-----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, MeLjF96djaogaBgFhQyLl6rqnwVxad6NZeyYCNEITQbECUSpw93mbbqGunIwIK8s SWy19+9fNGj38ddt1dGrEQ== 0001032210-99-001139.txt : 19990805 0001032210-99-001139.hdr.sgml : 19990805 ACCESSION NUMBER: 0001032210-99-001139 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990721 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TARGETED GENETICS CORP /WA/ CENTRAL INDEX KEY: 0000921114 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 911549568 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-23930 FILM NUMBER: 99677708 BUSINESS ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 100 CITY: SEATTLE STATE: WA ZIP: 98101 BUSINESS PHONE: 2066237612 MAIL ADDRESS: STREET 1: 1100 OLIVE WAY STREET 2: STE 100 CITY: SEATTLE STATE: WA ZIP: 98101 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of report (Date of earliest event reported): July 21, 1999 TARGETED GENETICS CORPORATION (Exact name of registrant as specified in charter)
Washington 0-23930 91-1549568 (State or other jurisdiction of (Commission File Number) (IRS Employer Identification No.) incorporation)
1100 Olive Way, Suite 100 Seattle, Washington 98101 (Address of principal executive offices) (Zip Code) (206) 623-7612 (Registrant's telephone number, including area code) Item 5. Other Events On July 21, 1999, Targeted Genetics Corporation (the "Company") entered into a joint venture with Elan International Services, Ltd. ("EIS"), an affiliate of Elan Corporation, PLC ("Elan"), to develop and commercialize enhanced gene delivery platforms that can be applied to a number of gene candidates. Pursuant to the joint venture, the Company, EIS and Elan entered into a Securities Purchase Agreement and a Funding Agreement; the Company and EIS entered into a Company Registration Rights Agreement and a Convertible Promissory Note; the Company and the newly created joint venture ("Newco") entered into a License Agreement; Elan and Newco entered into a License Agreement, and the Company, Elan, EIS and Newco entered into a Subscription, Joint Development and Operating Agreement (collectively, the "Transaction Documents"). Pursuant to the Transaction Documents, the Company subscribes for 80.1% of Newco's initial outstanding shares of common stock for $12.015 million, and Elan subscribes for 19.9% of Newco's initial outstanding shares of common stock for $2.985 million. The Company obtains funds to provide its portion of the Newco funding by issuing and selling shares of a newly created series of convertible, exchangeable preferred stock to Elan, for a purchase price of $12.015 million. For a period of 36 months following the signing of the Transaction Documents, and at the request of the Company, Elan is required to purchase up to $12.015 million of a new series of convertible debt to be issued by the Company. In addition, Elan further invests in the Company equity by purchasing the Company's common stock at a premium, for a total of up to $10 million. This investment will be made in two $5 million tranches. The first tranche is payable upon the signing of the Transaction Documents, and the second tranche will be paid one year after the signing of the Transaction Documents if the Company decides at its option to sell to Elan common stock at a premium for an additional $5 million. Except for certain exclusions necessitated by existing agreements of Elan and the Company, Newco will have access to all of Elan's drug delivery technology and all of the Company's gene delivery technology. Elan and the Company envision a program in which various permutations of drug delivery and gene delivery technologies will be explored and at least one potential product will be advanced into clinical trials. The Securities Purchase Agreement is attached hereto as Exhibit 1.1, the Company Registration Rights Agreement is attached hereto as Exhibit 1.2, the Funding Agreement is attached hereto as Exhibit 1.3, the Subscription, Joint Development and Operating Agreement is attached hereto as Exhibit 1.4, the Convertible Promissory Note is attached hereto as Exhibit 1.5, the Company License Agreement is attached hereto as Exhibit 1.6, and the Elan License Agreement is attached hereto as Exhibit 1.7. The Articles of Amendment of the Company, incorporating the Designation of Rights and Preferences for the newly issued preferred stock, are attached hereto as Exhibit 1.8. The First Amendment of Rights Agreement of the Company, designed to prevent the Rights Agreement from being triggered by this transaction, is attached hereto as Exhibit 1.9. -2- Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (c) Exhibits. Exhibit No. Description - ---------- ----------- 1.1 Securities Purchase Agreement, dated as of July 21, 1999, among the Company, EIS and Elan. 1.2 Registration Rights Agreement, dated as of July 21, 1999, by and among the Company and EIS. 1.3 Funding Agreement, dated as of July 21, 1999, among the Company, EIS and Elan. 1.4* Subscription, Joint Development and Operating Agreement, dated as of July 21, 1999, among Elan, EIS, the Company and Newco. 1.5 Convertible Promissory Note, dated July 21, 1999, issued by the Company to EIS 1.6* License Agreement dated July 21, 1999, by and between the Company and Newco. 1.7* License Agreement dated July 21, 1999, by and between Elan and Newco. 1.8 Articles of Amendment of the Company, filed with the State of Washington on July 21, 1999. 1.9 First Amendment of Rights Agreement of the Company, dated July 21, 1999. ________________________ * Confidential Treatment Requested; the omitted material has been separately filed with the Securities Exchange Commission. -3- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. TARGETED GENETICS CORPORATION By: /s/ James A. Johnson ----------------------------------- James A. Johnson Chief Financial Officer (Authorized Officer and Principal Financial Officer) Dated: August 4, 1999 -4- Exhibit Index Exhibit No. Description - ---------- ----------- 1.1 Securities Purchase Agreement, dated as of July 21, 1999, among the Company, EIS and Elan. 1.2 Registration Rights Agreement, dated as of July 21, 1999, by and among the Company and EIS. 1.3 Funding Agreement, dated as of July 21, 1999, among the Company, EIS and Elan. 1.4* Subscription, Joint Development and Operating Agreement, dated as of July 21, 1999, among Elan, EIS, the Company and Newco. 1.5 Convertible Promissory Note, dated July 21, 1999, issued by the Company to EIS 1.6* License Agreement dated July 21, 1999, by and between the Company and Newco. 1.7* License Agreement dated July 21, 1999, by and between Elan and Newco. 1.8 Articles of Amendment of the Company, filed with the State of Washington on July 21, 1999. 