 1998, the company formed a majority owned subsidiary, Xyris Corporation ("Xyris"), which was established to leverage the company's existing pharmaceutical technology in the agricultural biotechnology market. The company owns 82 percent of the outstanding stock of Xyris as of December 31, 1998, and the remaining 18 percent is owned in part by a third party and by the chief executive officer of Xyris. REVENUES Collaboration and licensing revenues The company's collaboration and licensing revenues increased to $38.9 million for the year ended December 31, 1998, from $22.5 million in 1997, primarily due to the acquisition Sequana. If the acquisition had occurred prior to 1997, revenues on a pro forma basis for 1997 would have been $42.1 million, and would have therefore been $3.2 million lower in 1998. Collaboration and licensing revenues for the year ended December 31, 1998 were attributable to the material collaborative research agreements with: (i) Parke-Davis for the gene identification program in schizophrenia and bipolar disorder, and includes research funding; (ii) BI for the gene identification program in asthma, and include research funding; (iii) BMS for the development of small molecule inhibitors of proteases involved in hepatitis C virus infection and include research funding, as well as a licensing fee; (iv) Merck for the development of small molecule inhibitors of proteases involved in osteoporosis, and include research funding and the amortization of an up-front licensing fee; and (v) RPR for the development of small molecule therapeutics that inhibit cathepsin S, associated with certain inflammatory diseases, and include a licensing fee. Although some of these agreements were new, 1998 revenues decreased when compared to 1997 on a pro forma basis because of lower revenues recognized under the following agreements: (i) the end of research funding in July 1998 of the P&U agreement for the development of inhibitors of Factor Xa; (ii) the end of the research phase in November 1997 of the Bayer agreement to develop inhibitors of the regulatory enzymes tryptase and chymase for the treatment of asthma; (iii) the termination of the Glaxo agreement for the genomics work in the area of type II diabetes and related conditions; and (iv) the end of the research phase of the SB agreement in December 1997 for the inhibition of intracellular viral proteases. Product revenues The company's product revenues increased to $8.5 million for the year ended December 31, 1998, from $2.3 million in 1997. The increase was primarily due to the overall increase in compound libraries shipped in 32 34 1998, when compared to 1997, in accordance with the terms of the combinatorial chemistry agreements with P&U, PD and RPR described above. Cost of Goods Sold The company's cost of goods sold increased to $2.1 million for the year ended December 31, 1998 from $1.0 million in 1997. The increase was primarily due to more compound libraries being shipped in 1998 than 1997 under the three agreements discussed above. Research and Development The company's research and development expenses increased to $62.2 million for the year ended December 31, 1998, from $30.0 million in 1997, primarily due to the acquisition of Sequana and additional costs associated with the clinical trials of APC-366, prior to the termination of that program. If the acquisition of Sequana had occurred prior to 1997, research and development expenses would have been $59.9 million in 1997 on a pro forma basis. The increase on a pro forma basis to $62.2 million in 1998 from $59.9 million in 1997 was due to the increase in clinical trial costs discussed above, as well as the expanded research efforts in drug discovery. General and Administrative The company's general and administrative expenses increased to $14.5 million for the year ended December 31, 1998, from $7.2 million in 1997, primarily due to the Sequana acquisition and the planning of our strategic initiative in oncology. Additionally, general and administrative expenses for 1998 included all of the expenses of the company's subsidiary, Xyris, due to the company's 82% ownership at December 31, 1998. Further expansions in general and administrative expenses took place in legal, finance and business development to support the company's expanded research and development efforts. These increases for 1998 were offset in part by the elimination of approximately $3.0 million of outside service costs, executive management, and other administrative expense from the combining of Arris (as the company was previously known) and Sequana. If the acquisition of Sequana had occurred prior to 1997, pro forma basis general and administrative expenses would have been $12.5 million in 1997. The increase, on a pro forma basis to $14.5 million in 1998 from $12.5 million in 1997 was primarily due to one-time charges related to the integration of Sequana, as well as the other administrative costs discussed above. Acquired In-Process Research and Development Acquired in-process research and development (IPR&D) expense increased to $124.9 million for the year ended December 31, 1998 due to the company's acquisition of Sequana Therapeutics on January 8, 1998. That acquisition was accounted for using the purchase method of accounting and the $174.1 million purchase price was allocated to the various tangible and intangible assets acquired based on their respective estimated fair values. As a result, $124.9 million was allocated to acquired IPR&D. The $124.9 million was expensed as a non-recurring charge on the acquisition date because the acquired in-process technology had not yet reached technological feasibility, had no future alternative uses, and all programs were still in the research phase. The company's use of the acquired in-process technology is to pursue the discovery of the genetic causes of diseases that can be used in the company's drug discovery programs or in the fulfillment of contractual obligations with our collaborators. The company anticipates that, utilizing the acquired in-process technology, it will take many years to determine the genetic causes of certain diseases and then introduce that information into the company's or our collaborators' drug discovery programs. There can be no assurance that the genetic causes of these diseases will be found, that pharmaceutical agents developed using this genetic information can be discovered by the company or our collaborators which can modulate those diseases, that any resulting pharmaceutical agent will be approved for marketing by regulatory authorities, or that any resulting pharmaceutical agent will be commercially successful. The nature of the acquired IPR&D as of the date of the acquisition relates to projects associated with the study of the genetic causes of certain major diseases, the development of software for use principally by the 33 35 Company in the study of genetic causes of diseases, and projects in the field of pharmacogenomics (the emerging science of how genetic variation among individuals affects drug safety and efficacy). The purchased research and development was identified and valued through extensive interviews and discussions with appropriate management and scientific personnel and the analysis of data provided by Sequana concerning Sequana's development projects, their respective stage of development, the time and resources needed to complete them, their expected income generating ability, target markets and associated risks. The following discussion outlines in detail the methods Axys used in allocating the cost of acquired IPR&D. The determination of the genetic causes of diseases as practiced by Sequana included the following four major processes, each of which involve technology risks and uncertainties, with the further risk that the failure to successfully complete any single process can prevent the project from reaching conclusion: 1. TECHNOLOGY: Development of laboratory methods for DNA sample intake, automated DNA sample handling, automated DNA sample storage which includes data acquisition and retrieval systems, and robotics systems. 2. DISEASE IDENTIFICATION: Identification of disease populations, which include inbreeding and background evaluations. This phase also includes the securing of contracts to obtain DNA samples and the tracing of patient information, which encompasses parental background, severity of disease, interviews, and physician participation. 3. GENETIC MAPPING: The processing of DNA samples including genotyping, the development of proprietary genotype markers, high throughput sequencing, computer-based analysis, and candidate gene identification. 4. GENE IDENTIFICATION AND VALIDATION: The refinement of genetic mapping to localize the gene to a single area of the genome including exact identification of the genetic sequence data, characterization of the function of the gene, localizing of gene function to certain tissues, and validation of the gene's function through manipulation to either induce or inhibit the creation of the product of the genetic sequence under study. Due to the nature of the scientific efforts required for each process, the earlier phases, particularly the disease identification phase, involve a level of complexity disproportionately greater than their cost or time to complete relative to the other phases. While programs were at varying stages of completion, all acquired programs were 45% complete in the aggregate. At the date of the acquisition, Sequana had ongoing programs in the following areas: - Asthma: The study of the genetic causes of Asthma in collaboration with Boehringer Ingelheim Int'l GmbH ("BI"): Sequana had received a milestone payment from BI and was pursuing the discovery of additional genes. The study of the additional genes had completed the first three processes outlined above. - Osteoporosis: The study of the genetic causes of Osteoporosis in collaboration with Corange International, Ltd. ("Corange"): Sequana had completed the first three processes outlined above. - Non-Insulin Dependent Diabetes Mellitus (NIDDM): The study of the genetic causes of NIDDM (or also Type II diabetes) in collaboration with Glaxo Wellcome, Inc. ("Glaxo"): Sequana had completed the first two processes outlined above. - Schiz/Bipolar: The study of the genetic causes of Schizophrenia and Bipolar Disorder (manic depressive illness) in collaboration with Parke-Davis ("Parke-Davis"): Sequana was in middle of the first process outlined above. - Obesity: This unpartnered program was set up to study the genetic causes of Obesity and had completed the four processes outlined above in an animal model. This program was also leading to early work in the genetic causes of certain visual disorders. 34 36 - Alzheimer's: The study of the function of genes identified with Alzheimer's disease. Sequana's efforts were focused on phases three and four only, with phase three being completed. - Pharmacogenomics: A program generally involved in the development of patient data, software tools and processes in the pursuit of pharmacogenomics activities. Due to the nature of this aspect of the technology acquired, it does not lend itself to being defined in the context of the four processes discussed. The Company estimates that Sequana was 70% complete with respect to the initial development of this technology. The Company intends to continue the development of this technology beyond the initial scope as defined at the date of the acquisition. - Other: Smaller studies of the genetic causes of other diseases (Inflammatory Bowel Disease, Type I Diabetes, and diseases associated with genetic variations in certain biological signaling processes -- Potassium Channels) were also underway progressing in varying degrees through the first two processes outlined above. The value of Sequana's projects noted above was determined after estimating the net cash flows from such projects, and discounting the net cash flows back to their present value. The net cash flows were based on the Company's estimate of revenue, research and development costs, general and administrative costs and income taxes. At the acquisition date, the company estimated revenue for the Sequana projects acquired would relate largely to research support and milestone payments through 2005. The company currently expects that medicines which utilize its proprietary developmental-stage technologies will obtain FDA approval beginning at various times beginning in 2005 through 2016. If such medicines are successfully marketed the Company will receive a royalty on the product sales. Research support costs were estimated at 150% of revenues in 1998, declining to a stabilized level of 65% of revenues in 2002 and beyond. The general and administrative costs were estimated to be approximately $6 million in 1998 and were assumed to grow at 20% annually until 2005, then to stabilize to 8% annual growth thereafter. The effective tax rate utilized was 40%. The discount rate used to value Sequana's IPR&D was 30%. The discount rate considers the company's weighted average cost of capital of 13% at the date of acquisition and a risk premium to reflect the risk associated with the stage of development the Sequana projects. The estimated cost and time needed to complete Sequana's programs at of the date of acquisition was approximately $190 million through 2007. Subsequent to the date of acquisition, as part of the company's ongoing assessment of allocating resources to projects, the Obesity and Alzheimers programs were temporarily suspended. In addition, the partnered programs have had the following changes: (i) Glaxo in the NIDDM program exercised their option for early termination upon Sequana's change in control and terminated the research funding in May 1998; (ii) Corange in the Osteoporosis program, changed their priorities following Roche Group's acquisition of Corange, and exercised its right to end this program in February 1999; and (iii) BI in the Asthma program, reduced the amount of research support in January 1999, and is currently in discussion with the company about the future of the program. If the company is unable to find alternative partners for any of these partnered programs, the company will have to further evaluate the future of these programs. Interest Income and Interest Expense Interest income increased to $4.7 million for the year ended December 31, 1998, from $3.4 million in 1997. The increase was primarily due to the increase in average cash and investment balances between the periods, as a result of the acquisition of Sequana. Interest expense increased to $2.4 million for the year ended December 31, 1998, from $1.0 in 1997. The increase was primarily due to the higher debt balances from the company's two lines of credit and existing leasing arrangements following the acquisition of Sequana. The company has generally used draw-downs from its lending arrangements for capital equipment leasehold improvements. 35 37 Provision for income tax The Company incurred a net operating loss in 1998 and, accordingly, no provision for federal or state income taxes was recorded. As of December 31, 1998, the Company had federal net operating tax loss carryforward of approximately $75.5 million. The company's ability to utilize its net operating loss carryforwards may be subject to an annual limitation in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended. Equity Interest in Loss of Joint Venture Equity interest in loss of joint venture increased to $2.4 million for the year ended December 31, 1998, and was due to the increase in the loss for Genos, which was acquired as part of the company's acquisition of Sequana. This amount represents the company's 50% portion of Genos' loss for 1998 based on its percentage ownership. Minority Interest Minority interest represents another investor's share of a subsidiary's operating income (loss), where the company owns 51% to 99% of that subsidiary. Income reported by the company which is attributable to a minority interest increased to $112,000 for the year ended December 1998, from none in 1997. This amount is the result of the formation of the Company's majority owned subsidiary, Xyris. Since we reports all of Xyris's expenses as our expenses (see "General and Administrative" above), this one line allocates a portion of Xyris' loss to the minority shareholders, and offsets our operating loss. YEARS ENDED DECEMBER 31, 1997 AND 1996 Revenues Collaboration and licensing revenues The company's collaboration and licensing revenues increased to $22.5 million for the year ended December 31, 1997 from $21.6 million in 1996. The company's collaboration and licensing revenues for the year ended December 31, 1997 were attributable to collaborations with P&U, Amgen, Bayer, SB, Merck, Abbott and BMS. The increase in 1997 was primarily due to (i) the inclusion of a full year of research and development funding support under a collaboration with Merck, which commenced in November 1996, to develop small molecule inhibitors of proteases involved in osteoporosis; (ii) additional research funding under a collaboration with PNU for the Xa project, which commenced in September 1995; (iii) the commencement of the collaboration with BMS to develop small molecule inhibitors of proteases involved in Hepatitis C virus infection; (iv) the commencement of the collaboration with Abbott to transfer to Abbott specialized drug discovery technologies for application by Abbott in an undisclosed proprietary research program; and (v) the inclusion of a full year of research and development funding support under a collaboration with SB, which commenced in June 1996, to develop inhibitors using Axys' proprietary Delta technology targeting intracellular viral proteases. The increases were partially offset by lower revenues recognized under the erythropoietin collaboration with Amgen, human growth hormone collaboration with P&U and the oral tryptase inhibitor collaboration with Bayer, where the funded research portion of these agreements ended during 1997. Product revenues Product revenues increased to $2.3 million for the year ended December 31, 1997 from none in 1996, primarily from the sale of combinatorial chemistry compounds. The company first starting shipping small molecule synthetic organic compounds in 1997 under an agreement with P&U, which commenced in March 1996 and extends until December 1999. 36 38 Cost of Goods Sold Cost of goods sold increased to $1.0 million for the year ended December 31, 1997, and was primarily due to the costs of producing combinatorial chemistry libraries. These costs were specifically related to the agreement with P&U for the compounds that were shipped during 1997. Research and Development The company's research and development expenses increased to $30.0 million for the year ended December 31, 1997, from $24.3 million in 1996, primarily due to the expansion of the company's research efforts in new and existing programs, the expense of two phase IIa clinical trials of APC-366, and investments in proprietary programs. General and Administrative The company's general and administrative expenses increased to $7.2 million for the year ended December 31, 1997, from $5.4 million in 1996, primarily due to increased support associated with the company's expanded research and development efforts, and the expansion of the company's facilities and business development activities. Interest income and interest expense Interest income increased to $3.4 million for the year ended December 31, 1997, from $3.1 million for the same period in 1996. The increase was primarily due to the increase in average cash balance between the periods, resulting from the receipt of up-front fees collected under new collaborations and the collection of revenues from the shipment of compounds under the collaboration with P&U. Interest expense increased to $1.0 million for the year ended December 31, 1997, from $670,000 in the same period in 1996. The increase was primarily due to the higher debt balances carried under bank lines of credit. The company has generally used draw-downs from its lending arrangements for capital equipment acquisitions. Provision for income tax The company incurred a net operating loss in 1997 and, accordingly, no provision for federal or state income taxes was recorded. As of December 31, 1997, the company had federal net operating tax loss carryforward of approximately $21.7 million. The company's ability to utilize its net operating loss carryforwards may be subject to an annual limitation in future periods pursuant to the "change in ownership rules" under Section 382 of the Internal Revenue Code of 1986, as amended. LIQUIDITY AND CAPITAL RESOURCES The company has financed its operations since inception primarily through private and public offerings of capital stock, through corporate collaborative research agreements, and sales of combinatorial chemistry compounds. As of December 31, 1998, the company had realized approximately $182 million (of which approximately $86 million was derived from Sequana) in net proceeds from offerings of its capital stock. In addition, the company had realized approximately $160 million (of which approximately $60 million was derived from Sequana) since inception from its collaborative research agreements and the sale of compound libraries. The company's principal sources of liquidity are its cash and investments, which totaled $72.7 million as of December 31, 1998. The company has two lines of credit under which it had borrowed a total of $25.9 million under the agreements as of December 31, 1998. The company has no additional borrowing capacity under these agreements. Net cash used in operating activities during the year ended December 31, 1998 was $27.2 million on a consolidated basis with Sequana, compared to $14.5 million, which represents Arris Pharmaceutical Corporation only in the same period in 1997. The increase was primarily due to the increase in net loss for the year ended December 31, 1998, which was principally due to the combined operating results of Arris and Sequana 37 39 and cash used in the acquisition of Sequana. Cash used in operating activities is expected to fluctuate from year to year depending, in part, upon the timing and amounts, if any, of cash received from existing and new collaboration agreements and the sale of compound libraries. The company also used approximately $8.3 million for the purchase of property, plant and equipment during the year ended December 31, 1998. Additional equipment is expected to be acquired or leased in connection with the company's continuing research and development activities. The company expects that its existing capital resources, including research and development revenues from existing collaborations, will enable the company to maintain current and planned operations for at least two years. The company will need to raise substantial additional capital to fund its operations beyond the end of such period. The company plans to seek such additional funding through use of various financing mechanisms that may then be available to the company. There can be no assurance that the company will be able to enter into new collaborations on acceptable terms or that additional financing will be available to the company on acceptable terms, or at all. Any additional funds raised by issuing equity securities may result in further dilution to stockholders. If adequate funds are not available, the company may be required to delay, to reduce the scope of or to eliminate one or more of its research or development programs or to obtain funds through arrangements with collaborative partners or others that may require the company to relinquish rights to certain of its technologies or products that the company would otherwise seek to develop or commercialize itself. IMPACT OF THE YEAR 2000 The Year 2000 problem or the "Y2K problem" is a problem that may arise at the turn of the century in computers or other equipment that utilizes microprocessor technology. Some computer software programs and computer equipment, as well as other equipment using embedded microprocessors, use two digit date fields rather than four date digit fields (that is, "98" in the computer code refers to the year "1998"). As a result, time-related functions in such software and equipment may misinterpret dates after January 1, 2000 to refer to the twentieth century rather than the twenty-first century (that is, "02" could be interpreted as "1902" rather than "2002"). This could potentially cause system or equipment shutdowns, failures or miscalculations, resulting in inaccuracies in computer output. The Y2K problem is a global problem and has the potential to impact virtually every company to one degree or another, including our company. The company is addressing the Y2K problem by reviewing its core information technology systems, including its servers, databases, desktop computers, significant applications (whether licensed from third parties or developed internally) and significant microprocessor-controlled equipment for Y2K readiness. Because the Y2K problem potentially affects many other companies, we are also in the process of reviewing the Y2K readiness of our vendors, service providers and other companies (including collaboration partners and customers) with whom we have significant business relationships ("Important Third Parties"). As the company completes these internal and external reviews, the company has been prioritizing the responses it needs to take to address the Y2K problem, to address the highest priorities first and to develop by the end of the second quarter of 1999 such contingency plans as management believes to be prudent. With respect to the company's core information technology systems and desktop computers, the company expects to have completed its review and to have made any necessary modifications or replacements by the end of the second quarter of 1999. With respect to third party software applications, the company expects to complete its review and to replace or upgrade such applications by the end of the third quarter of 1999. In this regard, the company is currently in the final stages of replacing its enterprise management information system with a new system that will be Y2K ready. With respect to the few software applications the company has developed and licensed to third parties, the company has completed its review of some of these applications and believes them to be Y2K ready. The remaining applications are being tested and if determined not to be Y2K ready, the company expects to provide to upgrades to such applications to make them Y2K ready by the third quarter of 1999. With respect to other internally-developed software applications, the company has compiled a list of such applications and has initiated the design of appropriate tests. The company expects to complete its review and replacement or upgrade of these applications by the end of the second quarter of 1999. Finally, with 38 40 respect to other significant microprocessor-controlled equipment, the company has identified such equipment and is in the process of testing it. The company expects to complete its test of such equipment and to have made any necessary upgrades or replacements by the end of the third quarter of 1999. The review of the Y2K readiness of Important Third Parties is in-progress and is expected to be substantially completed by the end of the second quarter of 1999. Following completion, the company expects to assess the nature and extent of the risk from non-readiness by such third parties and to either cease doing business with such third parties, locate back-up businesses who are Y2K ready, obtain reasonable assurances of Y2K readiness, or to implement other appropriate contingency plans, by the end of 1999. The total costs associated with the company's Y2K readiness efforts is estimated to be less than $250,000. Expenditures to date with respect to the Y2K problem have not been material and have largely consisted of the time of company personnel. The company believes that its Y2K readiness review and the actions it intends to take prior to the end of 1999 should result in the absence of significant Y2K-related problems for the company's computer systems, applications and microprocessor-controlled equipment. However, there can be no assurances that the company will be able to complete its review of various systems within the time frames indicated, that the company, will be completely Y2K ready by the end of 1999 or that the company will not encounter Y2K-related problems that could have a material adverse affect on the company's results of operations and financial condition. In addition, the company cannot guarantee the Y2K readiness of Important Third Parties and certain business disruptions could occur, such as a financial institution's inability to process checks drawn on bank accounts, to accept deposits or process wire transfers, an Important Third Party's business failure, interruption in deliveries of equipment, supplies and services from Important Third Parties, loss of voice and/or data connections, loss of power to electrical facilities, and other business interruptions which cannot be predicted. Accordingly, there can be no assurance that Y2K-related problems of Important Third Parties will not have a material adverse affect on the company's results of operations and financial condition. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Due to the composition of the company's interest earning assets (82% mature within one year) and interest bearing liabilities, the Company believes that the market risk is not significant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AXYS PHARMACEUTICALS, INC. INDEX TO FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996 WITH REPORT OF INDEPENDENT AUDITORS
PAGE ---- Report of Independent Auditors.............................. 40 Consolidated Balance Sheets................................. 41 Consolidated Statements of Operations....................... 42 Consolidated Statement of Stockholders' Equity.............. 43 Consolidated Statements of Cash Flows....................... 44 Notes to Consolidated Financial Statements.................. 45
39 41 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Axys Pharmaceuticals, Inc. We have audited the accompanying consolidated balance sheets of Axys Pharmaceuticals, Inc. (formerly Arris Pharmaceutical Corporation) as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Axys Pharmaceuticals, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Palo Alto, California February 5, 1999 40 42 AXYS PHARMACEUTICALS, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, --------------------- 1998 1997(1) --------- -------- Current assets: Cash and cash equivalents................................... $ 36,261 $ 22,938 Short-term marketable investments........................... 23,999 30,470 Accounts receivable, trade.................................. 2,140 1,301 Inventory................................................... 435 -- Prepaid expenses and other current assets................... 4,513 2,767 --------- -------- Total current assets.............................. 67,348 57,476 Marketable investments...................................... 12,457 -- Property and equipment, net................................. 21,510 14,454 Investment in joint venture................................. 1,908 -- Note receivable from officer................................ 821 810 Intangible assets, net...................................... 2,200 175 Other assets................................................ 1,018 669 --------- -------- $ 107,262 $ 73,584 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................ $ 3,788 $ 1,622 Accrued compensation........................................ 4,232 1,793 Other accrued liabilities................................... 2,956 2,148 Current portion of deferred revenue......................... 8,698 5,410 Current portion of capital lease and debt obligations....... 9,872 3,390 --------- -------- Total current liabilities......................... 29,546 14,363 Deferred revenue, noncurrent................................ -- 726 Capital lease and debt obligations, noncurrent.............. 16,816 14,605 Minority interest........................................... 388 -- Commitments Stockholders' equity: Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued or outstanding................. -- -- Common stock, $0.001 par value, 50,000,000 shares authorized, 30,234,150 and 15,203,089 shares issued and outstanding at December 31, 1998 and 1997, respectively........................................... 290,291 117,786 Note receivable from officer................................ -- (125) Accumulated other comprehensive income...................... 116 -- Accumulated deficit......................................... (229,895) (73,771) --------- -------- Total stockholders' equity.................................. 60,512 43,890 --------- -------- $ 107,262 $ 73,584 ========= ========
- --------------- (1) Represents the balances of Arris Pharmaceutical Corporation only. See accompanying notes. 41 43 AXYS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997(1) 1996(1) --------- -------- ------- Revenues: Collaboration and licensing revenues..................... $ 38,910 $ 22,499 $21,560 Product revenues......................................... 8,512 2,315 -- --------- -------- ------- Total revenues........................................ 47,422 24,814 21,560 Operating costs and expenses: Cost of goods sold....................................... 2,058 1,010 -- Research and development................................. 62,176 30,040 24,319 General and administrative............................... 14,460 7,153 5,409 Acquired in-process research and development............. 124,888 -- 230 --------- -------- ------- Total operating costs and expenses.................... 203,582 38,203 29,958 --------- -------- ------- Operating loss............................................. (156,160) (13,389) (8,398) Interest income............................................ 4,720 3,436 3,140 Interest expense........................................... (2,403) (1,014) (670) Equity interest in loss of joint venture................... (2,393) -- -- Minority interest.......................................... 112 -- -- --------- -------- ------- Net loss................................................... $(156,124) $(10,967) $(5,928) --------- -------- ------- Basic and diluted net loss per share....................... $ (5.25) $ (0.73) $ (0.45) ========= ======== ======= Shares used in computing basic and diluted net loss per share.................................................... 29,758 15,025 13,177 ========= ======== =======
- --------------- (1) Represents the results of Arris Pharmaceutical Corporation only. See accompanying notes. 42 44 AXYS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE ACCUMULATED COMMON STOCK RECEIVABLE OTHER TOTAL ---------------------- FROM DEFERRED COMPREHENSIVE ACCUMULATED STOCKHOLDERS' SHARES AMOUNT OFFICER COMPENSATION INCOME DEFICIT EQUITY ---------- -------- ---------- ------------ ------------- ----------- ------------- Balances at December 31, 1995.................... 10,169,076 $ 64,389 $(200) $(35) $ -- $ (56,876) $ 7,278 Exercise of options and a warrant to purchase common stock............ 466,088 1,425 -- -- -- -- 1,425 Issuance of common stock, net of issuance costs of $3,138.................. 3,450,00 41,712 -- -- -- -- 41,712 Issuance of common stock in connection with the Employee Stock Purchase Plan ("ESPP")........... 66,692 393 -- -- -- -- 393 Issuance of common stock in connection with the exercise of the Arris Canada minority interest option.................. 161,418 1,800 -- -- -- -- 1,800 Issuance of common stock in connection with the acquisition of Khepri Pharmaceuticals, Inc.... 518,701 6,185 -- -- -- -- 6,185 Amortization of deferred compensation............ -- -- -- 35 -- -- 35 Net loss.................. -- -- -- -- -- (5,928) (5,928) ---------- -------- ----- ---- ---- --------- --------- Balances at December 31, 1996.................... 14,831,975 115,904 (200) -- -- (62,804) 52,900 Exercise of options and a warrant to purchase common stock............ 313,000 1,327 -- -- -- -- 1,327 Issuance of common stock in connection with the ESPP.................... 58,114 555 -- -- -- -- 555 Forgiveness of note receivable.............. -- -- 75 -- -- -- 75 Net loss.................. -- -- -- -- -- (10,967) (10,967) ---------- -------- ----- ---- ---- --------- --------- Balances at December 31, 1997.................... 15,203,089 117,786 (125) -- -- (73,771) 43,890 Exercise of options and warrants to purchase common stock............ 91,649 621 -- -- -- -- 621 Issuance of common stock for cash................ 132,254 1,063 -- -- -- -- 1,063 Issuance of common stock in connection with the ESPP.................... 189,145 1,091 -- -- -- -- 1,091 Issuance of common stock in connection with the acquisition of Sequana Therapeutics, Inc....... 14,618,013 169,730 -- -- -- -- 169,730 Forgiveness of note receivable.............. -- -- 125 -- -- -- 125 Net loss.................. -- -- -- -- -- (156,124) (156,124) Unrealized gain on securities.............. -- -- -- -- 116 -- 116 --------- Comprehensive loss........ -- -- -- -- -- -- (156,008) ---------- -------- ----- ---- ---- --------- --------- Balance at December 31, 1998.................... 30,234,150 $290,291 $ -- $ -- $116 $(229,895) $ 60,512 ========== ======== ===== ==== ==== ========= =========