1.9 First Amendment of Rights Agreement of the Company, dated July 21, 1999. ________________________ * Confidential Treatment Requested; the omitted material has been separately filed with the Securities Exchange Commission. EX-1.1 2 SECURITIES PURCHASE AGREEMENT EXHIBIT 1.1 Execution Copy SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of July 21, --------- 1999, among Targeted Genetics Corporation, a Washington corporation (the "Company"), and Elan International Services, Ltd., a Bermuda private limited - -------- company, and a wholly owned subsidiary of Elan ("EIS"). --- R E C I T A L S: A. The Company desires to issue and sell to EIS, and EIS desires to purchase from the Company, (i) 12,015 shares of a newly-created series of the Company's Preferred Stock, par value $.01 per share, captioned "Series B Convertible Exchangeable Preferred Stock" (the "Series B Preferred Stock"), (ii) ------------------------ 2,148,899 shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"); together with the Series B Preferred Stock, the "Shares"). In ------------ ------ addition, EIS has agreed to lend certain funds to the Company pursuant to a convertible promissory note in the form attached hereto as Exhibit A (as amended at any time, the "Note"; together with the Shares, the "Securities"), with a ---- ---------- maximum aggregate principal amount of U.S.$12,015,000, amounts in respect of which shall be disbursed in accordance with its terms and subject to the conditions contained herein and therein. The rights, preferences and privileges of the Series B Preferred Stock are as set forth in the Certificate of Designations, Preferences and Rights (the "Certificate of Designations"), the --------------------------- form of which is attached hereto as Exhibit B. B. The Company and EIS have previously caused to be formed Targeted Genetics Newco, Ltd., a Bermuda private limited company ("Newco"), and pursuant ----- to the terms of a Subscription, Joint Development and Operating Agreement, dated as of the date hereof (as amended at any time, the "JDOA"), simultaneously with ---- the transactions contemplated by this Agreement, (i) the Company shall acquire 3,612 preferred shares of Newco, par value U.S.$1.00 per share (the "Newco ----- Preferred Stock") and 6,000 common shares of Newco, par value U.S.$1.00 per - --------------- share (the "Newco Common Stock"), and (ii) EIS shall acquire 897 shares of Newco ------------------ Preferred Stock and 1,491 shares of Newco Common Stock. Additionally, as of the date hereof, Newco has entered into license agreements with (i) Elan Corporation, plc, an Irish public limited company and parent corporation of EIS ("Elan;" such agreement, as amended at any time, the "Elan License Agreement"), ---- ---------------------- and (ii) the Company (such agreement, as amended at any time, the "Company ------- License Agreement" and, together with the Elan License Agreement, the "License - ----------------- ------- Agreements"). - ---------- C. The Company and EIS are executing and delivering on the date hereof a Registration Rights Agreement, in the form attached hereto as Exhibit C --------- (as amended at any time, the "Company Registration Rights Agreement"), in ------------------------------------- respect of the Common Stock issued or issuable upon conversion of the Series B Preferred Stock and the Note, the Common Stock being purchased hereunder, and any other Common Stock issued to EIS or any of its affiliates or permitted transferees upon any stock split, stock dividend, recapitalization or similar event affecting the Securities. The Company, EIS and Newco are also executing and delivering on the date hereof a Registration Rights Agreement in the form attached hereto as Exhibit D (as --------- amended at any time, the "Newco Registration Rights Agreement"). Additionally, ----------------------------------- the Company and EIS are executing and delivering on the date hereof a Funding Agreement in the form attached hereto as Exhibit E (the "Funding Agreement;" --------- ----------------- and, together with this Agreement, the Certificate of Designations, the JDOA, the Company Registration Rights Agreement, the Newco Registration Rights Agreement, the License Agreements and each other document or instrument executed and delivered in connection with the transactions contemplated hereby and by the JDOA, the "Transaction Documents"). --------------------- A G R E E M E N T: The parties hereto agree as follows: SECTION 1. Closing. ------- (a) Time and Place. The closing of the transactions contemplated -------------- hereby (the "Closing") shall occur on the date hereof (the "Closing Date"), at ------- ------------ the offices of Brock Silverstein LLC, 800 Third Avenue, 21st Floor, New York, NY 10022. (b) Issuance of Securities. At the Closing, the Company shall issue ---------------------- and sell to EIS, and EIS shall purchase from the Company: (i) 12,015 shares of Series B Preferred Stock, and (ii) 2,148,889 shares of Common Stock. (c) Purchase Price. The purchase price (the "Purchase Price") shall -------------- -------------- be the sum of (i) U.S.$12,015,000, the purchase price for the Series B Preferred Stock, and (ii) U.S.$5,000,000, the purchase price for the Common Stock. (d) Convertible Note Facility. EIS shall lend up to $12,015,000 to ------------------------- the Company pursuant to the terms and conditions of the Note. (e) Delivery. At the Closing: -------- (i) EIS shall pay the Purchase Price by wire transfer to an account designated by the Company and the parties hereto shall execute and deliver to each other, as applicable: (A) a certificate or certificates for the Series B Preferred Stock and the Common Stock; (B) the Note; (C) the Company Registration Rights Agreement; (D) the Newco Registration Rights Agreement; (E) the JDOA; (F) the Certificate of Designations, as filed with the Secretary of State of the State of Washington; (G) the License Agreements; (H) the Funding Agreement; (I) certificates as to the incumbency of the officers of the Company executing any of the Transaction Documents; and (J) any other documents or instruments reasonably requested by a party hereto; and (ii) The Company shall cause to be delivered to EIS an opinion of counsel in the form attached hereto as Exhibit F-1 and EIS shall ----------- cause to be delivered to the Company an opinion of counsel in the form attached hereto as Exhibit F-2. ----------- 2 (f) Subsequent Stock Purchase. At the Company's option, upon the ------------------------- first anniversary of the Closing Date, at the request of the Company, EIS shall, subject to receipt of any required approvals under the Mergers and Takeovers (Control) Acts 1978-1996, be required to subscribe for additional shares of Common Stock in the maximum aggregate amount of $5,000,000 (the "Subsequent ---------- Stock Purchase"), at a price per share equal to 120% of the average closing - -------------- price of the Common Stock for the 60 trading days prior to such date, as listed on the Nasdaq National Market. The closing of the Subsequent Stock Purchase shall occur, at the Company's request, within 10 business days of the first anniversary of the Closing Date. (g) Exemption from Registration. The Securities and any underlying --------------------------- shares of Common Stock will be issued under an exemption or exemptions from registration under the Securities Act of 1933, as amended (the "Securities ---------- Act"). Accordingly, the certificates evidencing the Series B Preferred Stock and - --- the Common Stock, the Note and any shares of Common Stock or other securities issuable upon the exercise, conversion or exchange of any of the Securities shall, upon issuance, contain a legend, substantially in the form as follows: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND NO INTEREST MAY BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS OR THIS CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES SATISFACTORY TO THIS CORPORATION THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT TO THE RESTRICTIONS CONTAINED IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT, DATED JULY 20, 1999, BY AND BETWEEN TARGETED GENETICS CORPORATION AND ELAN INTERNATIONAL SERVICES, LTD. SECTION 2. Representations and Warranties of the Company. The --------------------------------------------- Company hereby represents and warrants to EIS, as of the date hereof, as follows: (a) Organization. The Company is duly organized, and validly ------------ existing under the laws of the state of Washington and has all requisite corporate power and authority to own and lease its properties, to carry on its business as presently conducted and as proposed to be conducted and to consummate the transactions contemplated hereby. The Company is duly 3 qualified as a foreign corporation and in good standing to do business in each jurisdiction in which the nature of the business conducted or the property owned by it requires such qualification, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the business, assets, liabilities (contingent or otherwise), operations, condition (financial or otherwise), or prospects of the Company (a "Company ------- Material Adverse Effect"). - ------------------------- (b) Capitalization. As of the Closing Date, the Company has reserved -------------- a sufficient number of shares of Common Stock (i) for issuance upon conversion of the Series B Preferred Stock being purchased hereunder by EIS (including dividends in-kind thereon), (ii) for issuance pursuant to the Subsequent Stock Purchase, and (iii) for issuance upon conversion of the Note (including interest payable thereon). The Shares, when issued against payment therefor in accordance with this Agreement, will be duly and validly issued, fully paid and nonassessable, will not be issued in violation of any preemptive or similar rights. The shares of Common Stock underlying the Series B Preferred Stock and the Note (the "Underlying Shares"), when issued upon conversion or exercise in ----------------- accordance with the terms thereof, will be duly and validly issued, fully paid and nonassessable, and will not be issued in violation of any preemptive or similar rights. (c) Authorization of Transaction Documents. The Company has full -------------------------------------- corporate power and authority to execute and deliver this Agreement and each of the other Transaction Documents to which it is a party, and to perform its obligations hereunder and thereunder. The execution, delivery and performance by the Company of this Agreement and each of the other Transaction Documents to which it is a party, including the issuance and sale of the Securities, have been duly authorized by all requisite corporate action by the Company and, when executed and delivered by the Company, this Agreement and each of the other Transaction Documents to which it is a party will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except (A) that enforcement may be limited by (i) applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors' rights, and (ii) general equity principles and limitations on the availability of equitable relief, including specific performance, and (B) that any rights to indemnity or contribution hereunder or thereunder may be limited by state and federal securities laws and by public policy considerations. (d) No Violation. The execution, delivery and performance by the ------------ Company of this Agreement and each other Transaction Document to which it is a party, including the issuance and sale of the Securities, and compliance with the provisions hereof and thereof by the Company, does not conflict with or constitute or result in a breach of or default under (or an event which with notice or passage of time or both would constitute a default) or give rise to any right of termination, cancellation or acceleration under (i) the Articles of Incorporation, as amended, or by-laws, of the Company, (ii) applicable law, statute, rule or regulation, or any ruling, writ, injunction, order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to the Company or any of its properties or assets, or (iii) any contract filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K"), except where such breach, --------------- default, termination, cancellation or acceleration would not, individually or in the aggregate, have a Company Material Adverse Effect. 