See accompanying notes. 43 45 AXYS PHARMACEUTICALS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 (1) 1996 (1) --------- -------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $(156,124) $(10,967) $ (5,928) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 10,156 4,183 3,859 Loss on disposal of fixed assets.......................... 44 -- 209 Equity interest in loss of joint venture.................. 2,393 -- -- Acquired in-process research and development.............. 124,888 -- 230 Forgiveness of note receivable from officer............... 155 75 -- Minority interest......................................... 388 -- -- Changes in assets and liabilities: Accounts receivable..................................... (839) (1,301) -- Inventory............................................... (435) -- -- Prepaid expenses and other current assets............... 636 (585) (1,419) Other assets............................................ (2,469) (345) (657) Accounts payable........................................ (5,818) 183 567 Accrued compensation.................................... 2,440 313 (203) Accrued merger costs.................................... -- -- (762) Other accrued liabilities............................... 808 578 (319) Deferred revenue........................................ (3,382) (6,620) (1,301) --------- -------- -------- Net cash and cash equivalents used in operating activities................................................ (27,159) (14,486) (5,724) --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Available for-sale-securities: Purchases................................................. (56,065) (22,092) (11,628) Maturities................................................ 92,107 3,249 -- Held-to-maturity securities: Purchases................................................. -- (9,683) (74,458) Maturities................................................ -- 46,704 46,837 Sale (purchase) of restricted cash and investments.......... -- 7,250 (7,250) Acquisition, net of cash balances........................... 13,270 -- -- Investment in Genos joint venture........................... (2,000) -- -- Proceeds from sale of property and equipment................ 119 Expenditures for property and equipment..................... (8,263) (6,297) (6,881) --------- -------- -------- Net cash and cash equivalents provided by (used in) investing activities...................................... 39,166 19,131 (53,380) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from issuance of common stock.................. 2,775 1,882 43,495 Proceeds from issuance of note payable and capital lease obligations............................................... 6,174 19,115 9,164 Principal payments on note payable and capital lease obligations............................................... (7,633) (13,526) (4,439) --------- -------- -------- Net cash and cash equivalents provided by financing activities................................................ 1,316 7,471 48,220 --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 13,323 12,116 (10,884) Cash and cash equivalents, beginning of year................ 22,938 10,822 21,706 --------- -------- -------- Cash and cash equivalents, end of year...................... $ 36,261 $ 22,938 $ 10,822 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION Cash paid during the year for interest...................... $ 2,284 $ 826 $ 623 ========= ======== ======== SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ANDFINANCING ACTIVITIES Issuance of common stock and value of options and warrants issued in acquisitions.................................... $ 169,730 $ -- $ 6,185 ========= ======== ======== Issuance of common stock to Arris Canada minority interest investors................................................. $ -- $ -- $ 1,800 ========= ======== ======== Noncash acquisition of equipment under capital lease........ $ -- $ 1,719 $ -- ========= ======== ========
- --------------- (1) Represents the results of Arris Pharmaceutical Corporation only. See accompanying notes. 44 46 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization Axys Pharmaceuticals, Inc., a Delaware corporation ("Axys" or the "Company"), formerly known as Arris Pharmaceutical Corporation ("Arris"), focuses on transforming gene discoveries into drugs. Axys' business is focused in three primary areas: (i) drug discovery and development programs in collaboration with pharmaceutical and biotechnology companies, (ii) drug discovery and development programs which are not partnered in the area of oncology, and (iii) the spin out of affiliated businesses in combinatorial chemistry, pharmacogenomics, and agricultural biotechnology. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Arris Protease, Inc., Arris Pharmaceuticals Canada, Inc., and Sequana Therapeutics, Inc. ("Sequana") (See "Acquisition of Sequana", Note 2), and includes the accounts of Xyris Corporation, the Company's majority owned subsidiary (See "Formation of Xyris Corporation", Note 4). All significant intercompany accounts and transactions have been eliminated. Sequana owns 50% of Genos, a joint venture with Memorial Sloan Kettering Cancer Center ("MSKCC"). This investment is accounted for under the equity method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and such differences could be material. Cash and Cash Equivalents and Investments The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. Investments with maturities greater than three months and less than one year are classified as short-term investments. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, including adjustments for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts to maturity are included in interest income. The Company currently considers all its investment securities as available-for-sale. Available-for-sale securities are reported at estimated fair market value with the related unrealized gains and losses included in stockholders' equity. Realized gains and losses, and declines in value judged to be other than temporary are also included in interest income and expense and have been immaterial. The cost of securities sold is based on the specific identification method. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. At December 31, 1998, inventories consisted of the following (in thousands): Raw materials................................. $ 69 Finished goods................................ 366 ---- $435 ====
45 47 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Depreciation and Amortization Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets. Machinery and equipment has estimated useful lives ranging from 3 to 7 years and furniture and office equipment has a useful life of 5 years. Purchased computer software is amortized over 3 years. Leasehold improvements are amortized over the term of the lease or economic useful life, whichever is shorter. Revenue Recognition The Company recognizes revenues from its collaborative research programs as well as from product sales. Under the collaborative research agreements, revenue is recorded when earned as defined in the respective agreements. In general, these agreements have five components of revenue; (i) research support, (ii) license fees, (iii) commitment fees, (iv) milestone payments, and (v) royalties. Research funding and commitment fees are recognized over the research period and payments received in advance are recorded as deferred revenue. Licensing fees are recognized at the time of signing and milestone payments are recognized upon the achievement of mutually agreed upon benchmarks. Product sales, which result from the delivery of libraries of combinatorial chemistry compounds to pharmaceutical industry customers are recognized as revenue when the compounds are shipped. Any licensing fees associated with these compound supply agreements are recognized at the time of signing. Research and Development Research and development expenses consist of costs incurred for independent and collaborative research and development. These costs include direct costs and research-related overhead expenses. Research and development expenses under the collaborative research agreements approximate the research support revenue recognized under the agreements of $24,804,000, $13,622,000, and $12,801,000 in 1998, 1997 and 1996 respectively. Stock-Based Compensation As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), the Company has elected to continue 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 option and purchase plans. See Note 8 for pro forma disclosures required by FAS 123. Net Loss Per Share Basic earnings per share is computed based on the weighted average number of shares of the Company's common stock outstanding. In addition, there were other dilutive securities in the form of options and warrants to purchase 5,050,026, 2,168,860, and 1,932,981 shares of common stock outstanding at December 31, 1998, 1997, and 1996, respectively. These shares, which would normally be included in the computation of dilutive earnings per share, were not included in that computation because the effect would be antidilutive. Comprehensive Income As of January 1, 1998, the Company adopted the Statement of Financial Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive Income." Comprehensive loss is comprised of reported net loss and unrealized holding gains on available-for-sale securities. Comprehensive loss has been shown in the Consolidated Statements of Stockholders' Equity. 46 48 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Segment Information As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 superseded FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise." FAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. FAS 131 also establishes standards for related disclosures about products and services, geographical areas, and major customers. The adoption of FAS 131 did not affect results of operations or financial position, but did affect the disclosure of segment information (see "Segment Information", Note 12). Reclassifications Certain prior year amounts have been reclassified to conform to the 1998 presentations. 2. ACQUISITION OF SEQUANA On January 8, 1998, the Company acquired all of the outstanding capital stock of Sequana, a genomics company that used industrial-scale gene discovery technology and functional genomics to discover and characterize genes that cause certain common diseases. The Company issued shares of Axys Common Stock in exchange for all the outstanding common stock of Sequana, on the basis of 1.35 shares of Axys' common stock for one share of Sequana common stock. The purchase price of $174,070,000 consisted of (i) the issuance of 14,618,013 shares of Company common stock valued at $168,107,000, in exchange for all outstanding Sequana capital stock, (ii) the issuance of Company warrants valued at $1,623,000 in exchange for all of the outstanding Sequana warrants, and (iii) transaction costs totaling $4,340,000. The allocation of the purchase price was determined as follows: Net tangible assets acquired................................ $ 45,882,000 Assembled workforce of Sequana.............................. 3,300,000 Acquired in-process research and development................ 124,888,000 ------------ Total............................................. $174,070,000 ============
The acquisition has been accounted for as a purchase and accordingly, the original purchase price was allocated to acquired assets and assumed liabilities based upon their estimated fair values at the date of acquisition, and to the estimated fair value of in-process research and development ("IPR&D") was charged as an expense in the Axys consolidated financial statements as such acquired IPR&D had not reached technological feasibility. Intangible assets, other than the technology-related assets arising from the acquisition are being amortized on a straight line basis over 36 months. The acquired in-process research and development projects in the Sequana acquisition consisted of eight significant research and development projects. At the time of the acquisition, Sequana was developing technology in gene discovery, which included DNA sample collection, genetic and physical mapping, DNA sequencing and mutation analysis, and gene characterization and assay development. Projects were underway associated with the study of the genetic causes of certain diseases, the development of software used in the study of genetic causes of diseases, and projects in the field of pharmacogenomics (the science of how genetic variation among individuals affects drug safety and efficacy). The value allocated to purchased IPR&D was determined by estimating the costs to develop the purchased in-process technology into viable products, estimating the resulting net cash flows from such projects, and discounting the net cash flows back to their present value. The discount rate included a factor that takes into account the Company's weighted average cost of capital and the uncertainty surrounding the 47 49 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) successful development of the purchased in-process technology. Should these projects not be successfully developed, future revenue and profitability of the Company may be adversely affected. A brief description of each of the eight in-process projects is set forth below: - The study of the genetic causes of Asthma in collaboration with Boeringer Ingelheim Int'l GmbH ("BI") - The study of the genetic causes of Osteoporosis in collaboration with Corange International, Ltd. ("Corange") - The study of the genetic causes of Non-insulin Dependent Diabetes Mellitus (NIDDM or also Type II diabetes) in collaboration with Glaxo Wellcome, Inc. ("Glaxo") - The study of the genetic causes of Schizophrenia and Bipolar Disorder (manic depressive illness) in collaboration with Parke-Davis ("Parke-Davis") - The study of the genetic causes of Obesity - The study of the function of genes identified with Alzheimers disease using Sequana's nematode worm model system. - A program generally involved in the development of patient data, software tools and processes in the pursuit of pharmacogenomics activities. - Smaller studies of the genetic causes of other diseases (Alzheimers Disease, Cardiovascular Disease, Type I Diabetes, and Diseases associated with genetic variations in certain biological signaling processes -- (Potassium Channels) were also underway. The operating results of Sequana from January 1, 1998 to December 31, 1998 have been included in the Company's consolidated results of operations. The operating results of Sequana from January 1, 1998 to January 8, 1998 (date of acquisition) are considered immaterial. As part of the Company's acquisition of Sequana, the Company also obtained 50% ownership of Genos Biosciences, Inc. ("Genos") (see "Investment in Joint Venture", Note 1). The following unaudited pro forma financial summary is presented as if the operations of the Company and Sequana were combined as of January 1, 1997. The unaudited pro forma combined results are not necessarily indicative of the actual results that would have occurred had the acquisition been consummated at that date, or of the future operations of the combined entities. Nonrecurring charges, such as the acquired in-process research and development charge of $124.9 million are not reflected in the following pro forma financial summary. PRO FORMA FINANCIAL SUMMARY FOR THE YEAR ENDED DECEMBER 31, 1997 (UNAUDITED)
(In thousands, except per share amount) ------------------------- Contract Revenues............................... $ 44,399 Net Loss........................................ (26,108) Basic and diluted net loss per share............ $ (0.89)
3. INVESTMENT IN JOINT VENTURE In January 1997, Sequana formed Genos with MSKCC to focus on research and identification of genes and related genetic information of values in the prognosis, diagnosis and positive treatment of certain common cancers. As of December 31, 1998 Sequana had invested $5.2 million and licensed certain of its technology to 48 50 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Genos and has contracted with Genos to conduct research and provide certain other services to the joint venture. Payments to date for such research and services have not been material. In connection with the formation of Genos, Sequana issued a warrant to MSKCC to purchase 350,000 shares of Sequana's common stock. That warrant was assumed by the Company as part of the acquisition of Sequana on January 8, 1998, and was converted to a warrant to purchase an aggregate of 472,500 shares of Axys common stock at a price of $12.87 per share. 4. FORMATION OF XYRIS CORPORATION In May 1998, the Company formed a majority owned subsidiary, Xyris Corporation ("Xyris"), which was established to leverage Axys' existing pharmaceutical technology in the agricultural biotechnology market. In connection with the formation of Xyris, the Company granted Xyris the right, for a limited period, to negotiate an exclusive license in the field of agriculture to all Axys technology in exchange for an 82% ownership interest. A third party contributed $500,000 cash in exchange for a 15% ownership interest in Xyris. Under the terms of the financing, the Company granted the third party the right (the "Put Option") to require the Company to purchase all of the third party's interest in Xyris in exchange for that number of shares of the Company whose market value equals $500,000 at the date of the exercise of the Put Option. The Put Option was replaced by a new put option upon the closing of a second round of financing for Xyris in February 1999 (see "Subsequent Events-Second Round of Financing for Xyris Corporation," Note 15). 5. COLLABORATIVE RESEARCH AGREEMENTS AND PRODUCT SALES AGREEMENTS Since the Company's inception in April 1989 and subsequently with the acquisition of Sequana, the Company and its subsidiaries have funded much of their research through collaborative research agreements with pharmaceutical companies and from the sales of libraries of combinatorial chemistry compounds. In general, the collaborative research agreements include: (i) research support payments which the Company receives based on the number of researchers Axys is committing to the collaboration. In many cases, the agreements call for full-time scientific personnel with specific educational and professional achievements, as well as, in certain cases, related expertise in the area. Many of these agreements provide for extension periods at the option of the partner, which if agreed by the Company, would extend the research commitment; (ii) license fees or commitment fees received at the signing of a collaboration agreement in exchange for certain technology or product rights; (iii) milestone payments which are based on the Company or the collaboration partner achieving certain designated technical or regulatory objectives; (iv) royalty payments upon commercialization of any products resulting from the collaboration, usually based on a percentage of sales by the collaboration partner. With respect to the Company's product sales through its Advanced Technologies Division (see "Segment Information", Note 12), the Company has agreements with pharmaceutical and biotechnology companies for the production of combinatorial chemistry compounds, often referred to as libraries. These agreements include: (i) revenues from the delivery of chemical compound libraries based on a contracted price per compound; and (ii) license fees received at the signing of the agreement in exchange for technology rights. 49 51 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS Cash equivalents and marketable investments: The following is a summary of available-for-sale securities at December 31, 1998 and 1997:
GROSS GROSS ESTIMATED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------- ---------- ---------- --------- (IN THOUSANDS) AT DECEMBER 31, 1998: Commercial paper of U.S. corporations.......... $23,572 $ 35 $ -- $23,607 U.S. treasury securities....................... 500 1 -- 501 Certificates of deposit........................ 4,003 9 -- 4012 Securities of foreign corporations............. 3,431 13 -- 3,444 U.S. agency securities......................... 7,801 24 -- 7,825 Municipal obligations.......................... 4,001 34 -- 4,035 ------- ---- ---- ------- $43,308 $116 $ -- $43,424 ======= ==== ==== ======= AT DECEMBER 31, 1997: Commercial Paper of U.S. corporations.......... $21,430 $ -- $(45) $21,385 U.S. treasury securities....................... 14,384 27 -- 14,411 Certificates of deposit........................ 2,999 -- -- 2,999 Securities of foreign corporations............. 2,948 2 -- 2,950 U.S. agency securities......................... 2,121 -- (43) 2,078 ------- ---- ---- ------- $43,882 $ 29 $(88) $43,823 ======= ==== ==== ======= Balance sheet classification: AT DECEMBER 31, 1998: Cash equivalents............................... $ 6,967 $ 1 $ -- $ 6,968 Short-term marketable investments.............. 23,928 71 -- 23,999 Marketable investments......................... 12,413 44 -- 12,457 ------- ---- ---- ------- $43,308 $116 $ -- $43,424 ======= ==== ==== ======= AT DECEMBER 31, 1997: Cash equivalents............................... $13,412 $ -- $ -- $13,412 Short-term marketable investments.............. 30,470 29 $(88) 30,411 ------- ---- ---- ------- $43,882 $ 29 $(88) $43,823 ======= ==== ==== =======
At December 31, 1998, the marketable investments of $12,457,000 have contractual maturities that are due at various times up to 26 months. Estimated fair value of other financial instruments: The carrying value of the notes payable approximate their estimated fair value. The fair value of the notes payable was estimated based on current interest rates available to the Company for debt instruments with similar terms, degree of risk and remaining maturities. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company would realize in a current market exchange. 50 52 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and consists of the following:
DECEMBER 31, -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Machinery and equipment................................ $ 33,039 $ 15,569 Purchased software..................................... 1,748 875 Furniture and office equipment......................... 2,220 1,397 Leasehold improvements................................. 12,420 9,747 Construction in progress............................... 262 204 -------- -------- 49,689 27,792 Less accumulated depreciation and amortization......... (28,179) (13,338) -------- -------- $ 21,510 $ 14,454 ======== ========
Property and equipment includes approximately $15,011,000 and $12,267,000 recorded under capital leases at December 31, 1998 and 1997, respectively. Amortization is included with depreciation expense. Accumulated amortization of equipment under capital leases was approximately $12,886,000 and $8,615,000 at December 31, 1998 and 1997, respectively. 8. STOCKHOLDERS' EQUITY Common Stock At December 31, 1998, common stock was reserved for issuance as follows (in thousands): Stock options (including the Stock Bonus and 401(K) Plans).................................................... 6,047 Warrants.................................................... 630 Employee stock purchase plan................................ 26 ----- 6,703 =====
Stock Options The Company has various equity incentive plans under which it issues stock option to employees, consultants and members of the Board of Directors. The 1997 Equity Incentive Plan was approved by the stockholders in January 1998 and allows for incentive stock options or non-qualified stock options to be granted to employees, directors and consultants to purchase the Company's common stock at the discretion of the Board of Directors. The Company also has the 1997 Non-Officer Equity Incentive Plan, whereby non-officer employees and consultants may be granted non-qualified stock options to purchase the Company's common stock; the 1989 Stock Option Plan, whereby directors, officers, employees, and consultants may be issued restricted stock or granted incentive stock options or nonqualified stock options to purchase the Company's common stock at the discretion of the Board of Directors; and the 1994 Non-Employee Directors' Stock Option Plan, whereby nonqualified stock options are automatically granted to non-employee directors to purchase the Company's Common stock. All options granted under these Plans become exercisable pursuant to the applicable terms of the grant. For stock options granted through December 31, 1997, the exercise price of the options was computed at the average market value of the Company's common stock for the 15 days preceding the grant date. For options granted after December 31, 1997, the exercise price is equal to the market value of the Company's common stock on the date of grant. All options vest ratably over four years and expire ten years from the date of grant. 51 53 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In October 1998, the Company offered its employees the right to exchange their then outstanding options to purchase shares of common stock with exercise prices ranging from $4.31 to $15.59, for new options to purchase shares with exercise prices of $4.00 per share for non-officer employees and $5.00 per share for executive officer employees. Under this program, options to purchase 3,643,387 shares were exchanged resulting in a decrease in aggregate purchase price from $34,254,046 to $15,560,548. All new options have an additional year of vesting added to the original vesting term and a one-year freeze on exercisability except in some limited circumstances. Stock Bonus Plan In December 1993, the Board adopted the 1993 Employee Stock Bonus Plan, whereby the Company would reward employees for their contributions and to align the employees' long-term interests with those of the Company through the grant of stock of the Company for no consideration. Shares granted under this plan do not vest unless the recipient remains an employee of the Company for two years from the date of grant. Under the plan, 50,000 shares of common stock were reserved for grant. There were no grants outstanding under this plan at December 31, 1998. A total of 42,500 shares had vested and were exercised as of December 31, 1998. Transactions under all of the above equity incentive plans are as follows:
OUTSTANDING STOCK OPTIONS WEIGHTED- ----------------------------- AVERAGE SHARES NUMBER OF PRICE PER EXERCISE AVAILABLE SHARES SHARE PRICE ---------- ---------- --------------- ---------------- Balances at December 31, 1995......... 236,909 1,556,052 $ 0.07 - $13.08 $ 4.65 Shares reserved..................... 550,000 -- -- -- Options granted..................... (857,076) 857,076 $10.89 - $16.12 $13.64 Options exercised................... -- (431,409) $ 0.70 - $13.02 $ 2.11 Options canceled.................... 217,363 (217,363) $ 0.84 - $16.12 $ 9.17 ---------- ---------- Balances at December 31, 1996......... 147,196 1,764,356 $ 0.07 - $16.12 $ 9.10 ---------- ---------- --------------- ------ Shares reserved..................... 1,750,000 -- -- Options granted..................... (646,744) 646,744 $ 9.56 - $15.12 $12.93 Options exercised................... -- (281,694) $ 0.35 - $12.48 $ 2.91 Options canceled.................... 129,782 (129,782) $ 1.23 - $15.53 $11.26 ---------- ---------- Balances at December 31, 1997......... 1,380,234 1,999,624 $ 0.35 - $15.53 $11.06 ---------- ---------- --------------- ------ Shares reserved..................... 2,850,000 -- -- -- Options granted..................... (7,080,180) 7,080,180 $ 3.81 - $ 9.88 $ 5.86 Options exercised................... -- (226,193) $ 0.35 - $ 8.38 $ 3.23 Options canceled.................... 4,433,158 (4,433,158) $ 1.85 - $15.59 $ 9.28 ---------- ---------- Balances at December 31, 1998......... 1,583,212 4,420,453 $ 0.35 - $15.59 $ 4.80 ========== ========== =============== ======
The weighted average fair value of stock options outstanding under the plans were $4.80, $11.06, and $11.13 in 1998, 1997 and 1996, respectively. 52 54 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Options outstanding and exercisable by price range at December 31, 1998:
OPTIONS EXERCISABLE ------------------------------------------ OPTIONS EXERCISABLE WEIGHTED- --------------------------- OPTIONS AVERAGE OPTIONS OUTSTANDING AT REMAINING WEIGHTED- EXERCISABLE AT WEIGHTED- DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE RANGE OF 1998 LIFE EXERCISE 1998 EXERCISE EXERCISE PRICES (SHARES) (IN YEARS) PRICE (SHARES) PRICE --------------- -------------- ----------- --------- -------------- --------- $ 0.07 - $ 3.81 108,681 5.65 $ 2.00 79,770 $ 1.37 $ 3.88 - $ 4.00 2,524,199 4.84 $ 4.00 15,019 $ 4.00 $4.313 - $ 5.00 1,069,870 6.93 $ 4.95 2,070 $ 4.22 $ 5.09 - $ 7.63 451,017 9.07 $ 5.98 91,068 $ 5.90 $ 7.75 - $15.36 266,686 8.36 $10.97 135,579 $12.21 --------- ------- 4,420,453 6.01 $ 4.80 323,506 $ 7.33 ========= =======
Warrants As of December 31, 1998, the Company had issued warrants to purchase a total of 629,573 shares of the Company's common stock at prices ranging from $2.45 to $13.46 per share. These warrants expire at various dates from 1999 through 2005. Employee Stock Purchase Plan In October 1993, the Company adopted the 1993 Employee Stock Purchase Plan (the "Purchase Plan") under which employees who meet certain minimum employment criteria are eligible to participate. Eligible employees may purchase common stock of the Company at a purchase price of 85% of the lower of the fair market value of the stock at the enrollment or purchase date, within a two-year offering period. Under the Purchase Plan, 189,145 shares were issued in 1998. Shareholders Rights Plan On October 8, 1998, the Board of Directors adopted a Preferred Share Purchase Rights Plan (the "Plan") designed to enable all stockholders to realize the full value of their investment and to provide for fair and equal treatment for all stockholders in the event an unsolicited attempt were made to acquire the Company. In connection with the Plan, the Board declared a dividend of one preferred share purchase right (a "Right") for each share of common stock of the Company outstanding on October 28, 1998 and further directed the issuance of one such right with respect to each share of the Company's common stock that is issued after October 28, 1998. If a person, entity or group of affiliated or associated persons acquires beneficial ownership of 15% or more of the Company's common stock, or announces a tender offer for 15% or more of the Company's common stock, the rights will be distributed. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, at a price of $35.00 per one one-hundredth of a Preferred Share subject to adjustment. The Rights are redeemable prior to any person's acquisition of more than 15% of the Company's common stock and will expire on October 7, 2008. Stock-Based Compensation The Company has elected to follow APB 25 and related interpretations in accounting for its stock-based compensation plans because, as discussed below, the alternative fair value accounting provided for under SFAS 123 requires use of option valuation models that were not developed for use in valuing employee stock 53 55 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) options and employee stock-based awards. Compensation expense under APB 25 with respect to such awards has been immaterial. Pro Forma Disclosures Pro forma information regarding net loss and net loss per share is required by FAS 123, and has been determined as if the Company had accounted for its stock-based awards granted subsequent to December 31, 1994 under the fair value method of FAS 123. The fair value for these stock-based awards was estimated at the date of grant using a Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock-based awards have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company's stock-based awards to its employees. The fair value of the Company's stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:
OPTIONS EMPLOYEE STOCK PURCHASE PLAN ------------------------ ------------------------------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ------ ------ ------ Expected life (years).......... 5.0 5.0 5.0 0.5 0.5 5.0 Expected volatility............ 0.59 0.58 0.63 0.65 0.54 0.56 Risk-Free interest rate........ 5.13% 6.23% 5.90% 5.17% 5.67% 5.30%
For purposes of pro forma disclosures, the estimated fair value of the stock-based awards are amortized to pro forma net loss over the option's vesting period and the purchase plan's six-month purchase period. The Company's as reported and pro forma information follows (in thousands, except for net loss per share information):
YEAR ENDED DECEMBER -------------------------------- 1998 1997 1996 --------- -------- ------- Net loss As reported...................................... $(156,124) $(10,967) $(5,928) Pro forma........................................ $(163,470) $(14,418) $(8,308) Net loss per share -- basic and diluted As reported...................................... $ (5.25) $ (0.73) $ (0.45) Pro forma........................................ $ (5.49) $ (0.96) $ (0.63)
For pro forma purposes in accordance with FAS 123, the repricing of employee stock options during 1998 is treated as a modification of the stock-based award, with the original options being repurchased and new options granted. Any additional compensation arising from the modification is recognized over the remaining vesting period of the new grant. FAS 123 is effective for stock-based awards granted by the Company commencing January 1, 1995. 9. COMMITMENTS Leases The Company leases office and laboratory facilities and equipment. Rent expense, net of sublease income of $780,000 in 1998 ($597,000 in 1997, and $32,000 in 1996), for the years ended December 31, 1998, 1997 and 1996 was approximately $3,293,000, $1,622,000 and $1,155,000, respectively. 54 56 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under non-cancelable leases, net of non-cancelable sublease income of $822,000, $748,000, $767,000, $816,000, $836,000, and $1,480,000 for 1999, 2000, 2001, 2002, 2003, and thereafter are as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) 1999..................................................... 3,163 2,844 2000..................................................... 282 2,868 2001..................................................... -- 2,804 2002..................................................... -- 934 2003..................................................... -- 761 Thereafter............................................... -- 309 ------ ------ Total minimum lease payments............................... (3,445) 10,520 ====== Less amount representing interest.......................... (134) ------ Present value of future lease payments..................... (3,311) ------ Less current portion Non-current portion of capital lease obligations.............................................. 267 ======
Notes Payable The Company has two lines of credit, one with Sumitomo Bank, Limited ("Sumitomo") and one with Sumitomo and Silicon Valley Bank jointly, to provide an aggregate of up to $27 million in debt financing. The loans are subject to certain financial covenants over the course of the agreements. Interest is computed at various rates based on a Eurodollar rate plus applicable margin. The weighted average interest rate on these loans is approximately 7.5% at December 31, 1998. Interest and principal payments are due monthly over a term of up to 48 months. The Company was in compliance with all covenants at December 31, 1998. The balance outstanding on these loans at December 31, 1998 was $23.1 million. In February 1997, the Company entered into a lending arrangement with one of its facility lessors for tenant improvements. The loan amount was for $350,000, with interest accruing at 9% per annum. Principal and interest are due monthly through July 1, 2001. Principal maturities of notes payable at December 31, 1998 are as follows:
(IN THOUSANDS) 1999........................... $6,828 2000........................... 6,835 2001........................... 6,381 2002........................... 3,333
10. RELATED PARTY TRANSACTIONS In August 1997, the Company entered into an employment agreement with its Chief Executive Officer that extends through December 31, 2000. The agreement provides for compensation and bonus provisions in exchange for continued service and an agreement not to compete. In addition, the agreement provides for forgiveness on two notes receivable, one for $200,000 for the purchase of the Company's common stock which was included in stockholders' equity on the balance sheet and one for $750,000 which is included in noncurrent assets on the balance sheet. In addition, the agreement provides for the forgiveness of accrued interest, a partial tax gross-up and extends through 2001. The principal portion of the first note forgiven in 55 57 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1998 and 1997 was $125,000 and $75,000, respectively. The principal portion of the second note forgiven in 1998 was $30,000. 11. EMPLOYEE BENEFIT PLAN The Company maintains a 401(k) retirement savings plan for all of its eligible employees. Each participant in the plan may elect to contribute 1% to 15% of his or her annual salary to the plan, subject to statutory limitations. The Company matches 50% of the first 6% of the salary contributed by the employee. The Company's match is done with the Company's stock. The expense charged to operations under this plan for fiscal 1998 and 1997 was $295,180 and $276,000, respectively (none in 1996). 12. SEGMENT INFORMATION The Company operates two segments: (i) drug discovery, through collaborative research agreements and unpartnered programs in oncology, and (ii) combinatorial chemistry in the Advanced Technologies Division (ATD) through the sale of chemical compound libraries. The Company's reportable segments are strategic business units that offer different products and services. They are each managed separately because they perform different services utilizing different and distinct operations. Information as to the operations of drug discovery and ATD is set forth below based on the nature of the products and services offered. The Company evaluates performance based on several factors, of which the primary financial measure is business segment operating income or loss, defined as income or loss before interest income/expense and minority interest. Revenues for ATD include product sales and license or commitment fees associated with the respective agreement. Operating loss by segment for ATD does not include corporate overhead allocations, except for a facilities charge. The Company does not evaluate segment performance or allocate resources based on a segment's assets, therefore, assets are not reported by segment. The accounting policies of the business segments are the same as those described in the summary of accounting policies (Note 1).