4 (e) Approvals. No material permit, authorization, consent, approval, --------- or order of or by, or any notification of or filing with, any person or entity (governmental or otherwise) is required in connection with the execution, delivery or performance of this Agreement or the Transaction Documents, including the issuance and sale of the Securities, by the Company, other than the filing of a Form D by the Company pursuant to Regulation D under the Securities Act ("Regulation D"). (f) SEC Filings. The Company has filed with the Securities and ----------- Exchange Commission (the "SEC") all forms, reports, schedules, statements, --- exhibits and other documents (collectively, the "SEC Filings") required to be ----------- filed by the Company on or before the date hereof. At the time filed, the SEC Filings, including without limitation, any financial statements, exhibits and schedules included therein or documents incorporated therein by reference (i) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading and (ii) complied in all material respects with the applicable requirements of the Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as the case may be. ------------ (g) Financial Statements. The audited balance sheets of the Company -------------------- at December 31, 1997 and 1998, together with the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years ended December 31, 1998, together with the reports and opinions thereon of Ernst & Young LLP, contained in the 1998 Form 10-K, comply as to form in all material respects with applicable accounting requirements and the published rules and regulation of the SEC with respect thereto, and fairly present, in all material respects, the financial position of the Company and the results of its operations and its cash flows at such dates and for the years then ended and were prepared in conformity in all material respects with generally accepted accounting principles applied on a consistent basis. (h) Litigation. Except as disclosed in the SEC Filings there is no ---------- legal, administrative, arbitration or other action or proceeding or governmental investigation pending, or to the Company's knowledge, threatened against the Company, or any director, officer or employee of the Company that challenges the validity or performance of this Agreement or the other Transaction Documents to which the Company is a party. (i) Absence of Certain Events. Since December 31, 1998, except as ------------------------- contemplated by the Transaction Documents, (A) the Company has not (i) made, paid or declared any dividend or distribution to any equity holder (in such capacity) or redeemed any of its capital stock, (ii) varied its business plan or practices, in any material respect, from past practices, (iii) entered into any financing, joint venture, license or similar arrangement that would limit or restrict its ability to perform its obligations hereunder and under each of the other Transaction Documents to which it is a party, or (iv) suffered or permitted to be incurred any liability or obligation or any lien or encumbrance against any of its properties or assets that would limit or restrict its ability to perform its obligations hereunder and under each of the other Transaction Documents to which it is a party, and (B) there has not been any change or 5 development which has had, or in the Company's reasonable judgment is likely to have, a Company Material Adverse Effect. SECTION 3. Representation and Warranties of EIS. EIS hereby ------------------------------------ represents and warrants to the Company, as of the date hereof, as follows: (a) Organization. EIS is duly organized, validly existing and in ------------ good standing under the laws of Bermuda and has all requisite corporate power and authority to own and lease its properties, to carry on its business as presently conducted and as proposed to be conducted and to consummate the transactions contemplated hereby. EIS is duly qualified as a foreign corporation and in good standing to do business in each jurisdiction in which the nature of the business conducted or the property owned by it requires such qualification, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the business, assets, liabilities (contingent or otherwise), operations, condition (financial or otherwise), or prospects of EIS (an "EIS Material Adverse Effect"). --------------------------- (b) Authorization of Transaction Documents. EIS has full corporate -------------------------------------- power and authority to execute and deliver this Agreement and each of the other Transaction Documents to which it is a party, and to perform its obligations hereunder and thereunder. The execution, delivery, and performance by EIS of this Agreement and each other Transaction Document to which it is a party, including the purchase and acceptance of the Securities, have been duly authorized by all requisite corporate action by EIS and, when executed and delivered by EIS, this Agreement and each of the other Transaction Documents to which it is a party, will be the valid and binding obligations of EIS, enforceable against it in accordance with their respective terms, except (A) that enforcement may be limited by (i) applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting creditors' rights, and (ii) general equity principles and limitations on the availability of equitable relief, including specific performance, and (B) that any rights to indemnity or contribution hereunder or thereunder may be limited by state and federal securities laws and by public policy considerations. (c) No Violation. The execution, delivery and performance by EIS of ------------ this Agreement and each other Transaction Document to which it is a party, including the purchase and acceptance of the Securities, and compliance with provisions hereof and thereof by EIS, will not conflict with or constitute or result in a breach of or default under (or an event which with notice or passage of time or both would constitute a default) or give rise to any right of termination, cancellation or acceleration under (i) the by-laws of EIS, (ii) applicable law, statute, rule or regulation, or any ruling, writ, injunction, order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to EIS or any of its properties or assets, or (iii) any material contract to which EIS is a party, except where such breach, default, termination, cancellation or acceleration would not, individually or in the aggregate, have an EIS Material Adverse Effect. (d) Approvals. Except for consent required under the Mergers and --------- Takeovers (Control) Acts 1978-1996 no material permit, authorization, consent, approval or order of or by, or any notification of or filing with, any person or entity (governmental or otherwise) is required 6 in connection with the execution, delivery or performance of this Agreement or the Transaction Documents by EIS. (e) Investment Representations. -------------------------- (i) EIS is sophisticated in transactions of this type and capable of evaluating the merits and risks of the transactions described herein and in the other Transaction Documents to which it is a party, and has the capacity to protect its own interests. EIS has not been formed solely for the purpose of entering into the transactions described herein and therein and is acquiring the Securities (and the Underlying Shares) for investment for its own account, not as a nominee or agent, and not with the view to, or for resale, distribution or fractionalization thereof, in whole or in part, and no other person (other than Elan) has a direct or indirect interest, beneficial or otherwise in the Securities (or the Underlying Shares); provided, however, that EIS shall be permitted to convert or exchange such Securities in accordance with their terms. (ii) EIS has not and does not intend to enter into any contract, undertaking, agreement or arrangement with any person or entity to sell, transfer or pledge the Securities (or the Underlying Shares). (iii) EIS acknowledges its understanding that the private placement and sale of the Securities (and the Underlying Shares) is exempt from registration under the Securities Act by virtue of the provisions of Regulation D. In furtherance thereof, EIS represents and warrants that it is an "accredited investor" as that term is defined in Regulation D, has the financial ability to bear the economic risk of its investment, has adequate means for providing for its current needs and personal contingencies and has no need for liquidity with respect to its investment in the Company. (iv) EIS agrees that it shall not sell or otherwise transfer any of the Securities (or the Underlying Shares) without registration under the Securities Act or pursuant to an opinion of counsel reasonably satisfactory to the Company that an exemption from registration is available, and fully understands and agrees that it must bear the total economic risk of its purchase for an indefinite period of time because, among other reasons, none of the Securities (or the Underlying Shares) have been registered under the Securities Act or under the securities laws of any applicable state or other jurisdiction and, therefore, cannot be resold, pledged, assigned or otherwise disposed of unless subsequently registered under the Securities Act and under the applicable securities laws of such states or jurisdictions or an exemption from such registration is available. EIS understands that the Company is under no obligation to register the Securities (or the Underlying Shares) on its behalf with the exception of certain registration rights with respect to certain of the Securities (and the Underlying Shares), as provided in the Company Registration Rights Agreement. EIS understands the lack of liquidity and restrictions on transfer of the Securities (and the Underlying Shares) and that this investment is suitable only for a person or entity of adequate financial means that has no need for liquidity of this investment and that can afford a total loss of its investment. 7 (f) Litigation. There is no legal, administrative, arbitration or ---------- other action or proceeding or governmental investigation pending, or to EIS's knowledge threatened, against EIS that challenges the validity or performance of this Agreement or the other Transaction Documents to which EIS is a party. SECTION 4. Covenants of the Parties. ------------------------ (a) Operating Covenants. From and after the Closing Date and until ------------------- the earlier to occur of the exercise or expiration of the EIS Exchange Right (as such term is defined in Section 6 hereof), the Company shall not without the prior written consent of EIS: (i) sell, transfer, encumber, pledge or otherwise affect, in any respect, (A) any shares of Newco Preferred Stock or Newco Common Stock owned by the Company, including, without limitation, those shares of Newco Preferred Stock transferable to EIS upon exercise by EIS of the EIS Exchange Right, or (B) affect, in any respect, the Company's ability to permit EIS to exercise the EIS Exchange Right in full, as provided herein, or (ii) enter into any material transaction with a director, officer or more than 20% beneficial owner of Common Stock on other than an arm's length basis. (b) Fully-diluted Stock Ownership. Notwithstanding any other ----------------------------- provision of this Agreement, in the event that EIS shall have determined that at any time it (together with its affiliates, if applicable) holds or has the right to receive Common Stock (or securities or rights, options or warrants exerciseable, exchangeable or convertible for or into Common Stock) representing in the aggregate in excess of 19.9% of the Company's outstanding Common Stock on a fully diluted basis (assuming the exercise, exchange or conversion of such securities beneficially owned by EIS or its affiliates, but not the exercise, exchange or conversion of any other similar securities), EIS shall have the right, in its sole discretion, rather than acquiring such securities from the Company, to exchange such number of securities, as are necessary to bring its holdings to below 19.9% of the voting securities of the Company, for non-voting, convertible liquidation preferred stock of the Company (which shall be reasonably satisfactory to each of the Company and EIS), which equity securities shall be entitled to all of the other rights and benefits of the Common Stock. In the event that EIS shall undertake to exercise such right, EIS shall retain the additional right to exchange such new class of equity security for Common Stock, in its discretion at any time. Each of the Company and EIS shall use commercially reasonable effort to effect such transactions and any required subsequent conversions or adjustments to such securities, on a quarterly basis, within 15 business days of the end of each of EIS' fiscal quarter. (c) NASD Requirements. In the event that the conversion of all or any ----------------- portion of either or both of the Series B Preferred Stock or the Note would trigger NASD requirements that the Company acquire shareholder approval prior to such conversion, the Company will use its reasonable best efforts to obtain such approval at or as soon as practicable following such conversion or notice of EIS's intention to so convert, as the case may be (which conversion shall be subject to such approval). (d) Use of Proceeds. The Company shall use the proceeds of (i) the --------------- issuance and sale of the Series B Preferred Stock solely to meet its initial capitalization obligations to Newco as described in the JDOA, and (ii) the issuance and funding of the Note solely to meet its developmental funding obligations to Newco, as described in the Funding Agreement. 