YEAR ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 --------- -------- ------- (IN THOUSANDS) Revenues: Drug discovery........................... $ 35,760 $ 20,499 $19,893 ATD...................................... 11,662 4,315 1,667 --------- -------- ------- Total consolidated......................... $ 47,422 $ 24,814 $21,560 --------- -------- ------- Operating income (loss): Drug discovery (1)....................... $(160,290) $(11,294) $(5,928) ATD...................................... 4,172 327 -- --------- -------- ------- Total consolidated......................... $(156,124) $(10,967) $(5,928) ========= ======== =======
- --------------- (1) Includes $125 million and $0.2 million in acquired in-process research and development recorded in 1998 and 1996, respectively, related to certain acquisitions during the year. 13. INCOME TAXES As of December 31, 1998 and 1997, the Company had federal and state net operating loss carryforwards of approximately $75,500,000 and $7,800,000, respectively. As of December 31, 1998 and 1997, the Company also had federal research and development tax credit carryforwards of approximately $5,300,000 and 56 58 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) $2,800,000, respectively. The net operating loss and credit carryforwards will expire at various dates beginning in 2004 through 2018, if not utilized. The utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes are as follows:
DECEMBER 31, -------------------- 1998 1997 -------- -------- (IN THOUSANDS) Net operating loss carryforwards....................... $ 26,100 $ 7,700 Research credit carryforwards.......................... 7,200 2,600 Capitalized research and development................... 24,400 17,200 Other, net............................................. 5,000 2,100 -------- -------- Total deferred tax assets.............................. 62,700 29,600 Valuation allowance of deferred tax assets............. (62,700) (29,600) -------- -------- Net deferred tax assets................................ $ -- $ -- ======== ========
The net valuation allowance increased by approximately $4,700,000 and $2,300,000 during 1997 and 1996, respectively. Approximately $1,200,000 of the valuation allowance for deferred tax assets relates to benefits of stock options deductions which, when recognized, will be allocated directly to contributed capital. 14. REVENUES FROM SIGNIFICANT PARTNERS AND CUSTOMERS Major customers, responsible for 10% or more of revenues include drug discovery partners and pharmaceutical and biotechnology companies which purchase ATD compound libraries. The percentages of sales of each of these major customers to total revenue for the years ended December 31 were as follows:
1998 1997 1996 ---- ---- ---- Customer A.............................................. 34% -- -- Customer B.............................................. 14% -- -- Customer C.............................................. 14% -- -- Customer D.............................................. 10% 41% 40% All Others.............................................. 28% 59% 60% --- --- --- Total......................................... 100% 100% 100% === === ===
15. SUBSEQUENT EVENTS (UNAUDITED) Formation of PPGx, Inc. In February 1999, the Company announced the formation of a majority-owned subsidiary, PPGx, Inc. ("PPGx") which is engaged in the business of providing pharmacogenomic (the science of how genetic variations among individuals affects drug safety and efficacy) products and services to the pharmaceutical industry. In connection with the formation of PPGx, Axys contributed certain assets and technology in exchange for an 82% ownership interest in PPGx. PPD, Inc. ("PPD"), Axys' partner in PPGx, contributed 57 59 AXYS PHARMACEUTICALS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) certain assets, technology, cash and loan guarantees in exchange for an 18% ownership interest in PPGx and the exclusive, worldwide right to market the pharmacogenomic products and services of PPGx. Under the terms of a shareholder agreement between the Company and PPD, PPD has the option (the "PPD Option") to purchase 32% of PPGx from the Company at various escalating prices until February 1, 2002. Under certain circumstances, the Company has the option to put (the "Axys Put") 32% of PPGx to PPD at various escalating prices until August 1, 2002. At such time as either the PPD Option or the Axys Put are exercised, the Company would also become a co-guarantor of a certain PPGx line of credit to the extent any borrowings are outstanding at that time. Additionally, at any time after the fifth anniversary of the formation of PPGx, the Company and, provided either the PPD Option or the Axys Put have been exercised, PPD have the right to buy all of the outstanding equity interests in PPGx at fair market value in accordance with the terms of buy-sell provisions of the shareholder agreement. Second Round of Financing for Xyris Corporation In February 1999, Xyris concluded the negotiation of an exclusive license to all Axys technology in the field of agriculture (the "Technology License") (See Note 4). This resulted in the Company receiving additional shares of Xyris in exchange for the Technology License. Also in February 1999, Xyris completed a financing in which it raised $4,500,000 from a third party. After this financing, the third party's investment in Xyris totaled $5,000,000. Under the terms of the financing, the Company granted the third party the right (the "New Put Option") to require the Company to purchase all of the third party's interest in Xyris in exchange for that number of shares of the Company whose market value equals $5,000,000 at the date of the exercise of the New Put Option. The New Put Option may be exercised at any time between August 5, 1999 and February 5, 2001. The net effect of issuance of shares in connection with the Technology License and in connection with the financing reduced the Company's ownership in Xyris from 82% to 70%. 58 60 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference from the information under the captions "Proposals to be Voted Upon", "Nominees for Directors" and "Compliance with the Reporting Requirements of Section 16" contained in the Company's definitive proxy statement to be filed no later than April 30, 1999 in connection with the solicitation of proxies for the Company's annual meeting of stockholders to be held May 26, 1999 (the "Proxy Statement"). In addition, the information contained in Part I of this Form 10-K under the caption "Executive Officers of the Registrant" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the information under the captions "Compensation of Executive Officers," "Compensation of Non-Employee Directors" and "Employment Agreements and Change-in-Control Arrangements" contained in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the information under the caption "Axys Stock Ownership of Beneficial Owners, Directors and Management" contained in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the information under the caption "Relationships and Transactions You Should Know About" contained in the Proxy Statement. 59 61 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Index to Financial Statements The Financial Statements required by this item are submitted in Part II, Item 8 of this report. (2) Index to Financial Statements Schedules All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or in the notes thereto. (3) Exhibits.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 3.1 Amended and Restated Certificate of Incorporation. Incorporated by reference to Ex. 3.1 filed on Form 10-K filed on March 31, 1998. 3.2 Amended and Restated Bylaws.(1) 3.3 Registrant's Certificate of Designation of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 99.3 filed on Form 8-K dated October 8, 1998. 4.1 Rights Agreement dated as of October 8, 1998, among the Registrant and ChaseMellon Shareholders Services, LLC, incorporated by reference to Exhibit 99.2 filed on Form 8-K dated October 8, 1998. 4.2 Form of Rights Certificate, incorporated by reference to Exhibit 99.4 filed on Form 8-K dated October 8, 1998. 10.1 Registration Rights Agreement, among the Registrant and the other parties therein, dated January 7, 1998. 10.2 1989 Stock Plan, as amended.(2) 10.3 Form of Employee Stock Purchase Plan and Form of Offering Document.(2)(12) 10.4+ 1997 Equity Incentive Plan. Incorporated by reference to Exhibit 10.4 filed on Form 10-Q filed on August 15, 1998. 10.6 Standard Industrial Lease between the Registrant and Shelton Properties, Inc., dated October 15, 1992, with related addenda and amendment.(1) 10.7 Third Amendment to Lease between Registrant and Shelton Properties, Inc., dated March 29, 1994.(4) 10.8 Master Equipment Lease Agreement between the Registrant and Phoenix Leasing Incorporated, dated as of April 12, 1993, with related amendments.(1) 10.9 Re-Lease Agreement No. 6132A between the Registrant and PacifiCorp Credit Inc., dated December 27, 1992, with related agreements.(1) 10.10 Master Equipment Lease Agreement No. 2982 between the Registrant and MMC/GATX Partnership No. I, dated as of January 7, 1992, with related addenda.(1) 10.11** Research and License Agreement between the Registrant and Amgen Inc., dated May 28, 1993.(1) 10.12** Sponsored Research Agreement between the Registrant, the Whitehead Institute for Biomedical Research and Dr. Harvey Lodish, dated May 28, 1993.(1)
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.13** License Agreement between the Registrant, the Whitehead Institute for Biomedical Research and Massachusetts Institute of Technology, dated May 28, 1993.(1) 10.14 Consent and Waiver between the Registrant, Amgen Inc., and the Whitehead Institute for Biomedical Research, dated May 28, 1993.(1) 10.15** Collaboration Agreement between the Registrant and Pharmacia AB, dated March 29, 1993.(1) 10.16** Project Agreement between the Registrant and Pharmacia AB, dated March 29, 1993.(1) 10.17 Form of Restricted Stock Purchase Agreement.(1)(2) 10.18+ Form of Indemnity Agreement entered into between the Registrant and its officers and directors.(1)(2) 10.19 Stock Bonus Grant Plan.(2)(3) 10.20 Financing Agreement between Hambrecht and Quist Guaranty Finance, L.P., dated March 29, 1994, including Security Agreement and Warrant Purchase Agreement of even date.(4) 10.22+ 1994 Non-Employee Directors' Stock Option Plan, as amended on January 7, 1998. Incorporated by reference to Exhibit 10.22 filed on Form 10-K filed on March 31, 1998. 10.23 Fourth Amendment to Lease dated October 15, 1992 between the Registrant and Shelton Properties, Inc., dated October 1, 1994.(5) 10.24** Collaborative Research and License Agreement between the Registrant and Bayer AG, dated November 28, 1994.(6) 10.25** Research Agreement between the Registrant and Pharmacia AB, dated December 21, 1994.(5) 10.26 Form of Fifth Amendment to Lease dated October 15, 1992 between the Registrant and Shelton Properties, Inc. dated August 28, 1996.(6) 10.27 Master Equipment Lease Agreement between the Registrant and GE Capital, dated August 18, 1995.(6) 10.28** Collaborative Research and License Agreement between the Registrant and Pharmacia AB, dated August 29, 1995.(6) 10.30 Agreement and Plan of Merger and Reorganization among the Registrant, Chapel Acquisition Corp. and Khepri Pharmaceuticals, Inc., dated November 7, 1995.(8) 10.31 Form of Stockholder Agreement between the Registrant and certain former stockholders of Khepri Pharmaceuticals, Inc.(8) 10.32 Form of Agreement among the Registrant, Khepri Pharmaceuticals Canada, Inc. and the holders of Class B Shares of Khepri Pharmaceuticals Canada, Inc.(8) 10.33 Amendment to Agreement dated March 29, 1993 between the Registrant and Kabi Pharmacia AB, dated January 31, 1996.(9) 10.34 First Amendment to Research and License Agreement, dated May 28, 1993, between Registrant and Amgen, Inc., dated February 2, 1996.(9) 10.35 Research Agreement between the Registrant and Pharmacia & Upjohn, Inc., a Delaware corporation, dated February 29, 1996.(9)
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EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.36 Form of Sixth Amendment to Lease dated October 15, 1992 between the Registrant and Shelton Properties, Inc., dated March 29, 1996.(9) 10.37 Financing Agreement between Hambrecht and Quist Guaranty Finance, LLC, dated March 29, 1996, including Security Agreement and Warrant Purchase Agreement of even date.(9) 10.38 Amendment to Lease Schedule under Master Property Lease Agreement dated March 29, 1994 between Hambrecht and Quist Guaranty Finance, L.P., dated March 29, 1996.(9) 10.39 Standard Industrial Lease between the Registrant and The Equitable Life Assurance Society of the United States, dated August 5, 1996.(10) 10.40 Business Loan Agreement between Registrant and Bank of America National Trust and Savings Association, dated September 24, 1996.(10) 10.41 Sublease Agreement between Registrant and Fibrogen, Inc., dated September 30, 1996.(10) 10.42** Research Collaboration and License Agreement between Merck & Co., Inc. and the Registrant, dated November 6, 1996.(7) 10.44 Collaborative Research and License Agreement between SmithKline Beecham Corporation and the Registrant, dated June 27, 1996.(11) 10.46 Loan Agreement among the Registrant, as Borrower, and The Sumitomo Bank, Limited and Silicon Valley Bank, as Lenders and The Sumitomo Bank, Limited, as Agent, dated September 29, 1997.(13) 10.47 Sequana 1994 Incentive Stock Plan.(14) 10.48 Sequana 1995 Employee Stock Purchase Plan.(14) 10.49+ Sequana 1995 Director Stock Option Plan.(14) 10.50 Master Lease Agreement dated November 1, 1993 by and between Comdisco, Inc. and Sequana.(14) 10.52 Expansion Lease by and between Health Science Properties, Inc. and Sequana dated as of November 20, 1995.(15) 10.53** Collaborative Research Agreement dated as of June 30, 1995 by and between Sequana and Corange International, Ltd.(14) 10.54** Collaborative Research Agreement dated as of June 12, 1995 by and between Sequana and Boehringer Ingelheim International GmbH.(14) 10.55+ Form of Indemnification Agreement between the Registrant and its officers and directors.(14) 10.57 Letter Agreement dated September 7, 1993 between Sequana and Timothy J.R. Harris.(14) 10.58** Research Agreement dated as of April 2, 1996 by and between Sequana and Aurora Biosciences Corporation.(16) 10.59 Merger Agreement and Plan of Reorganization Agreement between Sequana, Sequana Merger Sub, Inc., NemaPharm, Inc. and the Shareholders of NemaPharm, Inc., dated July 19, 1996.(17) 10.60 Loan Agreement between Sequana and The Sumitomo Bank, Limited, dated as of October 23, 1996.(18)
62 64
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.61** Joint Venture Agreement among Sequana Therapeutics, Inc., Memorial Sloan-Kettering Cancer Center and Genos Biosciences, Inc., dated January 29, 1997.(19) 10.62* Amendment to Collaborative Research Agreement of June 12, 1995 between Sequana and Boehringer Ingelheim International GmbH, dated June 19, 1997.(20) 10.63 Second Amendment to Expansion Lease by and between Sequana and Alexandria Real Estate Equities, Inc., dated as of May 20, 1997.(20) 10.64 Agreement and Plan of Merger and Reorganization dated November 2, 1997, by and among the Registrant, Beagle Acquisition Sub, Inc., a California corporation and wholly owned subsidiary of the Registrant and Sequana.(21) 10.65 First Amendment to Loan Agreement Between the Registrant and The Sumitomo Bank, Limited, dated as of January 8, 1998. Incorporated by reference to Exhibit 10-65 filed on Form 10-K filed on March 31, 1998. 10.66 First Amendment to Loan Agreement Between Sequana and The Sumitomo Bank, Limited, dated as of January 8, 1998. Incorporated by reference to Exhibit 10-66 filed on Form 10-K filed on March 31, 1998. 10.67* Collaboration Agreement dated as of October 1997 by and between the Registrant and Bristol-Myers Squibb Company. Incorporated by reference to Exhibit 10-67 filed on Form 10-K filed on March 31, 1998. 10.68* Collaboration Agreement dated as of October 31, 1997 by and between Sequana and Warner-Lambert Company. Incorporated by reference to Exhibit 10-68 filed on Form 10-K filed on March 31, 1998. 10.69 Sequana Common Stock Purchase Agreement, dated October 31, 1997. Incorporated by reference to Exhibit 10-69 filed on Form 10-K filed on March 31, 1998. 10.70 $200,000 Promissory Note, dated September 2, 1997, issued by John P. Walker, to the Registrant. Incorporated by reference to Exhibit 10-70 filed on Form 10-K filed on March 31, 1998. 10.71 $750,000 Promissory Note, dated September 2, 1997, issued by John P. Walker, to the Registrant. Incorporated by reference to Exhibit 10-71 filed on Form 10-K filed on March 31, 1998. 10.72 Employment Agreement, dated August 29, 1997, by and between John Walker and the Registrant. Incorporated by reference to Exhibit 10-72 filed on Form 10-K filed on March 31, 1998. 10.73 Amended and Restated Severance Agreement by and between the Registrant and Kevin Kinsella, dated January 7, 1998. Incorporated by reference to Exhibit 10-73 filed on Form 10-K filed on March 31, 1998. 10.74 Amended and Restated Restricted Stock Purchase Agreement by and between Sequana and Kevin Kinsella, dated January 7, 1998. Incorporated by reference to Exhibit 10-74 filed on Form 10-K filed on March 31, 1998. 10.75 Consulting Agreement by and between Sequana and Kevin Kinsella, dated January 8, 1998. Incorporated by reference to Exhibit 10-75 filed on Form 10-K filed on March 31, 1998. 10.78 1997 Equity Incentive Plan, dated January 7, 1998.(22)
63 65
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.79 First Amendment to Lease Schedules Master Property Lease Agreement No. 943, dated March 29, 1994, Schedules Nos. 1 and 4 through 59, dated from March 29, 1994, through January 1, 1995.(23) 10.80 First Amendment to Lease Schedule Master Property Lease Agreement No. 963, dated March 29, 1996, Schedule No. 2, dated March 29, 1996.(23) 10.81 Second Amendment to Lease Schedule Master Property Lease Agreement No. 943, dated March 29, 1994, Schedule No. 2, dated March 29, 1994.(23) 10.82 First Amendment to Lease Schedule Master Property Lease Agreement No. 943, dated March 29, 1994, Schedule No. 3, dated March 29, 1994.(23) 10.83 Amendment to the Collaborative Research Agreement between Sequana and Corange International Ltd., effective June 30, 1995, dated January 9, 1998.(24) 10.84* Amendment No. 2 to the Collaborative Research Agreement between Sequana and Corange International Ltd., dated June 30, 1995, effective February 23, 1998.(24) 10.85 Employment Agreement by and between Tim Harris and the Company, dated as of January 8, 1998.(24) 10.86 Lease Agreement between Sequana and ARE-John Hopkins Court, LLC, dated as of January 7, 1998.(24) 10.87* Termination of Collaborative Research Agreement between Sequana and Glaxo Wellcome, Inc., effective February 1, 1998.(25) 10.88* Combinatorial Chemistry Agreement between the Registrant and Warner-Lambert Company, dated May 15, 1998.(25) 10.89* Collaboration Agreement by and among the Registrant and its subsidiaries, NemaPharm, Inc. and Sequana, and Roche Bioscience, dated June 1, 1998.(25) 10.90* Amendment dated September 21, 1998 to the Collaboration Agreement between Warner-Lambert Company and Sequana, dated October 31, 1997.(26) 10.91 1997 Non-Officer Equity Incentive Plan.(26) 10.93* Second Amendment to the Research Collaboration and License Agreement between Arris Pharmaceutical Corp. and Merck and Co., Inc., dated November 5, 1998. 10.94* Collaborative Research and License Agreement between the Registrant and Rhone-Poulenc Rorer Pharmaceuticals, Inc., dated December 11, 1998. 10.95* Combinatorial Chemistry Agreement between the Registrant and Rhone-Poulenc Rorer Pharmaceuticals, Inc., dated December 22, 1998. 10.96 Agreement, dated June 11, 1998, by and between William Newell and the Registrant. 21 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 24.1 Power of Attorney (incorporated in the signature page of this Form 10-K). 27 Financial Data Schedule.
- --------------- + Compensatory Benefit Plan or management contract. * Confidential treatment has been requested with respect to certain portions of this exhibit. 64 66 ** Confidential treatment has been granted with respect to certain portions of this exhibit. (1) Incorporated herein by reference to the Registration Statement on Form S-1 filed October 5, 1993, as amended thereto (file number 33-69972). (2) Compensation plan. (3) Incorporated herein by reference to the Registration Statement on Form S-8 filed January 31, 1994 (file number 33-69972). (4) Incorporated herein by reference to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1994. (5) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (6) Incorporated herein by reference to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1995. (7) Incorporated herein by reference to the Registrant's Registration Report on Form 10-K for the fiscal year ended December 31, 1996 (8) Incorporated herein by reference to the Registrant's Current Report on Form 8-K, filed November 13, 1995. (9) Incorporated herein by reference to the Registration Report on Form 10-Q for the quarter ended March 31, 1996. (10) Incorporated herein by reference to the Registration Report on Form 10-Q for the quarter ended September 30, 1996. (11) Incorporated herein by reference to the Registration Statement filed on Form S-3/A filed September 19, 1996 (file number 333-09307). (12) Incorporated by reference to the Registration Statement on Form S-8 filed July 29, 1996 (file number 333-09095). (13) Incorporated by reference to exhibit 10.47 to the Registrant's Report on Form 10-Q for the quarter ended October 31, 1997. (14) Incorporated by reference to exhibits filed with Sequana's Registration Statement on Form S-1, filed June 14, 1995 as amended (Reg. No. 33-93460). (15) Incorporated by reference to exhibits filed with Sequana's Registration Statement on Form S-1, filed February 12, 1996 as amended (Reg. No. 333-01226). (16) Incorporated by reference to exhibit 10.14 to Sequana's Report on Form 10-Q for the quarter ended June 30, 1996. (17) Incorporated by reference to exhibit 10.15 to Sequana's Report on Form 10-Q for the quarter ended September 30, 1996. (18) Incorporated by reference to exhibit 10.16 filed with Sequana's Report on Form 10-K, as amended, for the fiscal year ended December 31, 1996. (19) Incorporated by reference to exhibit 10.17 to Sequana's Report on Form 10-Q for the quarter ended March 31, 1997. (20) Incorporated by reference to exhibit 10.18 to Sequana's Report on Form 10-Q for the quarter ended June 30, 1997. (21) Incorporated by reference to exhibit 4.1 to the Schedule 13D filed by the Registrant on November 12, 1997. (22) Incorporated by reference to Appendix E to the Registrants Registration Statement on Form S-4, filed November 27, 1997. (23) Incorporated herein by reference to the Registrant's Registration Report on Form 10-K for the fiscal year ended December 31, 1997. (24) Incorporated herein by reference to the Registrant's Registration Report on Form 10-Q for the fiscal year ended March 31, 1998. 65 67 (25) Incorporated herein by reference to the Registrant's Registration Report on Form 10-Q for the fiscal year ended June 30, 1998. (26) Incorporated herein by reference to the Registrant's Registration Report on Form 10-Q for the fiscal year ended September 30, 1998. (b) Reports on Form 8-K On October 9, 1998 the Company filed a report on Form 8-K with the Securities and Exchange Commission disclosing under "Item 5 -- Other Events" that on October 8, 1998, the Board of Directors of Axys Pharmaceuticals, Inc. approved the adoption of a Preferred Share Purchase Rights Plan. (c) See Exhibits listed under Item 14(a)(3). (d) All schedules are omitted because they are not applicable or the required information is shown in the Financial Statements or in the noted thereto. 66 68 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 on the 30th day of March, 1999. AXYS PHARMACEUTICALS, INC. BY: /s/ JOHN P. WALKER ------------------------------------ John P. Walker Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears on the following page constitutes and appoints John P. Walker and Frederick J. Ruegsegger, or any of them, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that the said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. 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 indicated on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN P. WALKER Chief Executive Officer and March 30, 1999 - ----------------------------------------------------- Director (Principal John P. Walker executive officer) /s/ FREDERICK J. RUEGSEGGER Senior Vice President, Finance March 30, 1999 - ----------------------------------------------------- and Corporate Development and Frederick J. Ruegsegger Chief Financial Officer (Principal financial and accounting officer) Director - ----------------------------------------------------- Brook H. Byers /s/ ANTHONY B. EVNIN, PH.D. Director March 30, 1999 - ----------------------------------------------------- Anthony B. Evnin, Ph.D. /s/ VAUGHN M. KAILIAN Director March 30, 1999 - ----------------------------------------------------- Vaughn M. Kailian /s/ DONALD KENNEDY, PH.D. Director March 30, 1999 - ----------------------------------------------------- Donald Kennedy, Ph.D. /s/ ANN M. ARVIN, M.D. Director March 30, 1999 - ----------------------------------------------------- Ann M. Arvin, M.D. /s/ IRWIN LERNER Director March 30, 1999 - ----------------------------------------------------- Irwin Lerner /s/ J. LEIGHTON READ, M.D. Director March 30, 1999 - ----------------------------------------------------- J. Leighton Read, M.D.
67 69 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 3.1 Amended and Restated Certificate of Incorporation. Incorporated by reference to Ex. 3.1 filed on Form 10-K filed on March 31, 1998. 3.2 Amended and Restated Bylaws.(1) 3.3 Registrant's Certificate of Designation of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit 99.3 filed on Form 8-K dated October 8, 1998. 4.1 Rights Agreement dated as of October 8, 1998, among the Registrant and ChaseMellon Shareholders Services, LLC, incorporated by reference to Exhibit 99.2 filed on Form 8-K dated October 8, 1998. 4.2 Form of Rights Certificate, incorporated by reference to Exhibit 99.4 filed on Form 8-K dated October 8, 1998. 10.1 Registration Rights Agreement, among the Registrant and the other parties therein, dated January 7, 1998. 10.2 1989 Stock Plan, as amended.(2) 10.3 Form of Employee Stock Purchase Plan and Form of Offering Document.(2)(12) 10.4+ 1997 Equity Incentive Plan. Incorporated by reference to Exhibit 10.4 filed on Form 10-Q filed on August 15, 1998. 10.6 Standard Industrial Lease between the Registrant and Shelton Properties, Inc., dated October 15, 1992, with related addenda and amendment.(1) 10.7 Third Amendment to Lease between Registrant and Shelton Properties, Inc., dated March 29, 1994.(4) 10.8 Master Equipment Lease Agreement between the Registrant and Phoenix Leasing Incorporated, dated as of April 12, 1993, with related amendments.(1) 10.9 Re-Lease Agreement No. 6132A between the Registrant and PacifiCorp Credit Inc., dated December 27, 1992, with related agreements.(1) 10.10 Master Equipment Lease Agreement No. 2982 between the Registrant and MMC/GATX Partnership No. I, dated as of January 7, 1992, with related addenda.(1) 10.11** Research and License Agreement between the Registrant and Amgen Inc., dated May 28, 1993.(1) 10.12** Sponsored Research Agreement between the Registrant, the Whitehead Institute for Biomedical Research and Dr. Harvey Lodish, dated May 28, 1993.(1) 10.13** License Agreement between the Registrant, the Whitehead Institute for Biomedical Research and Massachusetts Institute of Technology, dated May 28, 1993.(1) 10.14 Consent and Waiver between the Registrant, Amgen Inc., and the Whitehead Institute for Biomedical Research, dated May 28, 1993.(1) 10.15** Collaboration Agreement between the Registrant and Pharmacia AB, dated March 29, 1993.(1) 10.16** Project Agreement between the Registrant and Pharmacia AB, dated March 29, 1993.(1) 10.17 Form of Restricted Stock Purchase Agreement.(1)(2)
68 70
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.18+ Form of Indemnity Agreement entered into between the Registrant and its officers and directors.(1)(2) 10.19 Stock Bonus Grant Plan.(2)(3) 10.20 Financing Agreement between Hambrecht and Quist Guaranty Finance, L.P., dated March 29, 1994, including Security Agreement and Warrant Purchase Agreement of even date.(4) 10.22+ 1994 Non-Employee Directors' Stock Option Plan, as amended on January 7, 1998. Incorporated by reference to Exhibit 10.22 filed on Form 10-K filed on March 31, 1998. 10.23 Fourth Amendment to Lease dated October 15, 1992 between the Registrant and Shelton Properties, Inc., dated October 1, 1994.(5) 10.24** Collaborative Research and License Agreement between the Registrant and Bayer AG, dated November 28, 1994.(6) 10.25** Research Agreement between the Registrant and Pharmacia AB, dated December 21, 1994.(5) 10.26 Form of Fifth Amendment to Lease dated October 15, 1992 between the Registrant and Shelton Properties, Inc. dated August 28, 1996.(6) 10.27 Master Equipment Lease Agreement between the Registrant and GE Capital, dated August 18, 1995.(6) 10.28** Collaborative Research and License Agreement between the Registrant and Pharmacia AB, dated August 29, 1995.(6) 10.30 Agreement and Plan of Merger and Reorganization among the Registrant, Chapel Acquisition Corp. and Khepri Pharmaceuticals, Inc., dated November 7, 1995.(8) 10.31 Form of Stockholder Agreement between the Registrant and certain former stockholders of Khepri Pharmaceuticals, Inc.(8) 10.32 Form of Agreement among the Registrant, Khepri Pharmaceuticals Canada, Inc. and the holders of Class B Shares of Khepri Pharmaceuticals Canada, Inc.(8) 10.33 Amendment to Agreement dated March 29, 1993 between the Registrant and Kabi Pharmacia AB, dated January 31, 1996.(9) 10.34 First Amendment to Research and License Agreement, dated May 28, 1993, between Registrant and Amgen, Inc., dated February 2, 1996.(9) 10.35 Research Agreement between the Registrant and Pharmacia & Upjohn, Inc., a Delaware corporation, dated February 29, 1996.(9) 10.36 Form of Sixth Amendment to Lease dated October 15, 1992 between the Registrant and Shelton Properties, Inc., dated March 29, 1996.(9) 10.37 Financing Agreement between Hambrecht and Quist Guaranty Finance, LLC, dated March 29, 1996, including Security Agreement and Warrant Purchase Agreement of even date.(9) 10.38 Amendment to Lease Schedule under Master Property Lease Agreement dated March 29, 1994 between Hambrecht and Quist Guaranty Finance, L.P., dated March 29, 1996.(9) 10.39 Standard Industrial Lease between the Registrant and The Equitable Life Assurance Society of the United States, dated August 5, 1996.(10) 10.40 Business Loan Agreement between Registrant and Bank of America National Trust and Savings Association, dated September 24, 1996.(10)
69 71
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.41 Sublease Agreement between Registrant and Fibrogen, Inc., dated September 30, 1996.(10) 10.42** Research Collaboration and License Agreement between Merck & Co., Inc. and the Registrant, dated November 6, 1996.(7) 10.44 Collaborative Research and License Agreement between SmithKline Beecham Corporation and the Registrant, dated June 27, 1996.(11) 10.46 Loan Agreement among the Registrant, as Borrower, and The Sumitomo Bank, Limited and Silicon Valley Bank, as Lenders and The Sumitomo Bank, Limited, as Agent, dated September 29, 1997.(13) 10.47 Sequana 1994 Incentive Stock Plan.(14) 10.48 Sequana 1995 Employee Stock Purchase Plan.(14) 10.49+ Sequana 1995 Director Stock Option Plan.(14) 10.50 Master Lease Agreement dated November 1, 1993 by and between Comdisco, Inc. and Sequana.(14) 10.52 Expansion Lease by and between Health Science Properties, Inc. and Sequana dated as of November 20, 1995.(15) 10.53** Collaborative Research Agreement dated as of June 30, 1995 by and between Sequana and Corange International, Ltd.(14) 10.54** Collaborative Research Agreement dated as of June 12, 1995 by and between Sequana and Boehringer Ingelheim International GmbH.(14) 10.55+ Form of Indemnification Agreement between the Registrant and its officers and directors.(14) 10.57 Letter Agreement dated September 7, 1993 between Sequana and Timothy J.R. Harris.(14) 10.58** Research Agreement dated as of April 2, 1996 by and between Sequana and Aurora Biosciences Corporation.(16) 10.59 Merger Agreement and Plan of Reorganization Agreement between Sequana, Sequana Merger Sub, Inc., NemaPharm, Inc. and the Shareholders of NemaPharm, Inc., dated July 19, 1996.(17) 10.60 Loan Agreement between Sequana and The Sumitomo Bank, Limited, dated as of October 23, 1996.(18) 10.61** Joint Venture Agreement among Sequana Therapeutics, Inc., Memorial Sloan-Kettering Cancer Center and Genos Biosciences, Inc., dated January 29, 1997.(19) 10.62* Amendment to Collaborative Research Agreement of June 12, 1995 between Sequana and Boehringer Ingelheim International GmbH, dated June 19, 1997.(20) 10.63 Second Amendment to Expansion Lease by and between Sequana and Alexandria Real Estate Equities, Inc., dated as of May 20, 1997.(20) 10.64 Agreement and Plan of Merger and Reorganization dated November 2, 1997, by and among the Registrant, Beagle Acquisition Sub, Inc., a California corporation and wholly owned subsidiary of the Registrant and Sequana.(21) 10.65 First Amendment to Loan Agreement Between the Registrant and The Sumitomo Bank, Limited, dated as of January 8, 1998. Incorporated by reference to Exhibit 10-65 filed on Form 10-K filed on March 31, 1998.
70 72
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.66 First Amendment to Loan Agreement Between Sequana and The Sumitomo Bank, Limited, dated as of January 8, 1998. Incorporated by reference to Exhibit 10-66 filed on Form 10-K filed on March 31, 1998. 10.67* Collaboration Agreement dated as of October 1997 by and between the Registrant and Bristol-Myers Squibb Company. Incorporated by reference to Exhibit 10-67 filed on Form 10-K filed on March 31, 1998. 10.68* Collaboration Agreement dated as of October 31, 1997 by and between Sequana and Warner-Lambert Company. Incorporated by reference to Exhibit 10-68 filed on Form 10-K filed on March 31, 1998. 10.69 Sequana Common Stock Purchase Agreement, dated October 31, 1997. Incorporated by reference to Exhibit 10-69 filed on Form 10-K filed on March 31, 1998. 10.70 $200,000 Promissory Note, dated September 2, 1997, issued by John P. Walker, to the Registrant. Incorporated by reference to Exhibit 10-70 filed on Form 10-K filed on March 31, 1998. 10.71 $750,000 Promissory Note, dated September 2, 1997, issued by John P. Walker, to the Registrant. Incorporated by reference to Exhibit 10-71 filed on Form 10-K filed on March 31, 1998. 10.72 Employment Agreement, dated August 29, 1997, by and between John Walker and the Registrant. Incorporated by reference to Exhibit 10-72 filed on Form 10-K filed on March 31, 1998. 10.73 Amended and Restated Severance Agreement by and between the Registrant and Kevin Kinsella, dated January 7, 1998. Incorporated by reference to Exhibit 10-73 filed on Form 10-K filed on March 31, 1998. 10.74 Amended and Restated Restricted Stock Purchase Agreement by and between Sequana and Kevin Kinsella, dated January 7, 1998. Incorporated by reference to Exhibit 10-74 filed on Form 10-K filed on March 31, 1998. 10.75 Consulting Agreement by and between Sequana and Kevin Kinsella, dated January 8, 1998. Incorporated by reference to Exhibit 10-75 filed on Form 10-K filed on March 31, 1998. 10.78 1997 Equity Incentive Plan, dated January 7, 1998.(22) 10.79 First Amendment to Lease Schedules Master Property Lease Agreement No. 943, dated March 29, 1994, Schedules Nos. 1 and 4 through 59, dated from March 29, 1994, through January 1, 1995.(23)
71 73
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------- ----------------------- 10.80 First Amendment to Lease Schedule Master Property Lease Agreement No. 963, dated March 29, 1996, Schedule No. 2, dated March 29, 1996.(23) 10.81 Second Amendment to Lease Schedule Master Property Lease Agreement No. 943, dated March 29, 1994, Schedule No. 2, dated March 29, 1994.(23) 10.82 First Amendment to Lease Schedule Master Property Lease Agreement No. 943, dated March 29, 1994, Schedule No. 3, dated March 29, 1994.(23) 10.83 Amendment to the Collaborative Research Agreement between Sequana and Corange International Ltd., effective June 30, 1995, dated January 9, 1998.(24) 10.84* Amendment No. 2 to the Collaborative Research Agreement between Sequana and Corange International Ltd., dated June 30, 1995, effective February 23, 1998.(24) 10.85 Employment Agreement by and between Tim Harris and the Company, dated as of January 8, 1998.(24) 10.86 Lease Agreement between Sequana and ARE-John Hopkins Court, LLC, dated as of January 7, 1998.(24) 10.87* Termination of Collaborative Research Agreement between Sequana and Glaxo Wellcome, Inc., effective February 1, 1998.(25) 10.88* Combinatorial Chemistry Agreement between the Registrant and Warner-Lambert Company, dated May 15, 1998.(25) 10.89* Collaboration Agreement by and among the Registrant and its subsidiaries, NemaPharm, Inc. and Sequana, and Roche Bioscience, dated June 1, 1998.(25) 10.90* Amendment dated September 21, 1998 to the Collaboration Agreement between Warner-Lambert Company and Sequana, dated October 31, 1997.(26) 10.91 1997 Non-Officer Equity Incentive Plan.(26) 10.93* Second Amendment to the Research Collaboration and License Agreement between Arris Pharmaceutical Corp. and Merck and Co., Inc., dated November 5, 1998. 10.94* Collaborative Research and License Agreement between the Registrant and Rhone-Poulenc Rorer Pharmaceuticals, Inc., dated December 11, 1998. 10.95* Combinatorial Chemistry Agreement between the Registrant and Rhone-Poulenc Rorer Pharmaceuticals, Inc., dated December 22, 1998. 10.96 Agreement, dated June 11, 1998, by and between William Newell and the Registrant. 21 Subsidiaries of the Registrant. 23.1 Consent of Ernst & Young LLP. 24.1 Power of Attorney (incorporated in the signature page of this Form 10-K). 27 Financial Data Schedule.
- --------------- + Compensatory Benefit Plan or management contract. * Confidential treatment has been requested with respect to certain portions of this exhibit. ** Confidential treatment has been granted with respect to certain portions of this exhibit. (1) Incorporated herein by reference to the Registration Statement on Form S-1 filed October 5, 1993, as amended thereto (file number 33-69972). (2) Compensation plan. 72 74 (3) Incorporated herein by reference to the Registration Statement on Form S-8 filed January 31, 1994 (file number 33-69972). (4) Incorporated herein by reference to the Registrant's Report on Form 10-Q for the quarter ended March 31, 1994. (5) Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. (6) Incorporated herein by reference to the Registrant's Report on Form 10-Q for the quarter ended September 30, 1995. (7) Incorporated herein by reference to the Registrant's Registration Report on Form 10-K for the fiscal year ended December 31, 1996 (8) Incorporated herein by reference to the Registrant's Current Report on Form 8-K, filed November 13, 1995. (9) Incorporated herein by reference to the Registration Report on Form 10-Q for the quarter ended March 31, 1996. (10) Incorporated herein by reference to the Registration Report on Form 10-Q for the quarter ended September 30, 1996. (11) Incorporated herein by reference to the Registration Statement filed on Form S-3/A filed September 19, 1996 (file number 333-09307). (12) Incorporated by reference to the Registration Statement on Form S-8 filed July 29, 1996 (file number 333-09095). (13) Incorporated by reference to exhibit 10.47 to the Registrant's Report on Form 10-Q for the quarter ended October 31, 1997. (14) Incorporated by reference to exhibits filed with Sequana's Registration Statement on Form S-1, filed June 14, 1995 as amended (Reg. No. 33-93460). (15) Incorporated by reference to exhibits filed with Sequana's Registration Statement on Form S-1, filed February 12, 1996 as amended (Reg. No. 333-01226). (16) Incorporated by reference to exhibit 10.14 to Sequana's Report on Form 10-Q for the quarter ended June 30, 1996. (17) Incorporated by reference to exhibit 10.15 to Sequana's Report on Form 10-Q for the quarter ended September 30, 1996. (18) Incorporated by reference to exhibit 10.16 filed with Sequana's Report on Form 10-K, as amended, for the fiscal year ended December 31, 1996. (19) Incorporated by reference to exhibit 10.17 to Sequana's Report on Form 10-Q for the quarter ended March 31, 1997. (20) Incorporated by reference to exhibit 10.18 to Sequana's Report on Form 10-Q for the quarter ended June 30, 1997. (21) Incorporated by reference to exhibit 4.1 to the Schedule 13D filed by the Registrant on November 12, 1997. (22) Incorporated by reference to Appendix E to the Registrants Registration Statement on Form S-4, filed November 27, 1997. (23) Incorporated herein by reference to the Registrant's Registration Report on Form 10-K for the fiscal year ended December 31, 1997. (24) Incorporated herein by reference to the Registrant's Registration Report on Form 10-Q for the quarter ended March 31, 1998. (25) Incorporated herein by reference to the Registrant's Registration Report on Form 10-Q for the quarter ended June 30, 1998. (26) Incorporated herein by reference to the Registrant's Registration Report on Form 10-Q for the quarter ended September 30, 1998. 73 EX-10.1 2 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.1 REGISTRATION RIGHTS AGREEMENT DECEMBER 17, 1998 2 TABLE OF CONTENTS
PAGE SECTION 1. GENERAL......................................................... 1 1.1 Definitions..................................................... 1 SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER.......................... 2 2.1 Restrictions on Transfer........................................ 2 2.2 Piggyback Registrations......................................... 3 2.3 Expenses of Registration........................................ 4 2.4 Obligations of the Company...................................... 4 2.5 Termination of Registration Rights.............................. 5 2.6 Delay of Registration; Furnishing Information................... 6 2.7 Indemnification................................................. 6 2.8 Assignment of Registration Rights............................... 8 2.9 "Market Stand-Off" Agreement; Agreement to Furnish Information.. 8 2.10 Rule 144 Reporting.............................................. 9 SECTION 3. MISCELLANEOUS................................................... 9 3.1 Governing Law................................................... 9 3.2 Survival........................................................ 9 3.3 Successors and Assigns.......................................... 9 3.4 Entire Agreement................................................ 10 3.5 Severability.................................................... 10 3.6 Amendment and Waiver............................................ 10 3.7 Delays or Omissions............................................. 10 3.8 Notices......................................................... 10 3.9 Attorneys' Fees................................................. 10 3.10 Titles and Subtitles............................................ 11 3.11 Counterparts.................................................... 11
3 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is entered into as of the 17th day of December 1998, by and among AXYS PHARMACEUTICALS, INC., a Delaware corporation (the "COMPANY") and 52ND STREET ASSOCIATES, INC., a _____________ corporation and wholly-owned subsidiary of McKinsey & Company, Inc. ("52ND STREET ASSOCIATES"). RECITALS WHEREAS, the Company proposes to sell and issue Twenty-Seven Thousand Three Hundred (27,300) shares of its Common Stock in connection with the Consulting Agreement between the Company and McKinsey & Company, Inc. of even date herewith (the "CONSULTING Agreement"). WHEREAS, as a condition of entering into the Consulting Agreement, McKinsey & Company, Inc. has requested that the Company extend to 52nd Street Associates registration rights as set forth below. NOW, THEREFORE, in consideration of the mutual promises, representations, warranties, covenants and conditions set forth in this Agreement and the Consulting Agreement, the parties mutually agree as follows: SECTION 1. GENERAL. 1.1 DEFINITIONS. As used in this Agreement the following terms shall have the following respective meanings: "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "FORM S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "HOLDER" means any person owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 2.8 hereof. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement. "REGISTRABLE SECURITIES" means (a) Common Stock of the Company issued to 52nd Street Associates in connection with the Consulting Agreement; and (b) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such above-described securities. Notwithstanding the 1 4 foregoing, Registrable Securities shall not include any securities sold by a person to the public pursuant to a registration statement or Rule 144 promulgated under the Securities Act or sold in a private transaction in which the transferor's rights under Section 2 of this Agreement are not assigned. "REGISTRATION EXPENSES" shall mean all expenses incurred by the Company in complying with Section 2.2 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements not to exceed twenty-five thousand dollars ($25,000) of a single special counsel for the Holders, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "SEC" or "COMMISSION" means the Securities and Exchange Commission. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. "SELLING EXPENSES" shall mean all underwriting discounts and selling commissions applicable to the sale. SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER 2.1 RESTRICTIONS ON TRANSFER. (a) The Holder agrees not to make any disposition of all or any portion of the Registrable Securities unless and until: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement or in accordance with an exemption from registration under the Securities Act; or (ii) (A) The transferee has agreed in writing to be bound by the terms of this Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. (iii) Notwithstanding the provisions of paragraphs (i) and (ii) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (A) a partnership to its partners or former partners in accordance with partnership interests, (B) a corporation to its shareholders in accordance with their interest in the corporation or to any entity which directly or indirectly controls, is under common control with, or is controlled by, such Holder, (C) a limited liability company to its members or former members in accordance with their interest in the limited liability company, (D) to an entity of which a majority of the equity and voting interest is owned by such Holder, directly or indirectly (an 2 5 "AFFILIATE"), or (E) to the Holder's family member or trust for the benefit of an individual Holder; provided that in each case the transferee will be subject to the terms of this Agreement to the same extent as if he were an original Holder hereunder. (b) Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of the Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED. (c) The Company shall be obligated to reissue promptly unlegended certificates at the request of any holder thereof if the holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 2.2 PIGGYBACK REGISTRATIONS. The Company shall notify all Holders of Registrable Securities in writing at least fifteen (15) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans or with respect to corporate reorganizations or other transactions under Rule 145 of the Securities Act) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. 3 6 (a) UNDERWRITING. If the registration statement under which the Company gives notice under this Section 2.2 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to be included in a registration pursuant to this Section 2.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form among the underwriter or underwriters selected for such underwriting by the Company and the Company. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders and any other shareholders of the Company's securities then having registration rights with respect to the Company's securities on a pro rata basis based on the total number of Registrable Securities held by the Holders and the total number of registrable shares held by such other shareholders; and third, to any shareholder of the Company (other than a Holder) on a pro rata basis. No such reduction shall (i) reduce the securities being offered by the Company for its own account to be included in the registration and underwriting, or (ii) reduce the amount of securities of the selling Holders included in the registration below fifteen percent (15%) of the total amount of securities included in such registration. In no event will shares of any other selling shareholder be included in such registration which would reduce the number of shares which may be included by Holders without the written consent of Holders of not less than sixty-six and two-thirds percent (66 2/3%) of the Registrable Securities proposed to be sold in the offering. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. For any Holder which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing person shall be deemed to be a single "Holder", and any pro rata reduction with respect to such "Holder" shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "Holder," as defined in this sentence. (b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 2.3 hereof. 2.3 EXPENSES OF REGISTRATION. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration under Section 2.2 herein shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. 4 7 2.4 OBLIGATIONS OF THE COMPANY. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to thirty (30) days or, if earlier, until the Holder or Holders have completed the distribution related thereto. The Company shall not be required to file, cause to become effective or maintain the effectiveness of any registration statement that contemplates a distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the period set forth in paragraph (a) above. (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Use its best efforts to furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and 5 8 substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters. 2.5 TERMINATION OF REGISTRATION RIGHTS. All registration rights granted under this Section 2 shall terminate and be of no further force and effect two (2) years after the date of this Agreement. In addition, a Holder's registration rights shall expire if all Registrable Securities held by and issuable to such Holder (and its affiliates, partners, former partners, members and former members) may be sold under Rule 144 during any ninety (90) day period. 2.6 DELAY OF REGISTRATION; FURNISHING INFORMATION. (a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2. (b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 2.2 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. 2.7 INDEMNIFICATION. In the event any Registrable Securities are included in a registration statement under Section 2.2.: (a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "VIOLATION") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will pay as incurred to each such Holder, partner, officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 2.7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation 6 9 which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration is being effected, indemnify and hold harmless the Company, each of its directors, its officers and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will pay as incurred any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Violation; provided, however, that the indemnity agreement contained in this Section 2.7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 2.7 exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 2.7 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.7, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.7. 7 10 (d) If the indemnification provided for in this Section 2.7 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder exceed the net proceeds from the offering received by such Holder. (e) The obligations of the Company and Holders under this Section 2.7 shall survive completion of any offering of Registrable Securities in a registration statement and the termination of this Agreement. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 2.8 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned by 52nd Street Associates to a transferee or assignee which is an affiliate, subsidiary, parent, general partner, limited partner, retired partner, member or retired member of 52nd Street Associates; provided, however, (i) 52nd Street Associates shall, within ten (10) days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (ii) such transferee shall agree to be subject to all restrictions set forth in this Agreement. 2.9 RULE 144 REPORTING. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; (b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and (c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the 8 11 reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. SECTION 3. MISCELLANEOUS 3.1 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 3.2 SURVIVAL. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated by the Purchase Agreements. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 3.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 3.4 ENTIRE AGREEMENT. This Agreement and the Consulting Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 3.5 SEVERABILITY. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. 3.6 AMENDMENT AND WAIVER. (a) Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and each of the holders of the Registrable Securities. 9 12 (b) Except as otherwise expressly provided, the obligations of the Company and the rights of the Holders under this Agreement may be waived only with the written consent of each of the holders of the Registrable Securities. 3.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative. 3.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the signature pages hereof or at such other address as such party may designate by ten (10) days advance written notice to the other parties hereto. 3.9 ATTORNEYS' FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shal l be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 3.10 TITLES AND SUBTITLES. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 3.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 10 13 IN WITNESS WHEREOF, the parties hereto have executed this REGISTRATION RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof. AXYS PHARMACEUTICALS, INC. 52ND STREET ASSOCIATES, INC. By: By: ---------------------------------- ---------------------------------- Title: Title: ------------------------------- ------------------------------- Address: 180 Kimball Way Address: South San Francisco, CA 94080 ----------------------------- Attn: President FAX: (650) 829-1067 ----------------------------- ----------------------------- FAX: --------------------------------- EX-10.93 3 2ND AMEND RESEARCH & COLLABORATION LICENSE AGREE 1 [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT 10.93 SECOND AMENDMENT TO AGREEMENT This is the second amendment to the Research Collaboration and License Agreement between MERCK & CO., INC., a corporation organized and existing under the laws of New Jersey ("MERCK") and ARRIS PHARMACEUTICAL CORPORATION, a corporation organized and existing under the laws of Delaware, now known as AxyS Pharmaceuticals, Inc. ("AxyS") made as of November 6, 1996 (the "Agreement"). The purpose of this second amendment is to extend the Research Program Term in accordance with Section 2.8 of the Agreement, and to amend Section 1.23(a)(iv) of the Agreement. 1. In accordance with Section 2.8 of the Agreement, the Research Program Term is extended for one additional year, through November 5, 1999. Reference is made to Section 5.2(C) of the Agreement. The parties agree that a [*] will be required during the period [*] and that [*] will be required during the [*] the Research Program Term, i.e., from [*], the [*]. 2. Attachment 2.1 setting forth the Research Program is hereby amended to include the additional research work set forth on the attachment to this second amendment. 3. Section 1.23(a)(iv) is hereby amended to read in its entirety as follows: [*] 4. Capitalized terms used and not otherwise defined herein shall have the respective meanings set forth in the Agreement. The Agreement, together with the first amendment dated February 9, 1998, and this second amendment, contain entire understanding of the parties with respect to their subject matter. All express or implied agreements and understandings, either oral or written, heretofore made are expressly merged in and made a part of the Agreement as amended by the first and second amendments. The Agreement and its amendments may be amended, or any term thereof modified, only by a written instrument duly executed by both parties hereto. IN WITNESS WHEREOF, the parties have executed this Amendment as of November 5, 1998. MERCK & CO., INC. AxyS Pharmaceutical, Inc. By: /s/ Bennett Shapiro By: /s/Daniel Petree ------------------------------ ------------------------------ Bernard W. Shapiro, M.D. Daniel H. Petree Executive Vice President President & Merck Research Laboratories Chief Operating Officer 2 ATTACHMENT 2.1 RESEARCH PROGRAM [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 3 APPENDIX A-1 [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 4 APPENDIX A-2 [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 5 APPENDIX B [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 6 APPENDIX C-1 [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 7 APPENDIX C-2 [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EX-10.94 4 COLLABORATIVE RESEARCH AGREEMENT W/ RHONE-POULENC 1 [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILE SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT 10.94 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (this "Agreement") is made and entered into effective as of December 11, 1998, by and between AXYS PHARMACEUTICALS, INC., a Delaware corporation having its principal place of business at 180 Kimball Way, South San Francisco, CA 94080 ("Axys"), and RHONE-POULENC RORER PHARMACEUTICALS INC., a Delaware corporation having a place of business at 500 Arcola Road, Collegeville, Pennsylvania 19426 ("RPR"). Axys and RPR may be referred to herein as a "Party" or, collectively, as "Parties." RECITALS WHEREAS, Axys and its Affiliates possess proprietary technology and know-how related to the discovery, identification and/or synthesis of cathepsin S inhibitors and have identified chemical compounds that are cathepsin S inhibitors; and WHEREAS, RPR and its Affiliates are engaged in the research, development and marketing of products for the treatment of, among other things, respiratory and cardiovascular diseases; and WHEREAS, Axys and RPR desire to collaborate in the discovery, development and commercialization of cathepsin S inhibitors for use in the prevention and/or treatment of certain human diseases as identified below. NOW, THEREFORE, in consideration of the various promises and undertakings set forth herein, the Parties agree as follows: ARTICLE 1 DEFINITIONS Unless otherwise specifically provided herein, the following terms shall have the following meanings: 1.1 "ACTIVE COMPOUND" means any compound that: (a) (1) has the ability to inhibit (or, in the case of a prodrug, an active species of which inhibits) cathepsin S with a [*]; (2) has greater than [*] for cathepsin S against an [*], as determined by the JRC; and (3) has appropriate [*] selected by the JRC; and 1. 2 (b) satisfies one or more of the following: (1) is [*]; or (2) is [*] either (i) [*] or (ii) [*]; or (3) [*] (including without limitation the [*] thereto) [*], and is determined to [*] or (4) is [*], as defined in any pending or issued claim of any unexpired Axys Patent, RPR Patent or Joint Patent filed in the United States or Japan or as a European Patent Application, or as a Patent Cooperation Treaty ("PCT") application designating the United States and the contracting states of the European Patent Convention, and [*], provided that [*]. Notwithstanding the foregoing provisions of this Section 1.1, the term "Active Compounds" [*]. 1.2 "AFFILIATE" with respect to Axys, shall mean any Person controlling, controlled by, or under common control with, Axys. With respect to RPR, "Affiliate" shall mean any Person controlled by Rhone-Poulenc Rorer, Inc., a Pennsylvania corporation. For the purposes of this Section 1.2 only, "control" shall refer to (a) the possession, directly or indirectly, of the power to direct the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise or (b) the ownership, directly or indirectly, of at least 50% (or, if less, the maximum ownership interest permitted by law) of the voting securities or other ownership interest of a Person. 1.3 "AXYS KNOW-HOW" means all Information Controlled by Axys at any time prior to the end of the Research Term constituting methods, techniques, materials, know-how, trade secrets, inventions or data necessary or useful for the identification, development, synthesis, assaying, manufacture, use or sale of Active Compounds and Licensed Products, but excluding the Axys Patents, Joint Patents and any information that Axys is restricted from disclosing due to confidentiality obligations to a Third Party. 1.4 "AXYS PATENTS" means all Patent Rights that are Controlled by Axys or an Affiliate of Axys that claim (i) Active Compounds or Licensed Products, (ii) the manufacture or use of Active Compounds or Licensed Products, or (iii) methods or materials used for discovering, identifying, or assaying for Active Compounds or Licensed Products, where such Patent Rights claim inventions made prior to the end of the Research Term, but excluding any Joint Patents. 1.5 "AXYS PRODUCT" shall have the meaning ascribed to such term in Section 5.3. 1.6 "BACK-UP COMPOUND" means any Active Compound [*], as provided in Section [*], together with any salt, solvate or prodrug of such [*]. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 2. 3 1.7 "COLLABORATION COMPOUND" means any Active Compound that has been [*] for further development and commercialization as a Collaboration Compound, pursuant to Section 5.1, together with any salt, solvate or prodrug of such selected compound. 1.8 "CONFIDENTIAL INFORMATION" means a Party's confidential information, inventions, know-how, data and materials relating to the Research, or the Active Compounds or Licensed Products, including without limitation research, technical, clinical development, manufacturing, marketing, financial, personnel and other business information and plans, which, if disclosed in written, graphic or electronic form, is marked or otherwise designated as "confidential" or "proprietary" and, if disclosed orally, is summarized and designated as "confidential" or "proprietary" in a writing provided to the receiving Party not later than sixty (60) days after such disclosure. 1.9 "CONTROL" means, with respect to an item of Information or intellectual property right, possession of the ability, whether by ownership or license, to grant a license or sublicense as provided for herein under such item or right without violating the terms of any agreement or other arrangements with any Third Party. 1.10 "EFFECTIVE DATE" means the effective date of this Agreement as set forth in the first paragraph hereof. 1.11 "FAIR MARKET VALUE" means the cash consideration which a willing seller would realize from an unaffiliated, unrelated and willing buyer in an arm's length sale of an identical item sold in the same quantity and at the same time and place of the transaction. 1.12 "FDA" means the United States Food and Drug Administration, or the successor federal agency thereto. 1.13 "FIELD" means the [*] of one or more Indications by means of inhibition of cathepsin S. 1.14 "FIRST COMMERCIAL SALE" means, with respect to any Licensed Product in any country, the first sale for use or consumption by the general public of such Licensed Product in such country after all Regulatory Approvals have been obtained in such country. 1.15 "FTE" means a full-time scientific person dedicated by Axys or RPR (or their Affiliates, as applicable) to the Research, or in the case of less than a full-time dedicated scientific person, a full-time, equivalent scientific person year, based upon a total of [*] per year of [*]. 1.16 "IND" means an investigational new drug application filed with the FDA for approval to commence human clinical trials, or the equivalent in other countries or regulatory jurisdictions. 1.17 "INDICATION" means any one of the following indications: [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 3. 4 (a) rheumatoid arthritis; (b) atherosclerosis and diseases and conditions caused by atherosclerosis; (c) Respiratory Diseases treated via oral delivery of a therapeutic; or (d) Respiratory Diseases treated by an inhalable or intranasally delivered formulation of a therapeutic. The term "Indication" shall also include any New Indication that is included within the definition pursuant to the terms of Section 5.3 (except as otherwise provided in Section 5.3(d)). 1.18 "INFORMATION" means any data results, information, know-how, trade secrets, techniques, methods, development, material, or compositions of matter of any type or kind. 1.19 "JOINT KNOW-HOW" means all Research Technology that is made jointly by employees or agents of Axys or its Affiliates and by employees or agents of RPR or its Affiliates, prior to the end of the Research Term, but excluding the Joint Patents. 1.20 "JOINT PATENTS" means all Patent Rights that claim or cover inventions within the Research Technology that are made jointly by employees or agents of Axys and by employees or agents of RPR or their respective Affiliates, prior to the end of the Research Term and name as inventors one or more employees or agents of Axys or its Affiliates together with one or more employees or agents of RPR or its Affiliates. 1.21 "JOINT RESEARCH COMMITTEE" OR "JRC" means that committee to be formed pursuant to Section 4.1. 1.22 "KNOW-HOW" means Axys Know-How and/or RPR Know-How. 1.23 "LICENSED PRODUCT" means any product, including any formulation thereof, containing or comprising a Collaboration Compound. 1.24 "MAJOR PHARMACEUTICAL MARKET" means each of the United States, the countries of the European Union, and Japan. 1.25 "MATERIALS" shall have the meaning assigned to such term in Section 2.11. 1.26 "NDA" means a New Drug Application filed pursuant to the requirements of the FDA, as more fully defined in 21 C.F.R. Section 314.5 et seq, and any equivalent application filed with any equivalent regulatory authority in a Major Pharmaceutical Market. 1.27 "NET SALES" means the [*]. For clarification, [*]. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 4. 5 1.28 "PATENT RIGHT" means (i) an issued and existing letters patent, including any extensions, supplemental protection certificates, registration, confirmation, reissue, reexamination or renewal thereof, (ii) pending applications, including any continuation, divisional, continuation-in-part application thereof, for any of the foregoing, and (iii) all counterparts to any of the foregoing issued by or filed in any country or other jurisdiction. 1.29 "PERSON" means any natural person, corporation, firm, business trust, joint venture, association, organization, company, partnership or other business entity, or any government or agency or political subdivision thereof. 1.30 "PHASE I" means that portion of the clinical development program which generally provides for the first introduction into humans of a product with the primary purpose of determining safety, metabolism and pharmacokinetic properties and clinical pharmacology of the product. 1.31 "PHASE III" means that portion of the clinical development program which provides for the pivotal trials of a product on sufficient numbers of patients to establish the safety and efficacy of a product for the desired label claims and indications. 1.32 "PHASE TRANSITION CRITERIA" shall have the meaning ascribed to it in the "Phase Transition Criteria" document, which is attached hereto as Exhibit A. 1.33 "REGULATORY APPROVAL" means any and all approvals (including price and reimbursement approvals), licenses, registrations, or authorizations of any federal, national, state, provincial or local regulatory agency, department, bureau or other government entity, necessary for the manufacture, use, storage, import, transport and sale of a Licensed Product in a country. 1.34 "RELEVANT PERIOD" means the period which begins on the Effective Date and ends on the [*] of the expiration of the Research Term. 1.35 "RESEARCH" means the collaborative research program undertaken by the Parties pursuant to this Agreement to discover, identify, synthesize and evaluate Active Compounds for use in the Field. 