8 (e) Confidentiality; Non-Disclosure. ------------------------------- (i) Subject to clauses (ii) and (iii) below, from and after the date hereof, neither the Company nor EIS (nor their respective affiliates) shall disclose to any person or entity this Agreement or the other Transaction Documents or the contents thereof or the parties thereto, except that such parties may make such disclosure (x) to their directors, officers, employees and advisors, so long as they shall have advised such persons of the obligation of confidentiality herein and for whose breach or default the disclosing party shall be responsible, or (y) as required by applicable law, rule, regulation or judicial or administrative process, provided that the disclosing party uses reasonable efforts to obtain an order or ruling protecting the confidentiality of confidential information of the other party contained herein or therein. The parties shall be entitled to seek injunctive or other equitable relief in respect of any breach or threatened breach of the foregoing covenant without the requirement of posting a bond or other collateral. (ii) Prior to issuing any press release or public disclosure in respect of this Agreement or the transactions contemplated hereby, the party proposing such issuance, except as may be required by law, in the written opinion of such party's outside legal counsel, shall obtain the consent of the other party to the contents thereof, which consent shall not be unreasonably withheld or delayed; it being understood that if such second party shall not have responded to such consent request within five business days, such consent shall be deemed given. (iii) This Section 4(d) shall not be construed to prohibit disclosure by the receiving party of any information which has not been previously determined to be confidential by the disclosing party, or which shall have become publicly disclosed (other than by breach of the receiving party's obligations hereunder). (f) Market Manipulation. For the 60 trading days prior to the first ------------------- anniversary of the Closing Date, neither EIS, nor any other affiliate of Elan shall sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire Common Stock. (g) Further Assurances. From and after the date hereof, each of the ------------------ parties hereto agree to do or cause to be done such further acts and things and deliver or cause to be delivered to each other such additional assignments, agreements, powers and instruments, as each may reasonably require or deem advisable to carry into effect the purposes of this Agreement and the other Transaction Documents. SECTION 5. Standstill. ---------- (a) Provided that nothing contained herein will prevent or prohibit EIS from purchasing Voting Stock (as defined below) of the Company pursuant to subsection 5(b) or from acquiring Voting Stock pursuant to the Subsequent Stock Purchase or conversion of the Series B 9 Preferred Stock or the Note in accordance with their respective terms, EIS will not, directly or indirectly, without the prior consent of a majority of the Board of Directors of the Company (the "Board"), (i) acquire (or offer or agree to acquire) any Voting Stock if, as a result, EIS would beneficially own more than 20% of the then outstanding Voting Stock; (ii) directly or indirectly solicit proxies or consents or become a participant in a solicitation (as such terms are defined in Regulation 14A under the Exchange Act) in opposition to the recommendation of the majority of the Board for a Takeover Event (as defined below); or (iii) transfer to any third party, other than its "affiliates," "associates" (as such terms are defined in Rule 12b-2 under the Exchange Act), officers, directors or employees, the right to vote any Voting Stock except in connection with the transfer of ownership of such Voting Stock for fair value. EIS also agrees that it will not advise, assist or encourage any third party to do any of the foregoing. Notwithstanding the foregoing, EIS will not be obligated to dispose of any Voting Stock it owns if its percentage ownership is increased as a result of a decrease in the number of shares of Voting Stock outstanding. (b) The provisions of this Section 5 will terminate: (i) if EIS owns less than 10% of Voting Stock; (ii) if any person or group, excluding EIS, any affiliate of Elan, or any group that includes Elan or any such affiliate, makes a bona fide offer to acquire Voting Stock which would, if successful, result in the bidder's beneficial ownership of at least 10% of the then outstanding Voting Stock; or (iii) upon the second anniversary of the date of this Agreement. (c) The Company will give EIS prompt notice of the receipt by the Company of any written notice couched in such terms as to put the Company reasonably on notice of the likelihood that a person or group has acquired or is proposing to acquire an aggregate position of at least 15% of the Voting Stock, the Company receiving any bona fide offer to purchase or acquire 15% or more of the Voting Stock or all or substantially all of the assets of the Company, and any Board determination to seek an acquiror for in excess of 15% of the Voting Stock. (d) EIS will cause its affiliates and associates to comply with the provisions of this Section 5, whether directly or indirectly, individually or as part of a "group" (as such term is defined in Rule 13d-5 under the Exchange Act). When used in this Section 5, the term EIS includes EIS together with its affiliates and associates. For purposes of this Section 5, the term "Takeover Event" means any -------------- proposal for any merger or business combination involving the Company or any of its subsidiaries, the purchase or sale of any assets of the Company or any of its subsidiaries, or the purchase of any of the Voting Stock, by tender offer or otherwise (except pursuant to the exercise of rights, warrants, options or similar securities distributed by the Company to holders of Voting Stock generally), and the term "Voting Stock" means the Common Stock and any preferred ------------ stock of the Company possessing voting rights and eligible to participate in votes of all of the Company's shareholders pursuant to the Company's Articles of Incorporation and Washington law, and includes any options, convertible securities or other rights to acquire such stock. SECTION 6. Certain Rights of EIS. (a) Preemptive Right. Until the --------------------- ---------------- fourth anniversary of the date hereof, EIS shall have the preemptive right to participate in any equity financing consummated by the Company, in order for EIS to maintain its pro rata interest in the Company, based on the actual number of shares of Common Stock outstanding on the date of 10 such financing is consummated (without, however, giving effect to the shares of Common Stock underlying the Series B Preferred Stock or the Note). Such participation by EIS shall be on the same terms and conditions offered to any other potential investor in such offering. (b) Company Board of Directors. For so long as (i) EIS and/or its -------------------------- affiliates or subsidiaries collectively own securities that represent ownership of at least 10% of the Common Stock (or securities convertible, exchangeable or exercisable for or into the Common Stock, but excluding the Series B Preferred