1.36 "RESEARCH PLAN" means the specific plan for conducting the Research, as described in Section 2.1 and attached hereto as Exhibit B, as such plan may be revised from time to time by the JRC. 1.37 "RESEARCH TECHNOLOGY" means all tangible and intangible know-how, trade secrets, inventions (whether or not patentable), discoveries, developments, data, clinical and preclinical results, information, and physical, chemical or biological material, and any replication of or any part of any of the foregoing, that was made by employees or agents of Axys, RPR, and/or any of their respective Affiliates, either alone or jointly, during the course of and in the conduct of the Research during the Research Term. 5. 6 1.38 "RESEARCH TERM" means the period during which the Parties shall conduct the Research, commencing on the Effective Date and terminating upon either: [*]. 1.39 "RESPIRATORY DISEASES" means [*] . 1.40 "RPR KNOW-HOW" means all Information Controlled by RPR at any time prior to the end of the Research Term constituting methods, techniques, materials, know-how, trade secrets, inventions or data necessary or useful for the identification, pharmacological development, synthesis, assaying and use of Active Compounds and Licensed Products, but excluding RPR Patents and Joint Patents and excluding any Information that RPR is restricted from disclosing due to confidentiality obligations to a Third Party. 1.41 "RPR PATENTS" means all Patent Rights Controlled by RPR or an Affiliate of RPR that claim Active Compounds, the manufacture or use of Active Compounds or methods or materials useful for discovering, identifying, or assaying for Active Compounds, where such Patent Rights claim inventions made prior to the end of the Research Term, but excluding any Joint Patents. 1.42 "SUBLICENSEE" means a Person other than an Affiliate of RPR to which RPR has granted sublicense rights under the licenses granted RPR hereunder, which rights include at least the rights to make and sell Licensed Products. Third Parties that are permitted only to distribute and resell finished Licensed Products or that manufacture or finish Licensed Products for supply to RPR or its Affiliate are not "Sublicensees." 1.43 "THIRD PARTY" means any Person other than Axys, RPR or Affiliates of either of them, or any Sublicensee. 1.44 "VALID CLAIM" means a claim of an issued and unexpired patent which has not been revoked or held unenforceable or invalid by a decision of a court or governmental agency of competent jurisdiction from which no appeal can be taken or, after mutual consultation and agreement, an appeal is not taken within the time allowed for appeal, and which has not been disclaimed, denied or admitted to be invalid or unenforceable through reissue or disclaimer or otherwise. ARTICLE 2 RESEARCH 2.1 COLLABORATIVE RESEARCH. Commencing on the Effective Date, subject to the terms and conditions herein, the Parties shall each use commercially reasonable diligent efforts to conduct the Research on a collaborative basis, with the goal of discovering, identifying, synthesizing and performing preclinical research on Active Compounds with the further goal of identifying and selecting certain Active Compounds that are suitable for development as Collaboration Compounds and for commercialization as Licensed Products for use in the Field as soon as reasonably practicable. Subject to Sections 2.3 and 2.4, the Parties shall conduct the [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 6. 7 Research as generally specified in the Research Plan (as amended or revised by the JRC from time to time) and in a manner consistent with the Phase Transition Criteria. The Research Plan, among other things as further specified in Section 4.3, shall specify the scientific direction and research milestones, and allocate Research responsibilities and resources between the Parties in a manner consistent with this Agreement. 2.2 CONDUCT OF THE RESEARCH. (a) The Research will be managed and directed by the JRC, as provided in Article 4 hereof. (b) During the course of the Research, each Party shall disclose to the other the Know-How and patent applications of such Party as the other Party reasonably needs to conduct its obligations and assigned tasks under the Research Plan. All work conducted by either Party in the course of the Research shall be completely and accurately recorded, in sufficient detail and in good scientific manner, in separate laboratory notebooks distinct from other work being conducted by the Parties. On reasonable notice, and at reasonable intervals, each Party shall have the right to inspect and copy all such records of the other Party reflecting Research Technology or work done under the Research, to the extent reasonably required to carry out its respective obligations and to exercise its respective rights hereunder. Notwithstanding Section 1.8, all such records shall constitute Confidential Information of the Party creating such records. The Parties acknowledge and agree that neither Party guarantees the success of the Research tasks undertaken hereunder. (c) In order to protect the Parties' patent rights under U.S. law in any inventions conceived or reduced to practice during or as a result of the Research, each Party agrees to maintain a policy which requires its employees to record and maintain all data and information developed during the Research in such a manner as to enable the parties to use such records to establish the earliest date of invention and/or diligence to reduction to practice. At a minimum, the policy shall require such individuals to record all inventions generated by them in standard laboratory notebooks which are dated and corroborated by non-inventors on a regular, contemporaneous basis. 2.3 AXYS RESEARCH EFFORTS. Axys agrees to commit the resources set forth in this Section 2.3 to perform its obligations under the Research Plan. In conducting the Research, Axys shall be responsible for the tasks allocated to it under the Research Plan. In the performance of such work, Axys shall maintain and utilize scientific staff, laboratories, offices and other facilities consistent with such undertaking. Axys shall use personnel with sufficient skills and experience as are required to accomplish efficiently and expeditiously the objectives of the Research as set forth in the Research Plan in good scientific manner and in compliance in all material respects with all applicable laws, rules, regulations, and all other requirements of applicable good laboratory practices. Commencing upon the Effective Date and continuing in each year during the Research Term, Axys shall commit [*] to conduct Axys' obligations under the Research Plan. [*]. Axys shall provide RPR [*] and [*]. [*]. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 7. 8 2.4 RPR RESEARCH EFFORTS. RPR agrees to commit the resources set forth in this Section 2.4 to perform its obligations under the Research Plan. In conducting the Research, RPR shall be responsible for the tasks allocated to it under the Research Plan. In the performance of such work, RPR shall maintain and utilize scientific staff, laboratories, offices and other facilities consistent with such undertaking and shall use personnel with sufficient skills and experience as are required to accomplish efficiently and expeditiously the objectives of the Research as set forth in the Research Plan in good scientific manner and in compliance in all material respects with all requirements of applicable laws, rules and regulations, and all other requirements of applicable good laboratory practices. Each year during the Research Term, RPR shall commit such average number of FTEs in its or its Affiliates' employ as shall be specified in the Research Plan and as shall be necessary to conducting RPR's obligations under the Research Plan. 2.5 RESEARCH FUNDING. RPR will support Axys' efforts under the Research by paying Axys an amount per year per FTE (the "FTE Reimbursement Rate"), dedicated to the Research during the Research Term, as provided in the Research Plan. The FTE Reimbursement Rate shall initially [*], but [*]. The amounts due Axys under this Section 2.5 shall be payable in equal installments on a quarterly basis, on the first day of each January, April, July and October of each year during the Research Term; provided, however, [*], which amounts shall be paid in equal quarterly installments as described in the immediately preceding sentence. [*]. RPR shall be solely responsible for supporting the costs of RPR's Research efforts, including its preclinical development efforts hereunder. 2.6 RESEARCH INFORMATION AND REPORTS. Subject to restrictions imposed by a Party's confidentiality obligations to any Third Party, each Party will also disclose at any time on or before the end of the Research Term any Know-How learned, acquired or discovered by such Party reasonably promptly after such Know-How is learned, acquired or discovered to the extent reasonably needed by the other Party for conducting its tasks under the Research. Further, each Party will disclose to the other all Research Technology discovered, invented, or made by such Party that is useful in or relates to the Research, including, without limitation, information regarding Active Compounds, activities of Active Compounds, derivatives, and results of in vitro and in vivo studies, assay techniques and new assays. Such Research Technology will be promptly disclosed to the other Party, with meaningful discoveries or advances being communicated as promptly as practicable after such information is obtained or its significance is appreciated. Each Party will provide the other with copies of the raw data generated in the course of the Research, if reasonably necessary to the other Party's work under the Research. Commencing six (6) months after the Effective Date, and continuing thereafter during the Agreement, each Party will give the other written reports on a semi-annual basis summarizing all research or development work done on Active Compounds, Back-Up Compounds and Collaboration Compounds during the previous two (2) quarters; provided, however, that once RPR or its Affiliates initiate clinical development for a Collaboration Compound or Back-Up Compound, RPR's obligations pursuant to this sentence regarding such Collaboration Compound or Back-Up Compound shall terminate and RPR shall thereafter provide the reports required by Section 5.2 hereof. Nothing herein shall require either Party to disclose information received from a Third Party which remains subject to confidentiality obligations to such Third Party. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 8. 9 2.7 IDENTIFICATION AND TESTING OF ACTIVE COMPOUNDS. Each Party shall inform the other Party and the JRC in writing as promptly as practicable upon the Party's discovery, synthesis, acquisition or identification of Active Compounds. The notifying Party shall include in such notices [*]. RPR and its Affiliates, alone or in conjunction with Axys, shall conduct such further testing of the Active Compounds as needed [*]. 2.8 EARLY TERMINATION OF AGREEMENT. (a) TERMINATION FOR [*]. If during the Research Term, the Parties mutually determine, in good faith, that the pursuit of cathepsin S inhibitors for use in the Field is [*] then upon such determination the Parties shall terminate this Agreement. Upon termination of this Agreement pursuant to this Section 2.8(a): (i) [*], and (ii) each Party [*]. (b) TERMINATION DUE TO ISSUANCE OF THIRD PARTY PATENT RIGHTS. In the event that, during the Research Term, a Patent Right owned by a Third Party (other than an affiliate of Rhone-Poulenc S.A.) is either granted or published in a Major Pharmaceutical Market and such Patent Right (a "Blocking Patent") claims (i) [*], or (ii) [*] by Axys and/or RPR as of the date the Parties become aware of such Patent Right, (each, a "Blocking Claim") then [*]. If in [*], and (y) [*], (i) RPR shall as promptly as practicable provide to Axys all copies of all data, reports, records and materials in RPR's possession or control which relate to the Research (provided that the provision to Axys of the foregoing copies shall not be deemed to create any additional rights or licenses in any such copies or the intellectual property embodied therein, and Axys' rights to use or exploit such information and rights shall be solely as expressly granted by RPR to Axys elsewhere in the Agreement and, with respect to Joint Know-How or Joint Patents, those rights of Axys as a joint owner); (ii) [*]; and (iii) RPR covenants that RPR and its Affiliates [*]. 2.9 EARLY TERMINATION OF COLLABORATIVE ASPECT OF RESEARCH. (a) TERMINATION FOR [*] OF RESEARCH OBLIGATIONS. In the event that Axys defaults in its performance of its obligations hereunder [*] either (i) to conduct its tasks under the Research Plan, and such failure [*] or (ii) to comply with its applicable exclusivity obligations under Section 2.13(a), then RPR may give notice to Axys specifying the nature of the default, requesting Axys to cure such default and stating RPR's intention to terminate the Research if such default is not cured within the period set forth below. If such default is not cured within sixty (60) days after the receipt of such notice, or if such default is not curable within such period, if Axys has not commenced reasonable actions to perform its obligations in the future and does not diligently continue to perform such obligations, RPR shall be entitled, without prejudice to any of its other rights conferred on it by this Agreement and in addition to any other remedies available to it by law or in equity, to terminate the collaborative aspects of the Research and RPR's obligations under Section 2.5 hereof by giving written notice to take effect immediately upon delivery of such notice. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 9. 10 (b) TERMINATION FOR CHANGE IN CONTROL OF AXYS. RPR may also terminate the collaborative aspects of the Research and its obligations under Section 2.5 hereof at any time prior to the expiration of the Research Term in the event that a Third Party acquires, directly or indirectly with its affiliates, fifty percent (50%) or more of the voting stock of, or all or substantially all of the assets of, Axys, whether through merger, consolidation, acquisition or otherwise), [*], provided, however, that RPR shall have exercised its termination rights within thirty (30) days after such rights first arise hereunder. (c) EFFECT OF TERMINATING THE RESEARCH. Upon termination of the collaborative aspects of the Research by RPR pursuant to subsection 2.9(a) or 2.9(b), Axys shall promptly provide to RPR copies of all data, reports, records and materials in Axys' possession that either (i) [*], or (ii) [*]. The provision to RPR of the foregoing copies shall not be deemed to create any additional rights or licenses in any such copies or the intellectual property embodied therein, and RPR's rights to use or exploit such information and rights shall be solely as expressly granted by Axys to RPR in Article 3 and, with respect to Joint Know-How or Joint Patents, those rights of RPR as a joint owner. After such termination, [*]; all of Axys' obligations under this Article 2 to undertake or conduct any actions relating to the Research shall immediately terminate; and [*]. RPR's exercise of its rights under this Section 2.9 shall not terminate any other rights (including without limitation the licenses granted to RPR and its Affiliates pursuant to Sections 3.1, 3.2 and 3.5 hereof) or obligations of the Parties under this Agreement other than those obligations set forth in this Article 2 that pertain directly to the conduct or funding of the Research, except as follows: thereafter (i) RPR shall be obligated to disclose to Axys any Research Technology developed by it only at the time it provides Axys the semi-annual reports specified in Section 2.6, (ii) [*] and (iii) the license granted to Axys and its Affiliates pursuant to Section 3.1(a) shall terminate. 2.10 EXTENSION OF RESEARCH TERM. By written notice to Axys given at least [*] of the Effective Date, RPR may extend the Research Term [*] of the Effective Date. In the event that RPR has elected to extend the Research Term for [*], then, by written notice to Axys given at least [*] prior to the third anniversary of the Effective Date, RPR may [*] the Research Term for an [*], which extension shall commence on the [*] of the Effective Date. At the end of the Research Term, whether extended or not, all obligations of the Parties to conduct any further Research activities shall terminate, but the other rights and obligations under this Agreement shall not otherwise be affected. 2.11 MATERIAL TRANSFER. In order to facilitate the Research, either Party may provide to the other Party certain biological materials or chemical compounds including, but not limited to Active Compounds, receptors, reagents and screens (collectively, "Materials") owned by or licensed to the supplying Party (other than under this Agreement) for use by the other Party in furtherance of the Research. Except as otherwise provided under this Agreement, all such Materials delivered to the other Party shall remain the sole property of the supplying Party, shall be used only in furtherance of the Research and solely under the control of the other Party (and, in the case of RPR, its Affiliates), shall not be used or delivered to or for the benefit of any Third Party without the prior written consent of the supplying Party, and shall not be used in research [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 10. 11 or testing involving human subjects. The Materials supplied under this Section 2.11 must be used with prudence and appropriate caution in any experimental work, since not all of their characteristics may be known. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 11.4 HEREOF, THE MATERIALS ARE PROVIDED "AS IS" AND WITHOUT ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR OF FITNESS FOR ANY PARTICULAR PURPOSE OR ANY WARRANTY THAT THE USE OF THE MATERIALS WILL NOT INFRINGE OR VIOLATE ANY PATENT OR OTHER PROPRIETARY RIGHTS OF ANY THIRD PARTY. 2.12 LIABILITY. In connection with conduct of the Research, each Party shall be responsible for, and hereby assumes, any and all risks of personal injury or property damage attributable to the negligent acts or omissions of that Party or its Affiliates, and their respective directors, officers, employees and agents. 2.13 [*]. (a) During the [*], neither Party (including its Affiliates) will [*]; provided, however, that a Party may [*] as it applies to such Party, as one of its remedies and not to the exclusion of any other remedy such Party may have, if the other Party materially violates its obligations under the foregoing covenant. During the [*], neither Party may [*]. (b) RPR and its Affiliates shall not [*]. (c) Upon expiration or termination of the [*] and continuing thereafter [*], then Axys covenants that it and its Affiliates shall not (i) [*], or (ii) [*]. For purposes of this Subsection 2.13(c)(ii), [*]. (d) The Parties agree that, given the high costs and significant risks involved in discovering and developing pharmaceutical products, and given that the Parties will be exchanging Confidential Information in order to perform the Research, the [*] relationship between them regarding the Research and the Field, which is reflected herein, is a fair and efficient means to reach a satisfactory conclusion from their cooperative efforts. 2.14 SUBCONTRACTORS. Either Party may perform some of its obligations under the Research through one or more subcontractors; provided that (i) none of the rights of the other Party hereunder are diminished or otherwise adversely affected as a result of such subcontracting, (ii) such Party obtains the written approval of the other Party prior to engaging any subcontractor, which approval shall not be unreasonably withheld or delayed, and (iii) the subcontractor undertakes in writing obligations of confidentiality and non-use regarding the other Party's Confidential Information which are substantially the same as those undertaken by RPR and Axys pursuant to Article 8 hereof. In the event a Party performs one or more of its obligations under the Research through a subcontractor, then such Party shall at all times be responsible for the performance of such subcontractor. For the avoidance of doubt, it is understood that an Affiliate of a Party shall not be deemed to be a subcontractor of such Party. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 11. 12 ARTICLE 3 LICENSES 3.1 RESEARCH LICENSES. (a) Subject to the other provisions of this Agreement, Axys hereby grants to RPR and its Affiliates during the Research Term an [*] world-wide, paid-up right and license under the Axys Patents and the Axys Know-How and Axys' rights in the Joint Patents and Joint Know-How [*] and to [*]. Subject to the other provisions of this Agreement, RPR hereby grants to Axys and its Affiliates during the Research Term an [*] world-wide, paid-up right and license under the RPR Patents and the RPR Know-How and RPR's rights in the Joint Patents and Joint-Know-How solely [*], and to [*]. [*] granted by the other Party in this Section 3.1(a). (b) Subject to the other provisions of this Agreement, Axys hereby grants to RPR and its Affiliates, [*], world-wide, paid-up right and license under the Axys Patents and Axys Know-How, and Axys' rights in the Joint Patents and Joint Know-How, solely [*] under the rights granted by Axys in this Section 3.1(b). 3.2 COMMERCIALIZATION LICENSE TO RPR. Subject to the other provisions of this Agreement, Axys hereby grants to RPR and its Affiliates an [*], world-wide, royalty-bearing right and license, [*], under the Axys Patents, the Axys Know-How and under Axys' rights in the Joint Know-How and Joint Patents, solely to [*] for use in the Field. For the avoidance of doubt, it is understood that RPR's and its Affiliates' right to sell Licensed Products shall include the right to sell such Licensed Products under the foregoing license through distributors. 3.3 NEGATIVE COVENANTS AND LICENSE LIMITATIONS. (a) MUTUAL COVENANTS. Each Party covenants to the other Party that it shall not practice, exercise or use any intellectual property rights licensed to it by the other Party under this Agreement, except as permitted expressly by the terms hereof. (b) ADDITIONAL NEGATIVE COVENANTS OF AXYS. Axys further covenants to RPR that: (i) except as otherwise permitted in Section 2.13(c), Axys and its Affiliates shall not [*]; (ii) until [*] Axys and its Affiliates shall not [*]; (iii) Axys and its Affiliates shall not [*] for any use or purpose; and (iv) except as otherwise permitted in Section 2.13(c), Axys and its Affiliates shall not [*], and Axys shall impose such restrictions on all its sublicensees and distributors of Axys Products. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 12. 13 (c) ADDITIONAL NEGATIVE COVENANTS OF RPR. RPR further covenants to Axys that: (i) RPR and its Affiliates shall not research, develop or commercialize, or license any Third Party [*], but excluding from the foregoing covenant (x) [*], or (y) any research undertaken by RPR and its Affiliates [*]; (ii) RPR and its Affiliates shall not conduct any clinical development work, or license any Third Party to conduct any clinical development work, on any Active Compound for use in the Field unless and until such Active Compound has been selected as a Collaboration Compound or a Back-Up Compound as provided in Section 5.1; (iii) RPR and its Affiliates and Sublicensees shall not commercialize or sell, or license any Third Party to commercialize or sell, any Back-up Compound for use in the Field, unless and until such Back-up Compound has been selected as a [*] as provided in Section 5.1; and (iv) RPR and its Affiliates shall not [*], and RPR shall impose such restriction on all its Sublicensees and distributors of Licensed Products. 3.4 LICENSE FOR AXYS PRODUCTS. Subject to the conditions set forth in Section 5.3, RPR hereby grants to Axys an exclusive license, with right to sublicense, under RPR's interests in the Joint Patents and Joint Know-How to conduct development on and to make, have made, use, import, offer for sale or sell Axys Products solely for use in the [*], as defined in Section [*] below. 3.5 CROSS-LICENSE OF [*]. Axys hereby grants to RPR and its Affiliates a non-exclusive, [*] license under the [*] disclosed to RPR hereunder for any purpose or use. RPR hereby grants to Axys a non-exclusive, [*] license under the [*] disclosed to Axys hereunder for any purpose or use. The licenses granted pursuant to this Section 3.5 shall [*]. ARTICLE 4 JOINT RESEARCH COMMITTEE. 4.1 CREATION AND STRUCTURE OF THE JOINT RESEARCH COMMITTEE. As of the Effective Date, the Parties have created a Joint Research Committee of [*] to facilitate the collaboration called for herein. The JRC shall consist of equal representatives nominated by each Party, as listed in the Research Plan. RPR shall designate one of its representatives as the Chairperson of the JRC. Members of the JRC may be represented at any meeting by a designee appointed by such member for such meeting. Each Party shall be free to change its representatives on notice to the other or to send a substitute representative to any JRC meeting. The JRC shall exist until the [*] anniversary of the termination or expiration of the Research Term, except that the JRC shall automatically terminate in the event (i) RPR terminates the Agreement pursuant to Sections 10.2 or 10.3, (ii) Axys terminates the Agreement pursuant to [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 13. 14 Section 10.2, (iii) this Agreement is terminated pursuant to the provisions of Section 2.8, or (iv) RPR terminates the collaborative aspects of the Research pursuant to Section 2.9. 4.2 REGULAR MEETINGS. The Chairperson shall call for the meetings of the JRC, which shall occur at mutually agreeable times except in extraordinary circumstances in which case Axys may request a meeting of the JRC. During the Relevant Period, the JRC shall meet in person at least once every three months. Meetings shall alternate between the offices of Axys and RPR. A JRC member of the Party hosting the meeting shall serve as Secretary of that meeting. The Secretary of the meeting shall prepare and distribute to all members of the JRC minutes of the meeting sufficiently in advance of the next meeting to allow adequate review and comment prior to the meeting. Such minutes shall provide a description in reasonable detail of the discussions had at the meeting and a list of any actions, decisions or determinations approved by the JRC. Minutes of each JRC meeting shall be approved or disapproved, and revised as necessary, at the next meeting. Final minutes of each meeting shall be distributed to the members of the JRC by the Chairperson. The JRC may also convene, or be polled or consulted, from time to time by means of telecommunications, video conferencing or written correspondence, as deemed necessary or appropriate. 4.3 RESPONSIBILITIES OF THE JOINT RESEARCH COMMITTEE. During the pendency of the Research, the JRC shall be the primary vehicle for interaction between the Parties with respect to the Research. Without limiting the foregoing, the JRC shall be responsible for: (i) reviewing, approving and amending the Research Plan; (ii) directing, managing and monitoring the progress of the Research; (iii) identifying to the parties that the criteria for particular changes to the Research Plan arising from changes in the Phase Transitions by RPR have been met; (iv) [*], and (v) reviewing and commenting upon (but not approving) the [*] of the Parties as provided in Article 7. The Research Plan shall contain the specific research objectives to be achieved according to the Phase Transition Criteria document attached hereto as Exhibit A, the specific responsibilities of the Parties, the timeline and budget for the Research, and the total number of FTEs to be devoted by each Party to the Research. Each Party shall disclose to the other proposed agenda items in advance of each meeting of the JRC. 4.4 SUBCOMMITTEES OF THE JRC. From time to time, the JRC may establish one or more subcommittees to oversee particular projects or activities, and such subcommittees will be constituted as the JRC agrees. 4.5 DECISIONS OF THE JRC. At least [*] of the JRC shall constitute a quorum for any meeting of the JRC; provided, that there are at least [*] present from each Party. All decisions of the JRC shall be made by the [*] JRC members participating in the meeting. In the event that the members of the JRC cannot agree with respect to a particular issue, such issue shall be referred to the President of Axys and the Senior Vice President, Research at RPR for resolution pursuant to Section 11.12. 4.6 EXPENSES. Each Party shall be responsible for all travel and related costs for its representatives to attend meetings of, and otherwise participate on, the JRC. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 14. 15 ARTICLE 5 PRODUCT DEVELOPMENT 5.1 SELECTION OF COMPOUNDS AND DILIGENCE. (a) Based upon criteria established by the JRC, the JRC shall review all data relating to the [*] and shall identify appropriate [*] for recommendation to RPR for selection as [*] for potential further development and commercialization. RPR, [*], shall select and designate certain of the [*] as the [*] for further preclinical and clinical development for use in the Field hereunder. With respect to any particular [*] selected by RPR, RPR [*]. At any time, [*] and the other terms of this Agreement. The [*] selected during a particular period shall be noted in the minutes of the next JRC meeting. RPR shall have the right to select any [*] at any time during the term of this Agreement except as otherwise provided as follows: [*]. (b) Once a Collaboration Compound is selected for preclinical development, RPR and its Affiliates shall be solely responsible for and shall have the sole right to develop the Collaboration Compound through preclinical development, all phases of clinical trials, and making all applications for and obtaining all Regulatory Approvals on a worldwide basis. RPR and its Affiliates shall use [*] to pursue the preclinical and clinical development and commercialization of all Collaboration Compounds in the Major Pharmaceutical Markets. RPR shall be [*]. If RPR and its Affiliates [*], provided that, [*]. Further, if [*], then (i) [*], (ii) [*], and (iii) [*]. (c) So long as RPR (or its Affiliates or Sublicensees) continues to use [*] for use in the Field in the Major Pharmaceutical Markets, [*]. Further, if [*] and [*], or [*]. (d) However, if [*] for use in the Field in each of the Major Pharmaceutical Markets, and [*]. If [*] for use in the Field in the Major Pharmaceutical Markets, then [*]. 5.2 DEVELOPMENT INFORMATION AND REPORTING. Commencing upon the [*], RPR shall prepare and maintain complete and accurate information regarding the worldwide clinical development of Collaboration Compounds and shall make such information available to Axys in the form of detailed reports provided to Axys [*]. Such reports shall reasonably and accurately summarize the status and results of all such development efforts. RPR [*] of Collaboration Compounds. Axys will be entitled to [*], and [*], Axys [*] to discuss RPR's development efforts of Collaboration Compounds. [*], RPR and its Affiliates [*]. 5.3 [*] AND [*]. (a) [*]. Commencing on the [*] of the Effective Date, if Axys [*]. RPR shall have [*] from the date of its [*] to determine whether [*], which activity would be subject to terms of this Agreement and the specific development and commercialization requirements set forth in this Section 5.3, or alternatively, to [*] and subject to the terms thereof. If RPR decides that [*], it shall so inform Axys of its decision by providing written notice. Upon receipt of such notice, but subject to subsection (e) below, [*] hereof, and RPR shall proceed as [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 15. 16 provided in subsection (d) below. If RPR [*], subject to the requirements in subsection (e) below. (b) FURTHER RPR INVESTIGATION. If, after receipt of the [*], RPR determines [*]. RPR shall have [*] from the date of providing Axys such notice and plan to complete such plan and determine whether [*] pursuant to subsection (a) above. RPR shall inform Axys by providing written notice of its decision. If, at the end of such [*]. (c) RPR Development of [*]. Within [*], under subsection (a) or (b) above, to develop a particular [*], RPR shall select such Active Compound as a Collaboration Compound and shall prepare a plan, which shall be attached as an appendix to the Research Plan, that contains the timeline and estimated resources for the preclinical and initial clinical development of such Collaboration Compound (the "Investigational Plan"). In addition to such Investigational Plan, RPR shall provide Axys with the following: (i) a timeline which has as a target the filing of the IND for the Collaboration Compound for the [*]; (ii) a description of how the proposed research for the Collaboration Compound meets RPR's Phase Transition Criteria (as set forth in Exhibit A attached hereto); (iii) a [*] regarding the development status of the Collaboration Compound; and (iv) a [*] of such Collaboration Compound (it being understood that the provisions of subsections (iii) and (iv) shall be in lieu of any obligations of RPR regarding such Collaboration Compound pursuant to Section 5.2 hereof). No later than [*] prior to the filing of the IND for the Collaboration Compound, RPR shall prepare a "Development Plan" for the Collaboration Compound, which shall consist of the expected timeline for development of such Collaboration Compound through Regulatory Approval for the [*], to be reviewed and approved by Axys, which approval shall not be unreasonably withheld or delayed. Following submission of the first NDA for such Collaboration Compound in the [*], RPR shall regularly report the commercialization status of the Collaboration Compound to Axys according to a schedule that shall be agreed to by the Parties, and [*] of such Collaboration Compound for use in the applicable [*]. RPR shall use [*] to complete its obligations under the Investigational Plan and the Development Plan regarding such Collaboration Compound for use in the [*]. (d) COMPOUND [*] If RPR [*], upon written notice to RPR. Upon such a [*], (i) such [*], (ii) Axys shall [*], subject to the requirements in subsection (e) below, and (iii) when there are [*], as such term is defined in Section 1.17. (e) DEVELOPMENT AND COMMERCIALIZATION OF AXYS PRODUCTS. Subject to RPR's rights pursuant to this Section 5.3, Axys may develop and commercialize an Axys Product on its own or seek out a corporate partner to assist in the development and commercialization. If, however, [*]. In no event shall [*] of the net sales of the Axys Product where such "net sales" shall be calculated using the methodology equivalent to that set forth in the definition of Net Sales in Section 1.27. (f) DILIGENT EFFORTS. For purposes of this Section 5.3, the term [*] shall be interpreted to mean [*], as such term is used elsewhere in this Agreement, [*]. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 16. 17 ARTICLE 6 PAYMENTS TO AXYS 6.1 LICENSE FEES. RPR shall pay Axys a [*] upon the Effective Date of this Agreement. 6.2 UP-FRONT RESEARCH PAYMENT. Upon the Effective Date, RPR shall pay Axys a [*] of Axys' activities under the Research. 6.3 MILESTONE PAYMENTS. (a) RPR shall make the following [*] payments to Axys within [*] after the occurrence of each of the listed Milestone Events:
MILESTONE EVENT PAYMENT AMOUNT --------------- -------------- [*] [*] As used in this Section 6.3, the following definitions apply: [*] shall have the meaning set forth in the [*]. [*] shall have the meaning set forth in the [*]. [*] means when [*]. [*] means when [*]. [*] shall have the meaning set forth in the [*]. [*] shall be [*].
(i) The Parties shall [*], which determination shall be made reasonably and in good faith. (ii) For clarity, the [*]. 6.4 ROYALTY PAYMENTS. Subject to the terms and conditions of this Agreement, RPR shall pay to Axys [*] of the Net Sales of Licensed Products. The Parties agree that the above royalty rates reflect an efficient and reasonable blended allocation of the values of the worldwide Know-How and Patent Rights licensed by Axys hereunder. 6.5 TERM OF ROYALTY OBLIGATION. The royalty obligations to Axys under Section 6.4 to Axys as to a particular Licensed Product shall terminate, [*] on the later of (a) [*]; [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 17. 18 or (b) [*]. 6.6 TIMING OF PAYMENT. Running royalties shall be payable on a quarterly basis, within [*] after the end of each calendar quarter, based upon the Net Sales during each calendar quarter, commencing with the calendar quarter in which the First Commercial Sale of a Licensed Product is made. Royalties shall be calculated in accordance with U.S. generally accepted accounting principles consistently applied and with the terms of this Article 6. 6.7 [*] LICENSES. If [*] a Party (or its Affiliate) [*], and such [*]. 6.8 THIRD PARTY LICENSES. (a) If an unexpired Third Party patent(s) claiming a Collaboration Compound, or its manufacture or its use in the Field, exist(s) in a country where a Licensed Product containing such Collaboration Compound is being manufactured, used or sold, and if it should prove in [*], then RPR may either: (i) [*]; or (ii) [*]. (b) It is understood that [*]. (c) Notwithstanding the foregoing in (b) above, [*], then the Parties shall [*], as provided in the foregoing paragraph, [*], then thereafter [*], then (a) Axys [*], and (b) RPR [*], and (ii) [*]. 6.9 MODE OF PAYMENT. All payments to Axys hereunder shall be made by deposit of United States Dollars in the requisite amount to such bank account as Axys may from time to time designate by notice to RPR. Payments shall be free and clear of any taxes (other than withholding and other taxes imposed on Axys), fees or charges, to the extent applicable. With respect to sales outside the United States, payments shall be calculated based on currency exchange rates for the last calendar quarter for which remittance is made for royalties. For each month and each currency, such exchange rate shall equal the arithmetic average of the daily exchange rates (obtained as described below) during the calendar quarter; each daily exchange rate shall be obtained from the Reuters Daily Rate Report or The Wall Street Journal, Eastern U.S. Edition, or, if not so available, as otherwise agreed by the Parties. 6.10 OBLIGATION TO PAY ROYALTIES. RPR's obligation to pay royalties to Axys under this Article 6 is imposed only once with respect to the same unit of Licensed Product regardless of the number of Axys Patents, RPR Patents, or Joint Patents pertaining thereto. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 18. 19 6.11 RECORDS RETENTION. For [*] after each sale of each Licensed Product, RPR shall keep (and shall ensure that its Affiliates and Sublicensees shall keep) records of such sale in sufficient detail to confirm the accuracy of the royalty calculations hereunder. 6.12 AUDITS. (a) Upon the written request of Axys, and not more than [*], RPR shall permit an independent certified public accounting firm of nationally recognized standing selected by Axys, and reasonably acceptable to RPR, at Axys' expense, to have access during normal business hours, and upon reasonable prior written notice, to such of the records of RPR as may be reasonably necessary to verify the accuracy of the royalty reports hereunder for any calendar year ending not more than [*] prior to the date of such request. The accounting firm shall disclose to Axys and RPR only whether the royalty reports are correct or incorrect and the specific details concerning any discrepancies. No other information shall be provided to Axys. (b) [*], with interest from the date originally due at the prime rate, as published in The Wall Street Journal (Eastern U.S. Edition) on the last business day preceding such date, within [*] after the date Axys delivers to RPR such accounting firm's written report, subject to the provisions of Subsection 6.12(e). If the amount of the underpayment is greater than [*] of the total amount owed, then [*]. (c) RPR shall include in each sublicense granted by it pursuant to this Agreement a provision requiring the Sublicensee to make reports to RPR, to keep and maintain records of sales made pursuant to such sublicense and to grant access to such records by Axys' independent accountant to the same extent required by RPR under this Agreement. (d) Axys shall treat all information subject to review under this Section 6.13 or under any sublicense agreement in accordance with the confidentiality provisions of Article 8 of this Agreement, and shall cause its accounting firm to enter into an acceptable confidentiality agreement with RPR obligating such firm to retain all such financial information in confidence pursuant to such confidentiality agreement. (e) If RPR in [*], then RPR shall [*]. The Parties shall promptly thereafter meet and negotiate in good faith a resolution to such dispute. In the event that the Parties are [*], the matter shall be resolved in a manner consistent with the procedures set forth in Section 11.12, and interest shall be payable on any [*] in the same manner as provided for in Section 6.12(b). 6.13 NO NON-MONETARY CONSIDERATION FOR SALES. Without the prior written consent of Axys, RPR shall not accept or solicit any non-monetary consideration in the sale of a Licensed Product other than as would be reflected in Net Sales, except in the case of clinical studies and customary promotional samples. 6.14 TAXES. The Party receiving royalties and other payments under this Agreement shall pay any and all taxes levied on account of such payment. If any taxes are required to be withheld by the paying Party, it shall (a) deduct such taxes from the remitting payment, (b) timely pay the taxes to the proper taxing authority, and (c) send proof of payment to the other [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 19. 20 Party and certify its receipt by the taxing authority within sixty (60) days following such payment. ARTICLE 7 INVENTIONS AND PATENTS 7.1 TITLE TO INVENTIONS. Each Party shall own and retain all right, title and interest in and to all Research Technology made solely by such Party's and/or any of its Affiliates' employee(s) or agent(s) and all intellectual property rights in such Research Technology. The Parties shall jointly own any Research Technology made jointly by the Parties' and/or their Affiliates employees or agents. Inventorship in Axys, RPR and Joint Patents will be determined by the applicable laws of the country or jurisdiction in which the particular Patent Right is sought. In the event that there is a dispute between the parties as to which Party shall own any Research Technology, the JRC shall establish a procedure to resolve such dispute, which may include engaging a Third Party patent attorney completely unaffiliated and independent of the Parties and jointly selected by the Parties, as an expert to resolve such dispute. 7.2 RIGHTS TO OTHER COMPOUNDS. The Parties expect that each of them will make [*] for purposes of this Agreement and that [*]. With respect to such compounds, the Parties agree as follows: (a) [*]; (b) Except as provided otherwise in this Agreement, compounds that are owned by a Party, either solely or jointly with the other Party, as determined under the provisions of Section 7.1, shall remain the solely or jointly owned property of such Party. All such compounds that are determined under the provisions of Section 1.1 not to be Active Compounds shall not be subject to this Agreement; (c) No implied license under any Patent Rights is granted under this Section 7.2. 7.3 PATENT PROSECUTION. The Parties expect that patent applications will be filed as required to secure suitable Patent Rights covering inventions within the Research Technology or otherwise applicable to the Field. The Parties agree as follows with respect to the filing and prosecution of such applications. (a) AXYS PATENTS. Subject to the provisions of this Section 7.3, (i) [*] shall be responsible for obtaining, prosecuting and/or maintaining [*], and (ii) [*] shall be responsible for obtaining, prosecuting and/or maintaining the [*]. In this regard, [*] shall file, prosecute and/or maintain patent applications in the [*] to secure Patents Rights for any Research Technology owned by [*] and other inventions claimed in the [*]. Within [*] of filing any such United States patent application, [*] will file a counterpart International Application under the PCT designating all member countries and any additional counterpart national patent applications in non-PCT member countries as [*] deems appropriate (or, for patent applications for which [*] retains the [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 20. 21 international filing and prosecution obligations as provided above, [*] shall file such counterparts, designating the member countries requested by [*]). [*] shall bear all costs for filing, prosecuting and/or maintaining [*]. [*] shall bear all costs for filing, prosecuting and/or maintaining [*]; provided, however, that (i) [*] the costs for filing, prosecuting and/or maintaining [*] under which [*] has granted a license to a Third Party, or which claim an Active Compound or any other compound or medicament (or their manufacture or use) for which [*] undertakes clinical development, and (ii) [*] may decline to pay costs for filing, prosecuting and/or maintaining any particular [*] in one or more countries, in which case such [*] under Sections 3.1 and 3.2 hereto in such countries. Unless [*] in a relevant country, [*]. To the extent reasonably practicable, without jeopardizing the breadth or availability of obtaining broad, enforceable Patent Rights, [*] shall attempt to file [*] based on Research Technology invented solely by [*]. (b) RPR PATENTS. [*] shall be responsible for obtaining, prosecuting and/or maintaining [*] Patent Rights covering Research Technology solely owned by [*]. [*] shall bear all costs for filing, prosecuting and/or maintaining RPR Patents throughout the world. (c) JOINT PATENTS. [*] shall be responsible for obtaining, prosecuting and/or maintaining throughout the world Patent Rights covering Research Technology jointly owned by Axys and RPR. [*] the costs for filing, prosecuting and/or maintaining Joint Patents in the United States. [*] shall bear all costs for filing, prosecuting and/or maintaining Joint Patents throughout the world (excluding the United States); provided, however, [*] the costs for filing, prosecuting and/or maintaining Joint Patents claiming an Active Compound for which [*] or grants a license to a Third Party. Notwithstanding the above, [*] may decline to file, prosecute and/or maintain any Joint Patent(s) or may decline to pay [*] the costs for filing, prosecuting and/or maintaining any Joint Patent(s), in which case [*], as the case may be. (d) COOPERATION. Each Party shall regularly provide the other Party with copies of all patent applications filed hereunder and other material submissions and correspondence with the patent offices, in sufficient time to allow for review and comment by the other Party. In addition, such filing Party shall provide the other Party and its patent counsel with an opportunity to consult with the Party and its patent counsel regarding the filing and contents of any such application, amendment, submission or response, and the advice and suggestions of the other Party and its patent counsel shall be taken into reasonable consideration by such Party and its legal counsel in connection with such filing. Each Party shall also provide the other Party [*]. (e) ELECTION NOT TO PROSECUTE. If either Party elects not to pursue the initial filing of a potential Axys Patent, RPR Patent or Joint Patent, or support the PCT International filing or the continued prosecution or maintenance of an Axys Patent, RPR Patent or Joint Patent, in a particular country for which it is responsible pursuant to Section 7.3(a), (b) or (c) (such Party being referred to herein as the "Non-Filing Party"), then it shall notify the other Party promptly in writing and in good time to enable the other Party to meet any applicable deadlines. With respect to Axys Patents, RPR Patents or Joint Patents scheduled for international filing with respect to such country, the Non-Filing Party shall notify the other Party in writing at least sixty [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 21. 22 (60) days before the date required for the convention year filing of such Axys Patent, RPR Patent or Joint Patent application or any other deadline date by which an action must be taken to establish or preserve an Axys Patent, RPR Patent or Joint Patent right in such country. The other Party shall then have the right, but not the obligation, to pursue the filing or support the continued prosecution or maintenance of such Axys Patent, RPR Patent or Joint Patent, at its expense in such country. If the other Party does so elect to pursue such filing or continue such support, then it shall notify the Non-Filing Party of such election, and the Non-Filing Party shall (i) reasonably cooperate with the other Party in this regard, and (ii) promptly release or assign, as the case may be, to the other Party, without consideration, all right, title and interest in such Axys Patent, RPR Patent or Joint Patent in such country. For the avoidance of doubt, in the event that the other Party supports a patent application that the Non-Filing Party declines to support, then such patent applications and patents that may result therefrom shall be considered an Axys Patent (in the case RPR is the Non-Filing Party) or an RPR Patent (in the case Axys is the Non-Filing Party), as applicable, for purposes of this Agreement. 7.4 ENFORCEMENT OF PATENTS. (a) If either Party considers that any Axys Patent, RPR Patent or Joint Patent claiming an Active Compound or Licensed Product, or the manufacture or use thereof, is being infringed by a Third Party's activities [*], it shall notify the other Party and provide it with any evidence of such infringement which is reasonably available. Subject to any limitations in the license agreements between Axys and Third Party licensors covering Axys Patents that are licensed to Axys, [*] shall have the first opportunity at its own expense to attempt to remove such infringement by commercially appropriate steps, including filing an infringement suit or taking other similar action. If required by law for [*] to prosecute such suit, [*] shall join such suit as a party, at [*]. [*] agrees to use reasonable efforts to obtain any consents required by Third Parties owning [*] to conduct suits thereunder for infringement by Third Parties in the Field. In the event [*] following notice of such infringement, [*] shall have the right to do so at its expense; provided that if [*] has commenced negotiations with an alleged infringer of the patent for discontinuance of such infringement within such three-month period, [*] shall have an [*] to conclude its negotiations before [*] may bring suit for such infringement. In no event, however, shall [*] be required to enforce any such Patent Right being infringed against more than one entity or in more than one country at any one time. (b) The Party not enforcing the applicable Patent Rights shall provide reasonable assistance to the other Party, including providing access to relevant documents and other evidence and making its employees available, subject to the enforcing Party's reimbursement of any out-of-pocket expenses incurred by the non-enforcing Party. (c) Any amounts recovered by [*] pursuant to subsection 7.4(a), whether by settlement or judgment, shall be allocated in the following order: (i) [*]; and (ii) [*], provided that if the [*], then the Parties shall [*]. Any amounts recovered by [*] pursuant to actions under subsection 7.4(a) shal be allocated in the following order: (i) [*] and (ii) the [*]. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 22. 23 (d) Except for Third Party infringement activities within the Field covered by the provisions of subsection 7.4(a), each Party [*] retain the sole and exclusive right to enforce its Patent Rights against all infringers at its sole cost and expense. 7.5 THIRD PARTY PATENT RIGHTS. If any warning letter or other notice of infringement is received by a Party, or action, suit or proceeding is brought against a Party alleging infringement of a Patent Right of any Third Party in the manufacture, use or sale of a Licensed Product or in conducting the Research, the Parties shall promptly discuss and decide the best way to respond. ARTICLE 8 CONFIDENTIALITY 8.1 CONFIDENTIALITY OBLIGATIONS. Each Party agrees that, for the term of this Agreement and for [*] thereafter, such Party shall keep, and shall ensure that its officers, directors, employees and agents keep, completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except as expressly permitted hereunder any Confidential Information furnished to it by the other Party pursuant to this Agreement (including, without limitation, Know-How of the disclosing Party). The foregoing obligations shall not apply to any information to the extent that it can be established by such receiving Party that such information: (a) was already known to the receiving Party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was subsequently lawfully disclosed to the receiving Party by a Third Party other than in contravention of a confidentiality obligation of such Third Party to the disclosing Party; or (e) was developed or discovered by employees of the receiving Party or its Affiliates who had no access to the Confidential Information of the disclosing Party. Each Party shall obtain written agreements from each of its employees and consultants who perform substantial work on the Research, which agreements shall obligate such persons to [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 23. 24 similar obligations of confidentiality and to assign to such Party all inventions made by such persons during the course of performing the Research. Each Party may disclose the other's Confidential Information to the extent such disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations, making a permitted sublicense of its rights hereunder or conducting clinical trials or otherwise in performing its obligations or exercising its rights hereunder, provided that if a Party is required to make any such disclosure of the other Party's Confidential Information, it will give reasonable advance notice to that other Party of such disclosure requirement, will cooperate with the other Party in its efforts to secure confidential treatment of such Information prior to its disclosure, and, save to the extent inappropriate in the case of patent applications, will use all reasonable efforts to secure confidential treatment of such information prior to its disclosure (whether through protective orders or confidentiality agreements or otherwise). In addition, RPR shall have the right to disclose Axys' Confidential Information to its Affiliates, provided that RPR shall ensure that its Affiliates maintain the confidentiality of such information in accordance with the provisions of this Section 8.1. [*], provided that [*]. 8.2 PUBLICATIONS. (a) Neither Party or its Affiliates shall publish or present the results of the Research or of development studies carried out on any Licensed Product, Collaboration Compound or Back-Up Compound [*] with respect thereto. Subject to the foregoing and the restrictions provided below, either Party may publish or present the results of the Research or of development studies carried out on such Licensed Product, Collaboration Compound or Back-Up Compound, subject to the prior review by the other Party [*] of such other Party's Confidential Information. Each Party shall provide to the other Party the opportunity to review any proposed abstracts, manuscripts or summaries of presentations which cover the results of the Research or of [*] clinical development of such Licensed Product, Collaboration Compound or Back-Up Compound. Each Party shall designate a person who shall be responsible for approving such publications. Such designated person shall respond in writing promptly and in no event later than [*] after receipt of the proposed material with either approval of the proposed material or a specific statement of concern, based upon either the need to seek patent protection or concern regarding competitive disadvantage arising from the proposal. In the event of concern, the submitting Party agrees not to submit such publication or to make such presentation that contains such information until the other Party is given a reasonable period of time (not to exceed [*] to seek patent protection for any material in such publication or presentation which it believes is patentable or to resolve any other issues. This Section 8.2(a) shall cease to apply with respect to any Collaboration Compound upon the commercial launch of a Licensed Product containing such Collaboration Compound as an active ingredient. Furthermore, with respect to any proposed abstracts, manuscripts or summaries of [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 24. 25 presentations by investigators or other Third Parties, such materials shall be subject to review under this Section 8.2(a) to the extent that RPR or Axys (as the case may be) has the right to do so. (b) Each Party also agrees to delete from any such proposed publication any Confidential Information of the other Party upon its reasonable request. (c) To the extent appropriate and within the Party's control, in any publication permitted under this Section 8.2, each Party shall acknowledge its collaboration with the other Party under this Agreement. 8.3 PRESS RELEASES. Except to the extent required by law or as otherwise permitted in accordance with this Section 8.3, neither Party shall make any public announcements concerning this Agreement or the subject matter hereof without the prior written consent of the other, which shall not be unreasonably withheld. Notwithstanding the foregoing, the Parties agree that each Party may desire or be required to issue press releases relating to the Agreement or activities thereunder, and the Parties agree to consult with each reasonably and in good faith with respect to the text and timing of such press releases prior to the issuance thereof, provided that a Party may not unreasonably withhold consent to such releases, and that either Party may issue such press releases as it determines, based on advice of counsel, are reasonably necessary to comply with laws or regulations or for appropriate market disclosure. The principles to be observed by Axys and RPR in public disclosures with respect to this Agreement shall be: accuracy, the requirements of confidentiality under this Article 8, and the normal business practice in the pharmaceutical and biotechnology industries for disclosures by companies comparable to Axys and RPR. In the event of a required or desired public announcement, such Party shall provide the other Party with a reasonable opportunity and the right to approve the content of such announcement prior to its being made, which approval shall not be delayed or unreasonably withheld. Furthermore, each Party shall give the other Party a reasonable opportunity to review all filings with the United States Securities and Exchange Commission describing the terms of this Agreement prior to submission of such filings, and shall give due consideration to any reasonable comments by the non-filing Party relating to such filing, including without limitation the provisions of this Agreement for which confidential treatment should be sought. ARTICLE 9 INDEMNIFICATION 9.1 INDEMNIFICATION BY RPR. RPR shall indemnify, defend and hold Axys and its Affiliates and each of their respective agents, employees, officers and directors (the "Axys Indemnitees") harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorneys' fees) arising out of Third Party claims or suits related to (a) RPR's performance of its obligations under this Agreement; (b) the manufacture, use or sale of Collaboration Compounds or Licensed Products by RPR and its Affiliates, Sublicensees, distributors and agents; or (c) breach by RPR of its representations and warranties set forth in Section 11.4; provided, however, RPR's obligations pursuant to this Section 9.1 shall not apply 25. 26 to the extent such claims or suits result from the negligence or willful misconduct of any of the Axys Indemnitees. Notwithstanding the foregoing, RPR shall have no obligation to indemnify the Axys Indemnitees with respect to claims arising out of breach by Axys of its representations and warranties set forth in Sections 11.4 or 11.5. 9.2 INDEMNIFICATION BY AXYS. Axys shall indemnify, defend and hold RPR and its Affiliates and each of their respective agents, employees, officers and directors (the "RPR Indemnitees") harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorney's fees) arising out of Third Party claims or suits related to (a) Axys' performance of its obligations under this Agreement; (b) breach by Axys of its representations and warranties set forth in Sections 11.4 or 11.5; (c) the manufacture, use or sale of Axys Products by Axys and its Affiliates, Sublicensees, distributors and agents; or (d) the manufacture, use or sale of Active Compounds and Licensed Products pursuant to any licenses which may be granted to Axys pursuant to Section 10.4; provided, however, that Axys' obligations pursuant to this Section 9.2 shall not apply to the extent that such claims or suits result from the negligence or willful misconduct of any of the RPR Indemnitees. Notwithstanding the foregoing, Axys shall have no obligation to indemnify the RPR Indemnitees with respect to claims arising out of a breach by RPR of its representations and warranties set forth in Section 11.4. 9.3 NOTIFICATION OF CLAIMS; CONDITIONS TO INDEMNIFICATION OBLIGATIONS. As a condition to a Party's right to receive indemnification under this Article 9, it shall (i) promptly notify the other Party as soon as it becomes aware of a claim or action for which indemnification may be sought pursuant hereto, (ii) cooperate with the indemnifying Party in the defense of such claim or suit, and (iii) permit the indemnifying Party to control the defense of such claim or suit, including without limitation the right to select defense counsel. In no event, however, may the indemnifying Party compromise or settle any claim or suit in a manner which admits fault or negligence on the part of the indemnified Party without the prior written consent of the indemnified Party. The indemnifying Party shall have no liability under this Article 9 with respect to claims or suits settled or compromised without its prior written consent. ARTICLE 10 TERMINATION AND EXPIRATION 10.1 TERM AND TERMINATION. This Agreement shall commence upon the Effective Date and, unless earlier terminated as provided herein, shall expire on the expiration of all royalty and other payment obligations hereunder. Upon the expiration, pursuant to Section 6.5, of RPR's royalty obligations with respect to a particular Licensed Product, the licenses granted to RPR and its Affiliates under Article 3 with respect to such Licensed Product shall expire, and RPR and its Affiliates shall automatically thereafter be granted a [*] license under the Axys Know-How and Axys Patents to make, have made, use, import, sell and offer for sale such Licensed Product for use in the Field worldwide. 10.2 TERMINATION OF THE AGREEMENT UPON MATERIAL BREACH. 26. 27 (a) Failure by a Party to comply with any of its material obligations contained herein shall entitle the Party not in default to give to the Party in default notice specifying the nature of the default, requiring it to make good or otherwise cure such default, and stating its intention to terminate if such default is not cured. If such default is not cured within [*] days after the receipt of such notice (or, if such default cannot be cured within such [*] period, if the Party in default does not commence and diligently continue actions to cure such default), the Party not in default shall be entitled, without prejudice to any of its other rights conferred on it by this Agreement, and in addition to any other remedies available to it by law or in equity, to terminate this Agreement; [*]. (b) The right of a Party to terminate this Agreement, as herein above provided, shall not be affected in any way by its waiver or failure to take action with respect to any prior default. (c) In the event that RPR or its Affiliates is developing or commercializing more than one Collaboration Compound and/or Licensed Product for use in the Field, and Axys terminates this Agreement pursuant to this Section 10.2 due to a breach pertaining to RPR's failure to use commercially reasonable diligent efforts with respect to, or make timely payments owed under this Agreement on account of, a particular Collaboration Compound or Licensed Product, then Axys shall be entitled to terminate this Agreement only with respect to such particular Collaboration Compound, and its related Back-Up Compounds, or such Licensed Product. Furthermore, in the event a breach relating to a particular Collaboration Compound or Licensed Product is limited to a particular Major Pharmaceutical Market, then Axys shall be entitled to terminate this Agreement only with respect to the particular Collaboration Compound or Licensed Product and only with respect to the particular Major Pharmaceutical Market. 10.3 TERMINATION OF THE AGREEMENT BY RPR. RPR may terminate this Agreement in its entirety upon [*] prior written notice to Axys [*]. However, if RPR terminates the Agreement under this Section 10.3, RPR covenants that [*] shall not develop or sell any Active Compound for any use based upon its cathepsin S inhibitory activity, and shall not license any Third Party to do so and shall terminate all then-existing sublicense rights regarding Active Compounds granted to Sublicensees. 10.4 CONSEQUENCES OF TERMINATION. (a) Upon termination of this Agreement (but not upon expiration of its term under Section 10.1), (i) each Party shall promptly return all relevant records and materials in its possession or control containing or comprising the other Party's Know-How or other Confidential Information and to which the former Party does not retain rights hereunder (except one copy of which may be retained in a Party's confidential files in its legal department for archival purposes); (ii) all licenses granted by each Party to the other under Article 3 shall [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 27. 28 terminate except as provided in Section 10.5(b); (iii) all rights in any Active Compounds (including any Collaboration Compounds and Back-Up Compounds) owned by a Party shall revert to such Party (subject to Section 10.3); (iv) [*] will provide to [*] copies of all reports and data, including preclinical data and reports, obtained by [*] pursuant to this Agreement that relate to Active Compounds owned by [*], within sixty (60) days of such termination (except in the case where [*] terminates under Section 10.2) (provided that the provision to [*] of the foregoing copies shall not be deemed to create any additional rights or licenses in any such copies or the intellectual property embodied therein, and [*] rights to use or exploit such information and rights shall be solely as expressly granted by [*] to [*] elsewhere in the Agreement and, with respect to Joint Know-How or Joint Patents, those rights of [*] as a joint owner); and (v) any and all claims and payment obligations that accrued prior to the date of such termination shall survive such termination. (b) Further, in the event Axys terminates this Agreement pursuant to Section 10.2, [*]. (c) Further, in the event RPR terminates this Agreement under the terms of Section 10.3, [*]. (d) In connection with the grant of a license pursuant to Section 10.4(c), [*], and upon the [*]. (e) Notwithstanding the provisions of Section 10.5(b) hereof, in the event that Axys terminates this Agreement pursuant to Section 10.2, then the restrictions imposed upon it pursuant to, and its obligations under, [*]. (f) Notwithstanding the provisions of Section 10.5(b) hereof, in the event that RPR terminates this Agreement pursuant to Section 10.2, then the restrictions imposed upon it pursuant to, and its obligations under, Sections 2.13(a), 3.3(c)(i) and 3.3(c)(iv) shall terminate, and the milestone payment and royalty payment obligations with respect to any Collaboration Compound or Licensed Product owned by RPR that RPR or its Affiliates or Sublicensees develops or commercializes thereafter shall [*] of the amounts otherwise owed under Article 6. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 28. 29 Such termination and [*] shall be RPR's exclusive remedy for Axys' breach, and RPR may not sue Axys for any damages or other remedy for such breach. 10.5 ACCRUED RIGHTS; SURVIVING OBLIGATIONS. (a) Termination, relinquishment or expiration of this Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of a Party prior to such termination, or expiration. Such termination, relinquishment or expiration shall not relieve a Party from obligations which are expressly indicated to survive termination or expiration of this Agreement. (b) Without limiting the foregoing, Sections 2.2(b), 2.3, 2.6, 2.7, 2.8, 2.11, 2.12, 2.13, 3.3, 3.4, 3.5, 5.3(d), (e) and (f), 6.3, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.11, 6.12, 6.13, 6.14, 10.1, 10.4, 10.5, 10.6, 11.3, 11.6, 11.10, 11.11, 11.12, 11.14 and 11.15 and Articles 1, 7, 8 and 9 of this Agreement shall survive the expiration or termination of this Agreement for any reason (except as expressly provided in Section 10.4). (c) Upon any termination of this Agreement as regards any particular Licensed Product, RPR and its Affiliates and Sublicensees shall be entitled, during the [*] of the Licensed Product which [*] as of the date of the termination, so long as RPR [*] in accordance with the terms and conditions set forth in this Agreement. 10.6 RIGHTS IN BANKRUPTCY. All rights and licenses granted under or pursuant to this Agreement by RPR or Axys are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to "intellectual property" as defined under Section 101 of the U.S. Bankruptcy Code. The Parties agree that the Parties, as licensees of such rights under this Agreement, shall retain and may fully exercise all of their rights and elections under the U.S. Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against either Party under the U.S. Bankruptcy Code, the Party hereto which is not a party to such proceeding shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, and same, if not already in their possession, shall be promptly delivered to them (i) upon any such commencement of a bankruptcy proceeding upon their written request therefor, unless the Party subject to such proceeding elects to continue to perform all of its obligations under this Agreement, or (ii) if not delivered under (i) above, following the rejection of this Agreement by or on behalf of the Party subject to such proceeding upon written request therefor by the non-subject Party. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 29. 30 ARTICLE 11 MISCELLANEOUS PROVISIONS 11.1 RELATIONSHIP OF THE PARTIES. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency or employer-employee relationship between the Parties. Neither Party shall incur any debts or make any commitments for the other. 11.2 ASSIGNMENTS. Except as expressly provided herein, neither this Agreement nor any interest hereunder shall be assignable, nor any other obligation delegable, by a Party without the prior written consent of the other; provided, however, that a Party may assign this Agreement to any Affiliate or to any successor in interest by way of merger or sale of all or substantially all of its assets in a manner such that the assignor shall remain liable and responsible for the performance and observance of all such Party's duties and obligations hereunder. This Agreement shall be binding upon the successors and permitted assigns of the Parties. Any assignment not in accordance with this Section 11.2 shall be void. [*]. 11.3 DISCLAIMER OF WARRANTIES. THE PARTIES EXPRESSLY DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT OF THIRD PARTY RIGHTS, UNLESS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT. 11.4 REPRESENTATIONS AND WARRANTIES. Each Party represents and warrants to the other Party that, as of the date of this Agreement: (a) such Party is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof; 30. 31 (b) such Party has taken all corporate action necessary to authorize the execution and delivery of this Agreement and the performance its obligations under this Agreement; (c) this Agreement is a legal and valid obligation of such Party, binding upon such Party and enforceable against such Party in accordance with the terms of this Agreement. The execution, delivery and performance of this Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which such Party is a party or by which such Party may be bound, and does not violate any law or regulation of any court, governmental body or administrative or other agency having authority over such Party. All consents, approvals and authorizations from all governmental authorities or other Third Parties required to be obtained by such Party in connection with this Agreement have been obtained; (d) it has the full and exclusive right, power and authority to enter into this Agreement, to perform the Research and to grant the licenses granted under Article 3 hereof; (e) All individuals who will perform any activities on its behalf in connection with the Research have assigned to it or its Affiliates the whole of their rights in any intellectual property conceived or reduced to practice by them as a result of the Research, and no Third Party will have any rights to any such intellectual property; and (f) With respect to any Material provided by it to the other Party, it has the full right to provide such Material and has no reason to believe that the other Party's use of such Material as contemplated by this Agreement will infringe the intellectual property rights of any Third Party. 11.5 ADDITIONAL REPRESENTATIONS AND WARRANTIES OF AXYS. Axys represents, warrants and covenants (as the case may be) to RPR that: (a) To [*]; (b) To [*]; (c) To [*]; (d) There [*]; (e) Axys [*]; and (f) Axys [*]. 11.6 COMBINATORIAL CHEMISTRY. It is understood by RPR that Axys has a combinatorial chemistry business, pursuant to which Axys has provided, and in the future will provide, libraries of combinatorial chemistry compounds to Third Party customers and grant to such customers certain license rights with respect to such compounds, for use by such customers in screening against targets selected by such customers and in synthesizing derivative [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 31. 32 compounds. RPR agrees that Axys' providing such compounds and granting such license rights to such customers [*]. 11.7 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 11.8 FORCE MAJEURE. Neither Party shall be liable to the other for failure or delay in the performance of any of its obligations under this Agreement for the time and to the extent such failure or delay is caused by earthquake, riot, civil commotion, war, strike, flood, governmental acts or restrictions or any other reason which is beyond the control of the respective Party. The Party affected by force majeure shall provide the other Party with full particulars thereof as soon as it becomes aware of the same (including its best estimate of the likely extent and duration of the interference with its activities), and will use commercially reasonable efforts to overcome the difficulties created thereby and to resume performance of its obligations as soon as practicable. If the performance of any obligation under this Agreement is delayed owing to a force majeure for any continuous period of more than six (6) months, the Parties hereto shall consult with respect to an equitable solution, including the possibility of the mutual termination of this Agreement. 11.9 NO TRADEMARK RIGHTS. No right, express or implied, is granted by this Agreement to a Party to use in any manner the name or any other trade name or trademark of a Party in connection with the performance of this Agreement. 11.10 ENTIRE AGREEMENT OF THE PARTIES; AMENDMENTS. This Agreement and the exhibits hereto constitute and contain the entire understanding and agreement of the Parties respecting the subject matter hereof and cancel and supersede any and all prior negotiations, correspondence, understandings and agreements between the Parties, whether oral or written, regarding such subject matter. No waiver, modification or amendment of any provision of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each Party. 