Stock) on a fully diluted basis, EIS shall be entitled to nominate one director ("EIS Director") for election to the Company's board of directors who shall be a ------------ member of the senior management of Elan, or otherwise shall be acceptable to the Company; provided, however, that the Company reserves the right to exclude such EIS Director from any material or meeting or portion thereof if the other Board members believe in good faith that such exclusion is reasonably necessary to protect confidential proprietary information, for competitive or similar reasons. (c) Conversion and Exchange Rights. The Certificate of Designations ------------------------------ sets forth certain rights of the holders of shares of Series B Preferred Stock to convert such shares of preferred stock into newly issued shares of Common Stock, or to exchange such shares of Series B Preferred Stock for certain shares of Newco Preferred Stock owned by the Company (the "EIS Exchange Right"), both ------------------ on the terms and conditions set forth therein. SECTION 7. Survival and Indemnification. (a) Survival. The ----------------------------- -------- representations and warranties of the Company and EIS contained herein shall survive for a period of 12 months from and after the date hereof. (b) Indemnification. In addition to all rights and remedies --------------- available to the parties hereto at law or in equity, the parties (each, in such capacity, "Indemnifying Party"; together, "Indemnifying Parties") shall ------------------ -------------------- indemnify each other as corporate entities (EIS and the Company), its stockholders, officers, directors and assigns, their affiliates, and its affiliates' stockholders, officers, directors, employees, agents, representatives, successors and assigns (collectively, the "Indemnified ----------- Person"), and save and hold each Indemnified Person harmless from and against and pay on behalf of or reimburse each such Indemnified Person, as and when incurred, for any and all loss, liability, demand, claim, action, cause of action, cost, damage, deficiency, tax, penalty, fine or expense, whether or not arising out of any claims by or on behalf of such Indemnified Person or any third party, including interest, penalties, reasonable attorneys' fees and expenses and all amounts paid in investigation, defense or settlement of any of the foregoing (collectively, "Losses"), that any such Indemnified Person may ------ suffer, sustain incur or become subject to, as a result of, in connection with, relating or incidental to or by virtue of: (i) any misrepresentation or breach of warranty on the part of the Indemnifying Party in the case of the Company under Section 2 of this Agreement or in the case of EIS under Section 3 of this Agreement or any of the other Transaction Documents (it being understood that the Company shall not be responsible for any such misrepresentation or breach of warranty by Newco); or (ii) any nonfulfillment, default or breach of any covenant or agreement on 11 the part of the Indemnifying Party under Section 4 of this Agreement or any of the other Transaction Documents. (c) Maximum Recovery. Notwithstanding anything in this Agreement ---------------- to the contrary, in no event shall the Indemnifying Parties be liable in the case of the Company for indemnification under this Section 7 in an amount in excess of the aggregate of the purchase price paid for the Shares and the amounts advanced and not repaid under the Note or in the case of EIS for indemnification hereunder in an amount in excess of such same aggregate. No Indemnified Person shall assert any such claim unless Losses in respect thereof incurred by any Indemnified Person, when aggregated with all previous Losses hereunder, equal or exceed U.S.$50,000, but at such time that an Indemnified Person is entitled to assert a claim, such claim shall include all Losses covered by this Section 7. (d) Exception. Notwithstanding the foregoing, upon judicial --------- determination that is final and no longer appealable, that the act or omission giving rise to the indemnification set forth above resulted primarily out of or was based primarily upon the Indemnified Person's negligence (unless such Indemnified Person's negligence was based upon the Indemnified Person's reliance in good faith upon any of the representations, warranties, covenants or promises made by the Indemnifying Party herein) the Indemnifying Party shall not be responsible for any Losses sought to be indemnified in connection therewith, and the Indemnifying Party shall be entitled to recover from the Indemnified Person all amounts previously paid in full or partial satisfaction of such indemnity, together with all costs and expenses (including reasonable attorneys fees) of the Indemnifying Party reasonably incurred in connection with the Indemnified Persons claim for indemnity, together with interest at the rate per annum publicly announced by Morgan Guaranty Trust Company as its prime rate from the time of payment of such amounts to the Indemnified Person until repayment to the Indemnifying Party. (e) Investigation. All indemnification rights hereunder shall ------------- survive the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby to the extent provided in Section 7(g) below, irrespective of any investigation, inquiry or examination made for or on behalf of, or any knowledge of the Indemnified Person or the acceptance of any certificate or opinion. (f) Contribution. If the indemnity provided for in this Section 7 ------------ shall be, in whole or in part, unavailable to any Indemnified Person, due to Section 7(b) being declared unenforceable by a court of competent jurisdiction based upon reasons of public policy, so that Section 7(b) shall be insufficient to hold each such Indemnified Person harmless from Losses which would otherwise be indemnified hereunder, then the Indemnifying Party and the Indemnified Person shall each contribute to the amount paid or payable for such Loss in such proportion as is appropriate to reflect not only the relative benefits received by the Indemnifying Party on the one hand and the Indemnified Person on the other, but also the relative fault of the Indemnifying Party and be in addition to any liability that the Indemnifying Party may otherwise have. The indemnity, contribution and expense reimbursement obligations that the Indemnifying Party has under this Section 7 shall survive the expiration of the Transaction Documents. The parties hereto further agree that the indemnification and reimbursement commitments set forth in this Agreement shall apply whether or not the Indemnified Person is a formal party to any such 12 lawsuit, claims