11.11 CAPTIONS. The captions to this Agreement are for convenience only, and are to be of no force or effect in construing or interpreting any of the provisions of this Agreement. 11.12 APPLICABLE LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the [*] applicable to contracts entered into and to be performed wholly within the [*] excluding conflict of laws principles. 11.13 DISPUTES. In the event of any controversy or claim arising out of, relating to or in connection with any provision of this Agreement, or the rights or obligations of the Parties hereunder, the Parties shall try to settle their differences amicably between themselves. Either Party may initiate such informal dispute resolution by sending written notice of the dispute to the other Party, and within [*] after such notice appropriate representatives of the Parties shall meet for attempted resolution by good faith negotiations. If such representatives are unable to resolve promptly such disputed matter, it shall be referred to the President of Axys and to the member of 32. 33 RPR's Executive Council specified by RPR, for discussion and resolution. If such personnel are unable to resolve such dispute within [*] of initiating such negotiations, the Parties agree first to try in good faith to settle the dispute by mediation under the Commercial Mediation Rules of the American Arbitration Association, before resorting to arbitration, litigation or some other dispute resolution procedure. 11.14 NOTICES AND DELIVERIES. Any notice, request, delivery, approval or consent required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered in person, transmitted by telecopier (receipt verified) or by express courier service (signature required) or five (5) days after it was sent by registered letter, return receipt requested (or its equivalent), to the Party to which it is directed at its address or facsimile number shown below or such other address or facsimile number as such Party shall have last given by notice to the other Parties. If to RPR, addressed to: Rhone-Poulenc Rorer Pharmaceuticals Inc. 500 Arcola Road Collegeville, PA 19426 Telecopier: (610) 454-3807 Attn.: General Counsel If to Axys, addressed to: Axys Pharmaceuticals, Inc. 180 Kimball Way South San Francisco, CA U.S. 94080 Telecopier: (650) 829-1067 Attn.: President and to: Axys Pharmaceuticals, Inc. 180 Kimball Way South San Francisco, CA 94080 Attn: General Counsel Telecopier: (650) 829-1067 With copies to: Cooley Godward Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306-2155 Telecopier: (650) 857-0663 Attn: Barclay James Kamb, Esq. 33. 34 11.15 NO CONSEQUENTIAL DAMAGES. IN NO EVENT SHALL EITHER PARTY OR ANY OF ITS RESPECTIVE AFFILIATES BE LIABLE TO THE OTHER PARTY OR ANY OF ITS AFFILIATES FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER IN CONTRACT, WARRANTY, TORT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, including, but not limited to, loss of profits or revenue, or claims of customers of any of them or other Third Parties for such or other damages. 11.16 NON-SOLICITATION. During the Research Term, and for a period of one (1) year thereafter, neither Party shall solicit, induce, encourage or attempt to induce or encourage any employee of the other Party to terminate his or her employment with such other Party or to breach any other obligation to such other Party. 11.17 WAIVER. A waiver by either Party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either Party. 11.18 COMPLIANCE WITH LAW. Nothing in this Agreement shall be deemed to permit a Party to export, reexport or otherwise transfer any Licensed Product sold under this Agreement without compliance with applicable laws. 11.19 SEVERABILITY. When possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. The Parties shall make a good faith effort to replace the invalid or unenforceable provision with a valid one which in its economic effect is most consistent with the invalid or unenforceable provision. 11.20 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, any one of which need not contain the signature of more than one Party but all such counterparts taken together shall constitute one and the same agreement. 34. 35 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their respective duly authorized officers as of the day and year first above written, each copy of which shall for all purposes be deemed to be an original. AXYS PHARMACEUTICALS, INC. RHONE-POULENC RORER PHARMACEUTICALS INC. By: /s/ Daniel Petree By: /s/ John Leone ------------------------------- --------------------------------- Name: Daniel H. Petree Name: John R. Leone ----------------------------- ------------------------------- Title: President & COO Title: Sr. V.P. & G.M. RPRP ---------------------------- ------------------------------ 35. 36 EXHIBIT A PHASE TRANSITION CRITERIA [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 1. 37 EXHIBIT B RESEARCH PLAN [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 1. 38 APPENDIX 1 [*] [*] = Certain confidential information contained in this document, marked by brackets, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities and Exchange Act of 1934, as amended. 39 COLLABORATIVE RESEARCH AND LICENSE AGREEMENT BETWEEN AXYS PHARMACEUTICALS, INC. AND RHONE-POULENC RORER PHARMACEUTICALS INC. 40 ARTICLE 1 DEFINITIONS..................................................................1 1.1 "Active Compound".............................................................1 1.2 "Affiliate"...................................................................2 1.3 "Axys Know-How"...............................................................2 1.4 "Axys Patents"................................................................2 1.5 "Axys Product"................................................................2 1.6 "Back-Up Compound"............................................................2 1.7 "Collaboration Compound"......................................................2 1.8 "Confidential Information"....................................................2 1.9 "Control".....................................................................3 1.10 "Effective Date"..............................................................3 1.11 "Fair Market Value"...........................................................3 1.12 "FDA".........................................................................3 1.13 "Field".......................................................................3 1.14 "First Commercial Sale".......................................................3 1.15 "FTE".........................................................................3 1.16 "IND".........................................................................3 1.17 "Indication"..................................................................3 1.18 "Information".................................................................4 1.19 "Joint Know-How"..............................................................4 1.20 "Joint Patents"...............................................................4 1.21 "Joint Research Committee" or "JRC"...........................................4 1.22 "Know-How"....................................................................4 1.23 "Licensed Product"............................................................4 1.24 "Major Pharmaceutical Market".................................................4 1.25 "Materials"...................................................................4 1.26 "NDA".........................................................................4 1.27 "Net Sales"...................................................................4 1.28 "Patent Right"................................................................5 1.29 "Person"......................................................................5 1.30 "Phase I".....................................................................5 1.31 "Phase III"...................................................................5
[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 2. 41 1.32 "Phase Transition Criteria"...................................................5 1.33 "Regulatory Approval".........................................................5 1.34 "Relevant Period".............................................................5 1.35 "Research"....................................................................5 1.36 "Research Plan"...............................................................5 1.37 "Research Technology".........................................................5 1.38 "Research Term"...............................................................6 1.39 "Respiratory Diseases"........................................................6 1.40 "RPR Know-How"................................................................6 1.41 "RPR Patents".................................................................6 1.42 "Sublicensee".................................................................6 1.43 "Third Party".................................................................6 1.44 "Valid Claim".................................................................6 ARTICLE 2 RESEARCH...................................................................6 2.1 Collaborative Research........................................................6 2.2 Conduct of the Research.......................................................7 2.3 Axys Research Efforts.........................................................7 2.4 RPR Research Efforts..........................................................8 2.5 Research Funding..............................................................8 2.6 Research Information and Reports..............................................8 2.7 Identification and Testing of Active Compounds................................9 2.8 Early Termination of Agreement................................................9 2.9 Early Termination of Collaborative Aspect of Research.........................9 2.10 Extension of Research Term...................................................10 2.11 Material Transfer............................................................10 2.12 Liability....................................................................11 2.13 [*]..........................................................................11 2.14 Subcontractors...............................................................11 ARTICLE 3 LICENSES..................................................................12 3.1 Research Licenses............................................................12 3.2 Commercialization License to RPR.............................................12 3.3 Negative Covenants and License Limitations...................................12
[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 3. 42 3.4 License for Axys Products....................................................13 3.5 Cross-License of [*].........................................................13 ARTICLE 4 JOINT RESEARCH COMMITTEE..................................................13 4.1 Creation and Structure of the Joint Research Committee.......................13 4.2 Regular Meetings.............................................................14 4.3 Responsibilities of the Joint Research Committee.............................14 4.4 Subcommittees of the JRC.....................................................14 4.5 Decisions of the JRC.........................................................14 4.6 Expenses.....................................................................14 ARTICLE 5 PRODUCT DEVELOPMENT.......................................................15 5.1 Selection of Compounds and Diligence.........................................15 5.2 Development Information and Reporting........................................15 5.3 [*] and [*]..................................................................15 ARTICLE 6 PAYMENTS TO AXYS..........................................................17 6.1 License Fees.................................................................17 6.2 Up-Front Research Payment....................................................17 6.3 Milestone Payments...........................................................17 6.4 Royalty Payments.............................................................18 6.5 Term of Royalty Obligation...................................................18 6.6 Timing of Payment............................................................18 6.7 [*] Licenses.................................................................19 6.8 Third Party Licenses.........................................................19 6.9 Mode of Payment..............................................................19 6.10 Obligation to Pay Royalties..................................................19 6.11 Records Retention............................................................19 6.12 Audits.......................................................................19 6.13 No Non-Monetary Consideration for Sales......................................20 6.14 Taxes........................................................................20 ARTICLE 7 INVENTIONS AND PATENTS....................................................20 7.1 Title to Inventions..........................................................20 7.2 Rights to Other Compounds....................................................21 7.3 Patent Prosecution...........................................................21
[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 4. 43 7.4 Enforcement of Patents.......................................................23 7.5 Third Party Patent Rights....................................................23 ARTICLE 8 CONFIDENTIALITY...........................................................24 8.1 Confidentiality Obligations..................................................24 8.2 Publications.................................................................25 8.3 Press Releases...............................................................26 ARTICLE 9 INDEMNIFICATION...........................................................26 9.1 Indemnification by RPR.......................................................26 9.2 Indemnification by Axys......................................................26 9.3 Notification of Claims; Conditions to Indemnification Obligations............27 ARTICLE 10 TERMINATION AND EXPIRATION................................................27 10.1 Term and Termination.........................................................27 10.2 Termination of the Agreement upon Material Breach............................27 10.3 Termination of the Agreement by RPR..........................................28 10.4 Consequences of Termination..................................................28 10.5 Accrued Rights; Surviving Obligations........................................29 10.6 Rights in Bankruptcy.........................................................30 ARTICLE 11 MISCELLANEOUS PROVISIONS..................................................30 11.1 Relationship of the Parties..................................................30 11.2 Assignments..................................................................30 11.3 Disclaimer of Warranties.....................................................31 11.4 Representations and Warranties...............................................31 11.5 Additional Representations and Warranties of Axys............................32 11.6 Combinatorial Chemistry......................................................32 11.7 Further Actions..............................................................32 11.8 Force Majeure................................................................32 11.9 No Trademark Rights..........................................................33 11.10 Entire Agreement of the Parties; Amendments..................................33 11.11 Captions.....................................................................33 11.12 Applicable Law...............................................................33 11.13 Disputes.....................................................................33 11.14 Notices and Deliveries.......................................................33
5. 44 11.15 No Consequential Damages.....................................................34 11.16 Non-Solicitation.............................................................34 11.17 Waiver.......................................................................34 11.18 Compliance with Law..........................................................35 11.19 Severability.................................................................35 11.20 Counterparts.................................................................35
6. EX-10.95 5 COMBINATORIAL CHEMISTRY AGREEMENT 1 [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. EXHIBIT 10.95 COMBINATORIAL CHEMISTRY AGREEMENT THIS COMBINATORIAL CHEMISTRY AGREEMENT (the "Agreement") is made and entered into effective as of December 22, 1998 (the "Effective Date"), by and between AXYS PHARMACEUTICALS, INC., a Delaware corporation having a place of business at 180 Kimball Way, South San Francisco, CA 94080 ("Axys"), and RHONE-POULENC RORER PHARMACEUTICALS INC., a Delaware corporation having a place of business at 500 Arcola Road, Collegeville, Pennsylvania 19426 ("RPR"). Axys and RPR may be referred to herein individually as a "Party" or, collectively, as the "Parties." RECITALS A. Axys has developed and owns certain technology and intellectual property rights relating to combinatorial chemistry and the synthesis of diverse chemistry libraries using combinatorial techniques. B. RPR desires to obtain from Axys a non-exclusive library of approximately [*] compounds to be synthesized pursuant to protocols developed by Axys and a license to use certain Axys combinatorial chemistry technology and intellectual property rights for RPR's drug discovery and development programs. C. Axys is willing to grant such rights to RPR and to synthesize and deliver to RPR such compound library pursuant to the following terms and conditions. NOW, THEREFORE, the Parties agree as follows: 1. DEFINITIONS 1.1 "AFFILIATE" means, with respect to a Party, any individual or entity that controls, is controlled by, or is under common control with, such Party. For this definition, the term "control" shall refer to (a) the ownership, directly or indirectly, of at least fifty percent (50%) of the voting securities or other ownership interest of an entity (or, if less, the maximum percentage permitted by law), or (b) the possession, directly or indirectly, of the power to direct the management or policies of an entity, whether through the ownership of voting securities, by contract or otherwise. 1.2 "AXYS IMPROVEMENT" means any invention, idea, concept, formula, design, techniques, enhancement or improvement (whether or not patentable or copyrightable or subject to any other form of intellectual property protection) which (i) is developed, conceived or 2 reduced to practice as a result of activities pursuant to this Agreement, (ii) relates to the Library, the Library Compounds, the Library Protocols, the Axys Know-How, or the Axys Patents, and (iii) is made by employees or agents of Axys or its Affiliates, either solely or together with one or more employees or agents of RPR and its Affiliates. 1.3 "AXYS KNOW-HOW" means Information Controlled by Axys during the Term that comprises or is contained in the Selected Protocols or relates directly to use of the Selected Protocols. The term "Axys Know-How" shall not include the general combinatorial chemistry techniques proprietary to Axys relating generally to synthesis of compounds or to accelerated medicinal chemistry based on the Library Compounds, or any computational methods and instrumentation know-how and compound management databases, or any Information relating to Library Protocols other than the Selected Protocols, except as the same may be contained in the Selected Protocols. 1.4 "AXYS PATENTS" means all Patent Rights that are Controlled by Axys and claim aspects of the Axys Know-How. 1.5 "CONFIDENTIAL INFORMATION" means the Information of a Party that it considers proprietary and/or confidential, and that, if disclosed under this Agreement in written, graphic or electronic form, is marked or otherwise designated as "confidential" or "proprietary" or the equivalent and, if disclosed orally, is characterized as "confidential" or "proprietary" by the disclosing Party at the time of such disclosure. 1.6 "CONTROLLED" means, with respect to a material or an item of Information, Patent Right or other intellectual property right, that the applicable Party owns or has a license or right to such material, Information, Patent Right or other intellectual property right and has the ability to grant to the other Party access and a right and license as provided for herein under such material, Information, Patent Right or other intellectual property right without violating the terms of any agreement or other arrangements with, or the rights of, any Third Party. 1.7 "DEVELOPMENT COMPOUND" means any Library Compound that RPR or its Affiliates undertakes to develop and commercialize pursuant to Section 2.8. 1.8 "DERIVATIVE" means a compound (other than a Library Compound) made by RPR or any of its Affiliates using a Selected Protocol or any RPR Protocol. 1.9 "EVALUATION PERIOD" means the period commencing on the Effective Date and terminating on [*]. 1.10 "GENERAL SCREENING" means use of the Library or any Library Compounds in assays (or other testing) to screen for activity against targets in the pursuit of the identification of lead compounds or structures in research and development programs, where the party conducting such screening is permitted and authorized to use the Library or any Library Compound to screen against [*] and/or [*]. For clarity, "General Screening" shall not include Limited Screening. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 2 3 1.11 "INFORMATION" means any data results, information, know-how, trade secrets, techniques, methods, development, material, or compositions of matter of any type or kind. 1.12 "LIBRARY" means the collection of approximately [*] to be synthesized by Axys and provided to RPR under the terms of Article 2 of this Agreement. 1.13 "LIBRARY COMPOUND" means any individual chemical compound within the Library and includes a Development Compound unless the context otherwise requires. 1.14 "LIBRARY PROTOCOL" means a Protocol used for synthesizing a set of related Library Compounds using combinatorial chemistry techniques. 1.15 "LIMITED SCREENING" means use of the Library or any Library Compounds in assays (or other testing) to screen for activity against targets in the pursuit of the identification of lead compounds or structures in research and development programs, where the party conducting such screening is permitted to use the Library or any Library Compound to screen against [*] and in [*]. 1.16 "PATENT RIGHTS" means (i) an issued and existing letters patent, including any extensions, supplemental protection certificates, registration, confirmation, reissue, reexamination or renewal thereof, (ii) pending applications, including any continuation, divisional, continuation-in-part application thereof, for any of the foregoing, and (iii) all counterparts to any of the foregoing issued by or filed in any country or other jurisdiction. 1.17 "PROTOCOL" means a detailed set of combinatorial chemistry synthetic methods and standard operating procedures designed to be used for synthesizing a set of related compounds using combinatorial chemistry techniques. 1.18 "RPR IMPROVEMENT" means any invention, idea, concept, formula, design, technique, enhancement or improvement (whether or not patentable or copyrightable or subject to any other form of intellectual property protection) which (i) is developed, conceived or reduced to practice as a result of activities pursuant to this Agreement, (ii) relates to the Derivatives, the RPR Protocols, or the RPR Know-How, and (iii) is made by employees or agents of RPR or its Affiliates, either solely or together with one or more employees or agents of Axys or its Affiliates. 1.19 "RPR KNOW-HOW" means all Information Controlled by RPR during the Term that relates to the Derivatives or the RPR Protocols. 1.20 "RPR PROTOCOL" means any Protocol which was developed by RPR or its Affiliates using any Information contained in a Selected Protocol. 1.21 "SCAFFOLD" means the chemical substructure common to a set of Library Compounds related by the use of a particular Library Protocol to synthesize such Library Compounds. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 3 4 1.22 "SELECTED PROTOCOL" means a Library Protocol that has been selected by RPR pursuant to Section 2.2 and, if applicable, [*], which Library Protocol shall contain at a minimum the enabling information outlined in Exhibit A attached hereto. 1.23 "TECHNOLOGY COMMITTEE" means the committee formed by the Parties under Section 2.4 of the Agreement. 1.24 "TERM" means the term of this Agreement as set forth in Section 8.1. 1.25 "THIRD PARTY" means any natural person, corporation, firm, business trust, joint venture, association, organization, company, partnership or other business entity, or any government or agency or political subdivision thereof, other than Axys, RPR or an Affiliate of either of them. 2. DEVELOPMENT AND TRANSFER OF LIBRARY 2.1 LIBRARY SYNTHESIS. Commencing promptly after the Effective Date, Axys will use [*] to synthesize Library Compounds to be provided to RPR as part of the Library. Such Library Compounds shall be synthesized using [*] Library Protocols of Axys. Axys will ensure that the Library will be comprised of [*] Library Compounds per Library Protocol used in making the Library. 2.2 SELECTED PROTOCOLS. During the Evaluation Period, RPR shall endeavor to evaluate the Library Compounds provided by Axys and the Scaffolds that are generated by Axys during such period. Prior to the end of the Evaluation Period, RPR shall choose, by written notice provided to Axys, as Selected Protocols [*] the Library Protocols. In addition, RPR [*]. RPR shall choose such [*] by written notice provided to Axys, [*]. Selection of Selected Protocols by RPR under this Section 2.2 shall be made based upon review by RPR of the Scaffolds that have been provided to RPR [*] and/or based upon screening or other data generated by RPR and its Affiliates from their use of the Library Compounds as permitted by this Agreement. Axys shall use [*] to complete delivery of the Selected Protocols and the Axys Know-How relating thereto within [*] of selection by RPR hereunder or as soon as reasonably available. Such delivery shall be in written form, CD-ROM, microfilm or other appropriate medium and format (including without limitation electronic transfer or delivery) as reasonably selected by the mutual agreement of the parties. RPR and its Affiliates may use the Selected Protocols and grant sublicenses to use the Selected Protocols only as permitted in Section 3.1. 2.3 DELIVERY OF LIBRARY COMPOUNDS. Axys shall use [*] to deliver the Library Compounds in the Library to RPR according to the following schedule: [*]. If Axys is able to produce and deliver the Library Compounds [*]. For Library Compounds other than Initial Library Compounds, Axys shall calculate a projected delivery date for the Library Compounds to be produced from each such Scaffold within a reasonable period of time following RPR's acceptance of, or failure to timely reject, Scaffolds pursuant to Section 2.9, and Axys shall [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 4 5 inform RPR of each such projected delivery date. [*] thereafter Axys shall update RPR on the then-projected delivery date(s) for such Library Compounds. The Library Compounds will conform to the specifications set forth in the applicable Library Protocol. Axys shall use due care in conducting the testing specified in Exhibit B for each Library Compound, and shall perform all such testing in accordance with generally prevailing industry standards. The Initial Library Compounds shall be delivered in [*] Library Compound present in the shipment. All Library Compounds delivered after the Initial Library Compounds shall be delivered in [*] Library Compound present in the shipment. For the Initial Library Compounds [*] of each Library Compound shall be [*] well plates. For all Library Compounds delivered after the Initial Library Compounds [*] well plates. Each shipment shall be accompanied by a confidential description of the identity and structure of each Library Compound in such shipment, as well as a diagram indicating the location of each Library Compound in each plate included in the shipment. Accompanying each shipment will be the results of the analysis of the Library Compounds, performed by Axys according to the method of analysis set forth in Exhibit B attached hereto. Axys shall make [*] to provide Library Compounds to RPR [*] and in any event [*]. Taking all deliveries of Library Compounds as a whole, Axys shall not [*]. 2.4 TECHNOLOGY COMMITTEE. Within thirty (30) days of the Effective Date, Axys and RPR shall form a committee consisting of two (2) representatives of each Party (the "Technology Committee"). The Technology Committee shall meet as needed at times as agreed upon by the members of the Technology Committee (but no more than once per quarter) to establish a mechanism for RPR to review the Scaffolds prior to the selection of Library Protocols under Section 2.2 or the rejection of such Scaffolds under Section 2.9, to memorialize the dates on which deliveries of Library Compounds were made by Axys to RPR, to review Axys [*] and to discuss and resolve any non-business aspects of the relationship of the Parties under this Agreement. The Technology Committee will also look at analytical methods and results, as well as alternative approaches to quality control relating to the Library Compounds. The Technology Committee shall act by unanimous consent, and may meet by telephone, videoconference or in face-to-face meetings, as agreed upon by the members of the committee. A Chairperson shall be appointed for each meeting of the Technology Committee by the members of the Technology Committee. Each Party may change its representatives on the Technology Committee as it deems appropriate, and may send non-voting representatives to attend committee meetings as observers. 2.5 RIGHT TO USE LIBRARY COMPOUNDS - RPR. All Axys Know-How and Axys Patents existing as of the Effective Date and relating to the Library and the Library Compounds including any Information of Axys relating thereto, shall be and remain the property of Axys (but subject to the licenses and other rights granted to RPR and its Affiliates hereunder). Subject to the terms of this Agreement, RPR and its Affiliates shall have the right to use the Library and the Library Compounds solely (a) [*] and (b) [*]. Except as permitted in the foregoing or as permitted in Section 6.3, RPR covenants that it and its Affiliates shall not transfer or disclose the Library or Library Compounds, or the structures thereof, to any Third Party for any purpose. RPR shall cause its Affiliates to observe the limitations contained in this Section 2.5 and elsewhere in this Agreement which are applicable to RPR and its Affiliates. RPR and its Affiliates may use all Information generated by the use of the Library and the Library [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 5 6 Compounds as permitted above for any purpose subject to and in compliance with the limitations in this Agreement. It is understood and agreed that the provisions of this Section 2.5 shall only apply to Library Compounds that are not Development Compounds and that the provisions of Section 2.8 shall apply to Development Compounds. 2.6 RIGHT TO USE LIBRARY COMPOUNDS - AXYS. Axys retains the rights to provide the Library, Library Compounds and all the Library Protocols (including without limitation the Selected Protocols) to Third Parties for use in General Screening; provided, however, that, (i) during the [*] period after each date of delivery of a set of Library Compounds by Axys, Axys covenants that it shall not provide the Library Protocols applicable to such Library Compounds or any of such Library Compounds (excluding a de minimis amount thereof) to more than [*] for use in General Screening (each of such Third Parties being referred to herein as a "General Screening Party"), and (ii) for an [*] thereafter, Axys covenants that it [*] for use in General Screening. Without limiting any of the foregoing, Axys and its Affiliates shall retain the right to use the Library and the Library Compounds for all internal purposes, including without limitation, General Screening, combinatorial chemistry and medicinal chemistry, and research (including, without limitation, drug discovery), development and commercialization activities of Axys and its Affiliates. Axys also retains the right to use all the Library Protocols (including without limitation the Selected Protocols) for any internal purpose and retains the right to use the Library and the Library Compounds in programs focused on specific targets and/or therapeutic areas pursuant to collaborative research, development or commercialization agreements with Third Parties (each such Third Party being referred to herein as a "Third Party Corporate Partner"), and to provide the Library or Library Compounds to Third Party Corporate Partners of Axys or its Affiliates for use by such partner in programs focused on specific targets pursuant to research, development or commercialization agreements between such Third Party Corporate Partner and Axys (or its Affiliate, as applicable), provided that, each such Third Party Corporate Partner (and its Affiliates) is contractually prohibited from using the Library or Library Compounds for General Screening (unless such partner is also one of the General Screening Parties) and is subject to a confidentiality agreement at least as restrictive as the provisions of Article 6. 2.7 RPR'S RIGHT TO DERIVATIVES. RPR and its Affiliates shall have the right to synthesize and use Derivatives for any and all research, development, commercialization and other purposes, including but not limited to research, development and commercialization programs conducted in collaboration with Third Parties. 2.8 RPR'S RIGHT TO DEVELOPMENT COMPOUNDS. If RPR or its Affiliates [*], in which case such Library Compound shall be deemed to be a Development Compound. With respect to Development Compounds, Axys shall inform other customers permitted to use such Library Compounds that they are no longer available for, and are no longer licensed for, selection by such customers for commercialization. RPR may designate up to [*] Library Compounds as Development Compounds at any time; provided, however, that RPR may not select, and will no longer be licensed to commercialize, any Library Compound as a Development Compound (i) if Axys has previously received written notice from any other customer that such customer has selected such Library Compound for commercialization, or (ii) [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 6 7 if Axys itself [*] has selected such Library Compound for commercialization. As soon as reasonably practicable following receipt of any such written notice, Axys shall inform RPR that such Library Compound is no longer available for selection as a Development Compound. For each Development Compound, RPR shall use [*]. If RPR fails to satisfy the diligence obligations set forth herein with respect to any Development Compound, such Development Compound shall again be deemed to be a Library Compound rather than a Development Compound. 2.9 RPR SCAFFOLD REVIEW. During the period when Axys is delivering the Library Compounds to RPR under Section 2.3, RPR and its Affiliates shall have the right, as provided below, to review the Scaffolds that Axys proposes to use in creating the Library Compounds, in advance of Axys delivering the Library Compounds based on such Scaffolds (but excluding the Scaffolds used for the Initial Library Compounds). Axys shall provide the proposed Scaffolds to RPR in confidence prior to preparing the Library Compounds based on such Scaffolds, and will use [*] to provide such Scaffolds as soon as Axys can reasonably do so in light of Axys' delivery schedule hereunder and in no event [*] in advance of starting the preparation of the related Library Compounds. RPR shall have the right to review such Scaffolds and shall have the right, subject to the following, to reject certain of such Scaffolds for any reason, including without limitation if RPR determines that any Library Compounds based on or including such Scaffolds will overlap with or are substantially identical to compounds that RPR or its Affiliates has manufactured or plans to manufacture. If RPR desires to reject a particular Scaffold, it shall notify Axys as soon as reasonably practicable and in no event [*] of receipt of the proposed Scaffold. If RPR accepts a particular Scaffold, it shall notify Axys as soon as reasonably practicable. Failure to notify Axys of its desire to reject a particular Scaffold within such [*] shall be deemed to be acceptance of such Scaffold by RPR. RPR shall have the right to reject up to [*]. 2.10 OPTIONAL CHEMISTRY SERVICES AND ENABLING COMBINATORIAL CHEMISTRY TECHNOLOGY. Axys agrees to provide RPR with [*]. If RPR is interested in pursuing such a project at Axys, RPR shall give Axys written notice of the desired project and details thereof, and the Parties shall meet to negotiate in good faith the financial terms and other terms and conditions relating to such project. Axys agrees that the [*]. 2.11 DELIVERY; TITLE. (a) Axys shall ship, [*], the Library Compounds to RPR in Collegeville, Pennsylvania or such other location within the continental United States as RPR designates in a written notice to Axys. (b) Title to the actual physical samples of each set of Library Compounds contained within the ninety-six (96) well plates provided by Axys under this Agreement shall pass to RPR (free and clear of any liens, security interests or other similar encumbrances) upon delivery of such Library Compounds to RPR; provided that the passing of such title shall neither limit or eliminate the restrictions upon use of the Library or the Library Compounds imposed by this Agreement; and provided further that the passing of title to such actual physical samples shall [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 7 8 not be deemed create any additional rights or licenses in such Library Compounds or the intellectual property embodied therein or used to synthesize such Library Compounds, and RPR's right to use such Library Compounds shall be solely as expressly granted by Axys to RPR herein. Risk of loss to the actual physical samples of each set of Library Compounds contained within the ninety-six (96) well plates provided by Axys under this Agreement shall pass to RPR [ * ]. Axys acknowledges that title to the actual physical samples of Derivatives produced by RPR under and in accordance with this Agreement remains with RPR or its Affiliates absent a further written agreement of the parties. 3. TECHNOLOGY LICENSE RIGHTS 3.1 TECHNOLOGY AND LIBRARY LICENSE RIGHTS. (a) LICENSES. Subject to the terms and conditions of this Agreement, Axys hereby grants RPR and its Affiliates the non-exclusive, worldwide, fully paid-up, perpetual (subject to termination under Section 8.4) right and license to use and practice the Axys Know-How and the Axys Patents solely (i) for RPR's and its Affiliates' permitted use of the Library and the Library Compounds under Section 2.5, (ii) for RPR's and its Affiliates' permitted synthesis and use of the Derivatives under Section 2.7 and permitted use of the Development Compounds under Section 2.8, and (iii) to synthesize additional quantities of Library Compounds for use as permitted in Section 2.5, provided such right and license shall not entitle RPR to any of the Library Protocols other than the Selected Protocols. (b) SUBLICENSING RIGHTS. RPR and its Affiliates shall have the right to grant sublicenses to Third Parties under the licenses granted pursuant to [*] above; provided that such sublicenses prohibit further sublicensing and limit the sublicensee to synthesizing and using Derivatives for the sublicensor's and/or for the sublicensee's internal research, development and commercialization purposes and no other purposes. RPR and its Affiliates shall also have the right to grant sublicenses to Third Parties under the licenses granted pursuant to [*] above; provided that such sublicenses may only be granted in conjunction with and in compliance with RPR's and its Affiliates' permitted use of the Library and Library Compounds under Section 2.5 and only to the extent needed to accomplish such permitted purposes. RPR and its Affiliates covenant that they will not transfer or disclose any Axys Know-How or Axys Patents disclosed hereunder to any Third Party except in connection with any sublicense permitted under this Subsection 3.1(b) or in connection with the exercise of its rights hereunder, and subject to limitations consistent with the above restrictions. RPR shall provide Axys with written notification of an intended sublicense pursuant to the second sentence of this Subsection 3.1(b) prior to the execution of a sublicense agreement and shall provide Axys with a copy of such sublicense agreement following execution (redacted of any confidential Information of RPR or its sublicensee). 3.2 LICENSE LIMITATIONS. RPR understands and agrees that its rights granted in Section 3.1 under the Axys Know-How and the Axys Patents are non-exclusive, and that Axys retains all its rights to use the Axys Know-How and Axys Patents for its own purposes and to license or disclose the Axys Know-How and Axys Patents to Third Parties without restriction, [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 8 9 subject only to the restrictions set forth in, and to the licenses and other rights granted RPR under, this Agreement. RPR covenants that RPR and its Affiliates shall not use or practice the Axys Know-How and/or Axys Patents (or grant sublicenses with respect thereto) for any use or purpose except as expressly permitted in Section 3.1, [*]. RPR covenants that RPR and its Affiliates will not sell or otherwise commercialize any Library Compound, but excluding from the foregoing limitation any Development Compound or any compound that is discovered or synthesized by RPR or its Affiliates completely independent of any activity permitted under this Agreement and without reliance on any Axys Know-How, Axys Patents or other Confidential Information of Axys disclosed to RPR. 3.3 [*] ON RESTRICTIVE PROVISIONS AND DELIVERY TIMES. Axys covenants that it will contractually bind any General Screening Party, any Third Party Corporate Partner, and any other Third Party to which Axys or its Affiliates provides the right to use any of the Library Compounds or Library Protocols to provisions [*] hereof and that it [*]. In the event that Axys desires to provide the Library Compounds or the Library Protocols to any Third Party on [*] hereof or [*], then [*], as the case may be. 4. PAYMENTS 4.1 LICENSE FEE. RPR shall pay Axys [*] within thirty (30) days of the Effective Date as a [*] license fee. 4.2 COMPOUND LICENSES AND PAYMENTS. The license fee and purchase price of Library Compounds delivered hereunder shall be calculated in accordance with the following: (a) for the Initial Library Compounds, the aggregate license fee and purchase price per Library Compound shall be equal to [*] for such Initial Library Compounds. (b) for Library Compounds delivered [*] the aggregate license fee and purchase price per Library Compound shall be equal to [*] for such Library Compounds. 4.3 PAYMENT PROCEDURES. Upon each delivery by Axys of particular Library Compounds pursuant to Section 2.3, RPR agrees to pay Axys the amounts set forth in Section 4.2 for such delivered Library Compounds, such payment to be made within [*] of receipt of an invoice from Axys regarding such delivered Library Compounds, which invoice shall be submitted promptly upon delivery of such Library Compounds by Axys under the terms of Section 2.3. RPR shall be responsible for additional payments of any sales, transfer, excise, export or other tax and of any customs tax or duties assessed on the sale or transfer of Library Compounds, Library Protocols, Axys Know-How or Axys Patents. Such additional payments shall exclude all taxes based upon the net income to Axys. 4.4 SELECTED PROTOCOL FEES. There is no charge beyond the payments set forth in Section 4.1 for the [*] Library Protocols chosen by RPR [*]. For each Library Protocol chosen by RPR following the Evaluation Period and during the Term as a Selected Protocol, RPR shall pay Axys [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 9 10 [*]. Such payments shall accompany the written notice whereby RPR informs Axys of its selection of the Selected Protocol. 5. INTELLECTUAL PROPERTY MATTERS 5.1 OWNERSHIP. (a) AXYS IMPROVEMENTS. Axys Improvements made solely by employees or agents of Axys and/or its Affiliates shall be owned solely by Axys. Axys Improvements made jointly by employees or agents of Axys and/or its Affiliates and one or more employees or agents of RPR and/or its Affiliates shall be owned jointly by the Parties. (b) RPR IMPROVEMENTS. RPR Improvements made solely by employees or agents of RPR and/or its Affiliates shall be owned solely by RPR. RPR Improvements made jointly by employees or agents of RPR and/or its Affiliates and one or more employees or agents of Axys and/or its Affiliates shall be owned jointly by the Parties. (c) NON-LIBRARY COMPOUNDS. Axys [*]. Axys will [*]. At RPR's request and expense, Axys will execute any documents or instruments as may be necessary [*]. In the event [*]. (d) LIBRARY COMPOUNDS. RPR [*]; provided nothing herein shall limit or otherwise affect the provisions of Section 2.11(b) or the licenses or other rights granted to RPR hereunder. 5.2 LIMITATION ON PATENT APPLICATIONS. (a) SPECIFIC CLAIMS. A Party shall not file or allow any of its Affiliates to file, and Axys shall not allow any General Screening Party or Third Party Corporate Partner to file, any patent applications that [*], provided that a Party shall have the right to [*], and Axys shall have the right to allow any General Screening Party or Third Party Corporate Partner to [*] and Axys shall have the right to [*]. RPR shall have the right to [*]. For clarity, this Section 5.2(a) prohibits RPR from filing a patent application that [*] and permits RPR to file a patent application that [*]. (B) GENERIC CLAIMS. A Party shall have the right to [*], and Axys shall have the right to allow any General Screening Party or Third Party Corporate Partner [*]. For clarity, this Section 5.2(b)(i) permits RPR to file a patent application that (A) [*] or (B) [*]. 5.3 ADDITIONAL LICENSES. (a) TO RPR. Subject to the limitations set forth herein, Axys hereby grants to RPR and its Affiliates a non-exclusive, world-wide, perpetual (subject to termination by Axys under Section 8.4), fully paid-up right and license, with the right to sublicense, under any issued or published Patent Rights Controlled by Axys or its Affiliates that [*] solely for RPR and its Affiliates and permitted sublicensees to make and use such Library Compounds to the extent [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 10 11 permitted in Section 2.5 and to make and use Library Compounds in connection with the use of Derivatives and Development Compounds to the extent permitted in Sections 2.7 and 2.8, respectively. (b) TO AXYS. (i) RPR hereby grants to Axys a non-exclusive, world-wide, perpetual, fully paid-up license, with right to sublicense, under issued or published patents owned by RPR or its Affiliate that [*] solely for Axys and its Affiliates and sublicensees to make, have made, import, use and derivatize, such Library Compound as permitted in Section 2.6 and for Axys and its Affiliates to offer for sale and sell such Library Compound (but not any derivatives thereof) as permitted in Section 2.6, but excluding from the foregoing license [*]. (ii) Subject to the limitations set forth herein, RPR hereby grants to Axys a non-exclusive, world-wide, perpetual, fully paid-up right and license, with the right to sublicense, under issued or published Patent Rights Controlled by RPR or its Affiliates that [*], but excluding from the foregoing right and license any [*]. (c) COVENANT TO SECURE. With respect to [*]. 5.4 HANDLING OF PATENTS. (a) AXYS OR RPR PATENTS RIGHTS. At its sole cost and expense, each Party shall have the right to file, prosecute, maintain and enforce the Patent Rights, which it Controls, subject to the provisions of this Section 5. Each Party agrees to provide the other with reasonable assistance in filing, prosecuting, maintaining and enforcing the other's Patent Rights, at the other's request and expense, including providing access to relevant documents and other evidence and making its employees available. Any amounts recovered by a Party, whether by settlement or judgment, shall be retained by such Party. (b) JOINT PATENTS RIGHTS. Responsibility for the filing, prosecution, maintenance and enforcement of Patent Rights the Parties jointly own (the "Joint Patent Rights") will be agreed upon by the Parties on a case-by-case basis and handled by mutually acceptable counsel. The Parties shall [*]. Any amounts recovered in the enforcement of Joint Patent Rights, whether by settlement or judgement, shall [*]. 5.5 THIRD PARTY PATENT RIGHTS. If any warning letter or other notice of infringement is received by a Party, or action, suit or proceeding is brought against a Party alleging infringement of a Patent Right of any Third Party in the manufacture, use or sale of a Library Compound or use of the Axys Know-How or Axys Patents as permitted herein, the Parties shall promptly discuss and decide the best way to respond. 6. CONFIDENTIALITY [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 11 12 6.1 CONFIDENTIALITY OBLIGATIONS. Each Party agrees that, for the Term and for ten (10) years thereafter, such Party shall keep, and shall ensure that its officers, directors, employees and agents keep, completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except as expressly permitted hereunder any Confidential Information furnished to it by the other Party pursuant to this Agreement; except that the foregoing obligations shall not apply to any Information to the extent that it can be established by such receiving Party that such Information: (a) was already known to the receiving Party or any of its Affiliates, other than pursuant to an obligation of confidentiality owed to the disclosing Party, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (d) was subsequently lawfully disclosed to the receiving Party or its Affiliates by a Third Party other than in contravention of a confidentiality obligation of such Third Party to the disclosing Party; or (e) was developed or discovered by employees of the receiving Party or its Affiliates who had no access to the Confidential Information of the disclosing Party. Notwithstanding the foregoing, each Party may disclose the other Party's Confidential Information only to the extent such disclosure is reasonably necessary in filing or prosecuting Patent Rights, prosecuting or defending litigation, complying with applicable governmental laws or regulations, making a permitted sublicense of its rights hereunder or conducting clinical trials or otherwise in performing its obligations or exercising its rights hereunder, provided that if a Party is required to make any such disclosure of the other Party's Confidential Information, it will, whenever reasonably possible, give advance notice to the latter Party of such disclosure requirement, will cooperate with the other Party in its efforts to secure confidential treatment of such Information prior to its disclosure (whether through protective orders or confidentiality agreements or otherwise), and will use reasonable efforts to limit the extent of such disclosure and, if requested by the other Party because of an inability of such other Party to seek confidential treatment, to secure confidential treatment of such Information prior to its disclosure (whether through protective orders or confidentiality agreements or otherwise). 6.2 PRESS RELEASES. Except to the extent required by law or as otherwise permitted in accordance with this Section 6.2 or Section 6.3, neither Party shall make any public announcements concerning this Agreement or the subject matter hereof without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, the Parties agree that each Party may desire or be required to issue press releases relating to this Agreement or the activities hereunder, and the Parties agree to [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 12 13 consult with each other reasonably and in good faith with respect to the text of such press releases prior to the issuance thereof, provided that a Party may not unreasonably withhold consent to such releases, and that either Party may issue such press releases as it determines, based on advice of counsel, are reasonably necessary to comply with laws or regulations or for appropriate market disclosure. The principles to be observed by Axys and RPR in public disclosures with respect to this Agreement shall be: accuracy, the requirements of confidentiality under this Article 6, and the normal business practices in the pharmaceutical and biotechnology industries for disclosures by companies comparable to Axys and RPR. Except as set forth in Section 6.3 hereof, in the event of a required or desired public announcement, such Party shall provide the other Party with a reasonable opportunity and the right to approve the content of such announcement prior to its being made, which approval shall not be unreasonably withheld or delayed. Furthermore, each Party shall give the other Party a reasonable opportunity to review all filings with the United States Securities and Exchange Commission describing the terms of this Agreement prior to submission of such filings, and shall give due consideration to any reasonable comments by the non-filing Party relating to such filing, including without limitation the provisions of this Agreement for which confidential treatment should be sought. 6.3 PUBLICATIONS. Notwithstanding the terms of Section 6.2, either Party may publish Information that such Party discovered or developed in its research, development or commercialization activities derived from use of the Library or any Library Compound without the consent of or notice to the other Party, provided, however, that no such publication may contain any Confidential Information of the other Party, or may disclose the structure of a Library Compound or Information that reasonably may be interpreted to disclose the structure of a Library Compound unless: (a) such structure is in the public domain at the time of such publication; or (b) such structure was independently discovered by employees of the publishing Party who had no access to the Library, the Library Compounds or any Confidential Information of the other Party; or (c) the disclosure of such structure is required to support a patent filing pursuant to Section 5.2; or (d) the other Party has consented in writing to such disclosure. 7. INDEMNIFICATION 7.1 INDEMNIFICATION BY RPR. RPR shall indemnify, defend and hold Axys and its Affiliates and their respective agents, employees, officers and directors (collectively the "Axys Indemnitees") harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorneys' fees) arising out of Third Party claims or suits related to (a) RPR's or any of its Affiliate's negligence, willful misconduct or breach of this Agreement; (b) the manufacture or use of Library Compound(s), Derivatives, or Development Compounds or the manufacture, use or sale of compounds or products containing compounds that are based upon or derived from a Library Compound, Derivative or Development Compound, by RPR and [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 13 14 its Affiliates, sublicensees, distributors and agents, or (c) RPR's obligation pursuant to Section 4.3 to pay taxes; provided, however, that the foregoing shall not apply to the extent such claims or suits result from the negligence or willful misconduct of or breach of this Agreement by any of the Axys Indemnitees. Notwithstanding the foregoing, RPR shall have no obligation to indemnify the Axys Indemnitees with respect to claims arising out of breach by Axys of its representations and warranties set forth in Section 9.4 hereof. 7.2 INDEMNIFICATION BY AXYS. Axys shall indemnify, defend and hold RPR and its Affiliates and their respective agents, employees, officers and directors (collectively the "RPR Indemnitees") harmless from and against any and all liability, damage, loss, cost or expense (including reasonable attorney's fees) arising out of Third Party claims or suits related to (a) Axys' or its Affiliates' negligence, willful misconduct or breach of this Agreement, except to the extent that such claims or suits result from (i) the manufacture, use, or sale by RPR and its Affiliates, sublicensees, distributors and agents of compounds, or products containing compounds, that are based upon or derived from a Library Compound, or (ii) the negligence or willful misconduct of or breach of this Agreement by any of the RPR Indemnitees; or (b) the manufacture, use or sale to Third Parties by Axys, its Affiliates, Third Party licensees, distributors or agents of Library Compound(s) or the manufacture, use or sale of compounds, or products containing compounds, that are based or derived from Library Compounds. Notwithstanding the foregoing, Axys shall have no obligation to indemnify the RPR Indemnitees with respect to claims arising out of breach by RPR of its representations and warranties set forth in Section 9.4 hereof. 7.3 NOTIFICATION OF CLAIMS; CONDITIONS TO INDEMNIFICATION OBLIGATIONS. As a condition to a Party's right to receive indemnification under this Article 7, it shall (i) promptly notify the other Party as soon as it becomes aware of a claim or action for which indemnification may be sought pursuant hereto, (ii) cooperate with the indemnifying Party in the defense of such claim or suit, and (iii) permit the indemnifying Party to control the defense of such claim or suit, including without limitation the right to select defense counsel. In no event, however, may the indemnifying Party compromise or settle any claim or suit in a manner which admits fault or negligence on the part of the indemnified Party without the prior written consent of the indemnified Party. The indemnifying Party shall have no liability under this Article 7 with respect to claims or suits settled or compromised without its prior written consent. 8. TERMINATION AND EXPIRATION 8.1 TERM AND TERMINATION. This Agreement shall commence upon the Effective Date and, unless earlier terminated as provided herein, shall expire on the second anniversary of the Effective Date or, if later, upon the completion of delivery of the Library to RPR. The license and other rights granted under Sections 2.5, 2.7, 2.8, 3.1, 3.2, 5.1, 5.2 and 5.3 shall survive such expiration, subject to compliance by RPR and its Affiliates with all limitations on the practice of such license rights set forth in such Sections. 8.2 TERMINATION BY RPR FOR FAILURE TO DELIVER. RPR shall have the right to terminate this Agreement [*] written notice if Axys has materially failed to comply with the [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 14 15 delivery schedule for delivering Library Compounds under Section 2.3, provided that such termination shall not be effective if Axys cures such failure prior to the end of such [*]. The license and other rights under Sections 2.5, 2.7, 2.8, 3.1, 3.2, 5.1, 5.2 and 5.3 shall survive such termination with respect to the Library Compounds and Selected Protocols already delivered and paid for by RPR, subject to compliance by RPR and its Affiliates with all limitations on the practice of such license rights set forth in such Sections. 8.3 TERMINATION UPON MATERIAL BREACH. (a) Failure by a Party to comply with any of its material obligations contained herein shall entitle the Party not in default to give to the Party in default notice specifying the nature of the default, requiring it to make good or otherwise cure such default, and stating its intention to terminate if such default is not cured. If such default is not cured within [*] after the date of such notice (or, if such default cannot be cured within such [*] period, if the Party in default does not commence and diligently continue actions to cure such default), the Party not in default shall be entitled, without prejudice to any of its other rights conferred on it by this Agreement, and in addition to any other remedies available to it by law or in equity, to terminate this Agreement; provided, however, that such right to terminate shall be stayed in the event that, during such [*], the Party alleged to have been in default shall have initiated dispute resolution proceedings in accordance with Section 9.11 with respect to the alleged default, which stay shall last so long as the initiating Party diligently and in good faith pursues the prompt resolution of such proceedings. (b) The right of a Party to terminate this Agreement, as provided above, shall not be affected in any way by its waiver or failure to take action with respect to any prior default. A Party may waive its right to terminate this Agreement with respect to a particular default, provided that any such waiver shall not constitute a waiver of, and such Party shall retain all rights to pursue, any and all other remedies it may have at law or in equity of such default by the other Party. 8.4 CONSEQUENCES OF TERMINATION. (a) Upon termination of this Agreement by RPR pursuant to Section 8.3, then: (i) the license and other rights granted under Sections 2.5, 2.7, 2.8, 3.1, 5.1, 5.2 and 5.3 shall survive termination for Library Compounds and Selected Protocols delivered and paid for by RPR, subject to compliance with all limitations in such Sections and in Section 3.2; (ii) Axys shall promptly return all Confidential Information of RPR in its possession; (iii) all obligations and rights of Axys to provide additional Library Compounds shall terminate; and (iv) RPR shall retain the right to use the Library Compounds and Selected Protocols already delivered and paid for as permitted under this Agreement. (b) Upon termination of this Agreement by Axys pursuant to Section 8.3, then: (i) all licenses and other rights granted by Axys to RPR under this Agreement, or, if applicable, under this Agreement as to the particular Library Compounds so terminated, shall terminate; (ii) RPR shall return all existing samples of the Library Compounds that are subject to the termination and all rights to use such Library Compounds shall terminate and revert to Axys; [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 15 16 (iii) if the entire Agreement is terminated, all obligations of Axys to provide additional Library Compounds shall terminate; and (iv) the license rights granted to Axys by RPR in Section 5.3 shall survive any such termination. (c) In the event this Agreement is terminated pursuant to Section 8.3 prior to October 31, 1999, RPR shall be entitled, in addition to its other rights and remedies, to damages equal to the product of [*], and (y) the number of months remaining between the date of termination and October 31, 1999. 8.5 ACCRUED RIGHTS; SURVIVING OBLIGATIONS. (a) Termination or expiration of this Agreement for any reason shall be without prejudice to any rights which shall have accrued to the benefit of a Party prior to such termination or expiration. Such termination or expiration shall not relieve a Party from obligations which are expressly indicated to survive termination or expiration of this Agreement. (b) Without limiting the second sentence of Section 8.5(a), Sections 2.5, 2.7, 2.8, 2.11(b), 5.1, 5.2, 5.3, 5.4, 9.10, 9.11 and 9.13 and Articles 1, 3, 6, 7 and 8 of this Agreement shall survive the expiration or termination of this Agreement for any reason except to the extent otherwise provided in Section 8.4. 8.6 RIGHTS IN BANKRUPTCY. All rights and licenses granted under or pursuant to this Agreement by RPR or Axys are, and shall otherwise be deemed to be, for purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of right to "intellectual property" as defined under Section 101 of the U.S. Bankruptcy Code. The Parties agree that the Parties, as licensees of such rights under this Agreement, shall retain and may fully exercise all of their rights and elections under the U.S. Bankruptcy Code. The Parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against either Party under the U.S. Bankruptcy Code, the Party hereto which is not a party to such proceeding shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, and same, if not already in their possession, shall be promptly delivered to them (i) upon any such commencement of a bankruptcy proceeding upon their written request therefor, unless the Party subject to such proceeding elects to continue to perform all of its obligations under this Agreement or (ii) if not delivered under (i) above, following the rejection of this Agreement by or on behalf of the Party subject to such proceeding upon written request therefor by the non-subject Party. 9. MISCELLANEOUS PROVISIONS 9.1 RELATIONSHIP OF THE PARTIES. Nothing in this Agreement is intended or shall be deemed to constitute a partnership, agency or employer-employee relationship between the Parties. Neither Party shall incur any debts or make any commitments for the other. 9.2 ASSIGNMENTS. Except as expressly provided herein, neither this Agreement nor any interest hereunder shall be assignable, nor any other obligation delegable, by a Party without the prior written consent of the other Party, which consent shall not be unreasonably withheld or [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 16 17 delayed; provided, however, that a Party may assign this Agreement to any Affiliate or to any successor in interest by way of merger, acquisition or sale of all or substantially all of its assets in a manner such that the assignee shall be liable and responsible for the performance and observance of all such Party's duties and obligations hereunder, but provided that if such assignee is an Affiliate of the assigning Party, such Party shall guarantee the performance by such Affiliate of all its obligations under the Agreement. This Agreement shall be binding upon the successors and permitted assigns of the Parties; provided, however, that in the event that Axys is acquired, the Axys Know-How and the Axys Patents shall not include any information or intellectual property rights owned by the acquiring company as of the date of such acquisition, unless previously licensed to Axys. Any assignment not in accordance with this Section 9.2 shall be null and void. On December 1, 1998, Rhone-Poulenc S.A. and Hoechst AG announced their common intention to merge their respective life sciences businesses into a new company, Aventis S.A. (the "Merger"). In the event the Merger is consummated, RPR shall be entitled to assign this Agreement to Aventis or an Affiliate of Aventis without the prior written consent of Axys; provided such entity agrees in writing to undertake and perform all liabilities, duties and obligations of RPR hereunder. 9.3 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY SET FORTH IN SECTION 9.4, THE PARTIES EXPRESSLY DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT OF THIRD PARTY RIGHTS, UNLESS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT. 9.4 REPRESENTATIONS AND WARRANTIES. (a) Each Party represents and warrants to the other Party that, as of the date of this Agreement: (i) such Party is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof; (ii) such Party has taken all corporate action necessary to authorize the execution and delivery of this Agreement and the performance of its obligations under this Agreement; and (iii) this Agreement is a legal and valid obligation of such Party, binding upon such Party and enforceable against such Party in accordance with the terms of this Agreement, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors' rights, and subject to general equity principles and to limitations on availability of equitable relief, including specific performance. All consents, approvals and authorizations from all governmental authorities or other Third Parties required to be obtained by such Party in connection with this Agreement have been obtained. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 17 18 (iv) such Party has obtained written confidentiality agreements from each of its employees and consultants who have access to the Confidential Information of the other Party hereunder, whether in the form of general confidentiality agreements from the employees obtained at the time of commencement of such employees' employment by such Party or otherwise, which agreements obligate such persons to maintain as confidential all confidential information obtained by such Party in confidence from a Third Party. (b) Axys represents and warrants to RPR that as of the date of this Agreement: (i) [*], in whole or in part; (ii) it has the full right, power and authority to enter into this Agreement and to grant the licenses granted under Articles 3 and 5 hereof; (iii) [*]; (iv) the execution, delivery and performance of this Agreement by Axys does not and will not constitute a material breach under, and is not and will not be precluded by the terms of, any agreement to which Axys is a party or by which Axys or its assets is bound; (v) [*]; and (vi) [*]. (c) RPR represents and warrants to Axys that as of the date of this Agreement: (i) it has the full right, power and authority to enter into this Agreement and to grant the licenses granted under Section 5.3 hereof; (ii) the execution, delivery and performance of this Agreement by RPR does not and will not constitute a material breach under, and is not and will not be precluded by the terms of, any agreement to which RPR is a party or by which RPR or its assets is bound. 9.5 FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments and to do all such other acts as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 9.6 FORCE MAJEURE. Neither Party shall be liable to the other for failure or delay in the performance of any of its obligations under this Agreement for the time and to the extent such failure or delay is caused by earthquake, riot, civil commotion, war, strike, flood, governmental acts or restrictions or any other reason which is beyond the control of the respective Party. The Party affected by force majeure shall provide the other Party with full particulars thereof as soon as it becomes aware of the same (including its best estimate of the [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 18 19 likely extent and duration of the interference with its activities), and will use commercially reasonable efforts to overcome the difficulties created thereby and to resume performance of its obligations as soon as practicable. If the performance of any obligation under this Agreement is delayed owing to a force majeure for any continuous period of more than [*], the Parties hereto shall consult with respect to an equitable solution, including the possibility of the mutual termination of this Agreement. 9.7 NO TRADEMARK RIGHTS. No right, express or implied, is granted by this Agreement to a Party to use in any manner the name or any other trade name or trademark of a Party in connection with the performance of this Agreement. 9.8 ENTIRE AGREEMENT OF THE PARTIES; AMENDMENTS. This Agreement, together with the Exhibits hereto, constitutes and contains the entire understanding and agreement of the Parties respecting the subject matter hereof and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements between the Parties, whether oral or written, regarding such subject matter. No waiver, modification or amendment of any provision of this Agreement shall be valid or effective unless made in writing and signed by a duly authorized officer of each Party. 9.9 CAPTIONS. The captions and headings to this Agreement are for convenience only, and are to be of no force or effect in construing or interpreting any of the provisions of this Agreement. 9.10 APPLICABLE LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the [*], applicable to contracts entered into and to be performed wholly within the [*], excluding conflict of laws principles. 9.11 DISPUTES. In the event of any controversy or claim arising out of, relating to or in connection with any provision of this Agreement, or the rights or obligations of the Parties hereunder, the Parties shall try to settle their differences amicably between themselves by referring the disputed matter to the Chief Executive Officer of Axys and the Senior Vice President, Research of RPR for discussion and resolution. Either Party may initiate such informal dispute resolution by sending written notice of the dispute to the other Party, and within [*] after such notice such representatives of the Parties shall meet for attempted resolution by good faith negotiations. If such personnel are unable to resolve such dispute within [*] of their first meeting of such negotiations, either Party may seek to have such dispute resolved in any federal or state court in the United States having jurisdiction over the dispute and the Parties. 9.12 NOTICES AND DELIVERIES. Any notice, request, delivery, approval or consent required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been sufficiently given if delivered in person, transmitted by telecopier (receipt verified) or by express courier service (signature required) or five (5) days after it was sent by registered letter, return receipt requested (or its equivalent), to the Party to which it is directed at its address or facsimile shown below or such other address or facsimile number as such party shall have last given by notice to the other Parties. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 19 20 If to RPR, addressed to: Rhone-Poulenc Rorer Pharmaceuticals Inc. 500 Arcola Road Collegeville, PA 19426 Telecopier: (610) 454-3807 Attn.: General Counsel If to Axys, addressed to: Axys Pharmaceuticals, Inc. 180 Kimball Way South San Francisco, CA USA 94080 Telecopier: (650) 829-1067 Attn: Chief Executive Officer with a copy to: Axys Pharmaceuticals, Inc. 180 Kimball Way South San Francisco, CA USA 94080 Telecopier: (650) 829-1067 Attn: General Counsel 9.13 NO CONSEQUENTIAL DAMAGES. IN NO EVENT SHALL EITHER PARTY OR ANY OF ITS RESPECTIVE AFFILIATES BE LIABLE TO THE OTHER PARTY OR ANY OF ITS AFFILIATES FOR SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER IN CONTRACT, WARRANTY, TORT, NEGLIGENCE, STRICT LIABILITY OR OTHERWISE, including, but not limited to, loss of profits or revenue, or claims of customers of any of them or other Third Parties for such or other damages, but excluding from the foregoing liabilities arising from breach of the limitations in Sections 2.5, 2.6, 2.7 or 3.3 or Article 6. 9.14 WAIVER. A waiver by either Party of any of the terms and conditions of this Agreement in any instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach hereof. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be in limitation of any other remedy, right, undertaking, obligation or agreement of either party. 9.15 COMPLIANCE WITH LAW. Nothing in this Agreement shall be deemed to permit a Party to export, reexport or otherwise transfer any Library Compound or any Axys Know-How provided under this Agreement without compliance with all applicable laws. 9.16 SEVERABILITY. When possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 20 21 of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. The Parties shall make a good faith effort to replace the invalid or unenforceable provision with a valid one, which in its economic effect is most consistent with the invalid or unenforceable provision. 9.17 COUNTERPARTS. This Agreement may be executed simultaneously in any number of counterparts, any one of which need not contain the signature of more than one Party but all such counterparts taken together shall constitute one and the same agreement. [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 21 22 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their respective duly authorized officers as of the Effective Date, each copy of which shall for all purposes be deemed to be an original. RHONE-POULENC RORER PHARMACEUTICALS INC. By: /s/ Kenneth R. Pina --------------------------------- Title: VP --------------------------------- AXYS PHARMACEUTICALS, INC. By: /s/ Frederick Ruegsegger --------------------------------- Title: Senior VP & CFO --------------------------------- [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 22 23 EXHIBIT A LIBRARY PROTOCOL CRITERIA [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 23 24 EXHIBIT B METHODS OF ANALYSIS [*] [*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. 24 EX-10.96 6 AGREEMENT 1 EXHIBIT 10.96 [AXYS LETTERHEAD] June 11, 1998 Mr. William Newell 1905 Ray Drive Burlingame, CA 94010 Dear Bill: It is my pleasure to provide you with this letter extending our formal offer to have you join Axys Pharmaceuticals as our Vice President and General Counsel. In this capacity, you will report directly to me, have the overall responsibility for all the legal activity of the company and will become a member of the Executive Committee, the most senior management group within the company. Your starting salary will be $225,000 per annum, payable in accordance with Axys' standard practices. Our current pay periods are on the 15th and last day of each month. In addition to your salary, you will be eligible for a 25% bonus, which will be prorated for 1998, and will be based on either 100% of the company's performance against our stated corporate-wide objectives, or on a 50/50 basis, with 50% being dependent on corporate achievements and 50% on your attainment of individual MBOs. As indicated, we will review the best format, for this first year of your employment, after you have been on board for several months. In the long term, the bonus program will be at the same level and same conditions as other members of the Executive Committee. You will also receive an initial option grant for 75,000 shares of Axys stock. As you know, this will be priced the first day of your employment, will vest at 12.5% of total at the end of the first six months, and the remaining portion at the rate of 1/42nd per month. If there are any unvested options, at a point in time where the company would undergo a change in control, then you would immediately vest in any remaining unvested options, provided, as we have discussed, that your continued services were not deemed to be critical to the acquirer and therefore an important component of any deal structure that would be proposed. Additionally, I will recommend you for an additional grant of 25,000 shares during the first quarter of 1999. We will pay a prorated portion of your current life insurance payments. As indicated, we are changing our current life insurance programs in the company, such that you would have approximately three times your annual salary in life insurance coverage. That portion of your current $1.7 million life insurance policy not otherwise covered by this, will be reimbursable by the company. As mentioned, I would anticipate that this would amount to $1400-$1500 per year. We will insure that the normal company benefits are provided to you. I am including for your review a copy of our current brochure outlining those benefits currently in place. As I believe you know, we are looking at some changes to this program as we integrate the Sequana and Arris plans. 1 2 I believe this sums up the various points we had discussed during our previous meetings. I'll look forward to hearing from you formally regarding your acceptance and, as mentioned, we are certainly very enthusiastic about your joining our senior management team during July. Best regards, /s/ JOHN WALKER - ------------------------ John Walker Chairman Chief Executive Officer JW:cs Enc. 2 EX-21 7 SUBSIDIARIES OF REGISTRANT 1 Exhibit 21 SUBSIDIARIES OF REGISTRANT
State or Other Subsidiary Jurisdiction of Incorporation ---------- ----------------------------- Sequana Therapeutics, Inc. California (dba Axys Pharmaceuticals, Inc.) Arris Pharmaceuticals Canada, Inc. Quebec Genos BioSciences, Inc. Delaware Xyris Corporation California PPGx, Inc. Delaware
EX-23.1 8 CONSENT OF ERNST & YOUNG 1 Exhibit 23.1 We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-74720, 33-80852, 333-09095, 333-44667, 333-44669, 333-36639, 33-92900, 333-00500 and 333-36645) pertaining to the 1989 Stock Plan, 1993 Employee Stock Purchase Plan, 1993 Employee Stock Bonus Plan, 1994 Non-Employee Directors' Stock Option Plan and 1997 Equity Incentive Plan of Axys Pharmaceuticals, Inc. of our report dated February 5, 1999 with respect to the consolidated financial statements of Axys Pharmaceuticals, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1998. ERNST & YOUNG LLP Palo Alto, California March 30, 1999 78. EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS, STOCKHOLDERS' EQUITY AND CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES THERETO. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 36,261 55,898 2,140 0 435 67,348 49,689 (28,179) 107,262 29,546 0 0 0 30,234 60,512 107,262 8,512 38,910 2,058 62,176 14,460 0 2,403 (156,124) 0 (156,124) 0 0 0 (156,124) (5.25) (5.25)
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