or other proceedings. (g) Limitation. No claim shall be brought by an Indemnified Person ---------- in respect of any misrepresentation or breach of warranty under this Agreement after one year from the date hereof; and any claim for nonfulfillment, default or breach of any covenant shall be brought within one year of the date of that such Indemnified Person became aware or should have become aware of the nonfulfillment, default or breach. Except as set forth in the previous sentence and in Section 7(c) above, this Section 7 is not intended to limit the rights or remedies otherwise available to any party hereto with respect to this Agreement or the Transaction Documents. SECTION 8. Withholding Taxes. The Company shall be entitled to ----------------- withhold from any payments made by the Company with respect to the Shares or the Notes any taxes required to be withheld under U.S. tax laws and shall have no obligation to make any additional payments to EIS to cover such taxes. If any such withholding tax becomes due with respect to interest accrued but not paid under the Note, the EIS shall on demand by the Company pay to the Company an amount on an after-tax basis necessary to cover any such withholding tax. EIS acknowledges that any cash dividend payments with respect to the Shares will be subject to 30% U.S. federal income withholding tax under current law; provided, -------- however, that the Shares will not be subject to 30% U.S. federal income - ------- withholding tax if the Company has no earnings or profits or to the extent the Securities are transferred to a resident of a country that has an income tax treaty with the United States that exempts dividends from withholding tax and such person supplies an accurate and timely Internal Revenue Service form establishing its entitlement to an exemption. The Company agrees that it will not withhold tax or require payment by EIS of any withholding tax if it receives from EIS an accurate and timely Internal Revenue Service form W-8 or any successor or additional form indicating its entitlement to an exemption from withholding. EIS hereby represents, warrants, and covenants that if at any time the form so supplied becomes inaccurate and no longer permits an exemption from withholding tax to apply, it shall promptly notify the Company of that inaccuracy. At the point, the Company may begin to withhold payments due under the Note and EIS shall pay to the Company any amount necessary on an after-tax basis to cover any liability the Company has incurred for taxes due with respect to payments accrued or paid under the Note after such form no longer permitted the exemption to apply and before the inaccurate information was corrected by EIS. SECTION 9. Notices. All notices, demands and requests of any kind to ------- be delivered to any party in connection with this Agreement shall be in writing and shall be deemed to have been duly given if personally or hand delivered or if sent by an internationally-recognized overnight delivery or by registered or certified mail, return receipt requested and postage prepaid, or by facsimile transmission addressed as follows: (i) if to the Company, to: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, Washington 98101 Attention: Chief Executive Officer 13 Facsimile: 206-623-7064 with a copy to: Perkins Coie 1201 Third Avenue, 48th Floor Seattle Washington 98101 Attn: Stephen M. Graham, Esq. Facsimile: 206-583-8500 (ii) if to EIS, to: Elan International Services, Ltd. Flatts, Smiths Parish Bermuda, FL 04 Attention: Director Facsimile: 441-292-2224 with a copy to: Brock Silverstein LLC 800 Third Avenue, 21st Floor New York, New York 10022 Attention: David Robbins, Esq. Facsimile: 212-371-5500 or to such other address as the party to whom notice is to be given may have furnished to the other party hereto in writing in accordance with provisions of this Section 9. Any such notice or communication shall be deemed to have been effectively given (i) in the case of personal or hand delivery, on the date of such delivery, (ii) in the case of an internationally-recognized overnight delivery service, on the second business day after the date when sent, (iii) in the case of mailing, on the fifth business day following that day on which the piece of mail containing such communication is posted, and (iv) in the case of facsimile transmission, on the date of telephone confirmation of receipt. SECTION 10. Entire Agreement. This Agreement and the other ---------------- Transaction Documents contain the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings among the parties with respect thereto. SECTION 11. Amendments. This Agreement may not be modified or ---------- amended, or any of the provisions hereof waived, except by written agreement of the Company and EIS. SECTION 12. Counterparts and Facsimile. The Transaction Documents -------------------------- may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one agreement. Each of 14 the Transaction Documents may be signed and delivered to the other party by facsimile transmission; such transmission shall be deemed a valid signature. SECTION 13. Headings. The section and paragraph headings contained -------- in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of the Agreement. SECTION 14. Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the substantive (as opposed to procedural) laws of the State of New York, without giving effect to principles thereof relating to conflicts of laws SECTION 15. Disputes. Any dispute under this Agreement or any other -------- of the Transaction Documents shall be adjudicated on an exclusive basis by binding arbitration between or among the parties in accordance with the rules and regulations of the American Arbitration Association in the County, City and State of New York; provided, that any such dispute that (x) involves a collection, proceeding in respect of the Convertible Promissory Note or (y) a request for injunctive or other equitable relief may, in any such case, at the option of the party seeking such relief, be adjudicated, on an exclusive basis, in any federal or state court sitting in the County, City and State of New York. SECTION 16. Expenses. Each of the parties shall be responsible for -------- its own costs and expenses incurred in connection with the transactions contemplated hereby and by the other Transaction Documents. SECTION 17. Assignments and Transfers. This Agreement and all of the ------------------------- provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. This Agreement, the shares of Series B Preferred Stock and Common Stock being purchased hereunder by EIS, the Note, and the shares of Common Stock underlying the Series B Preferred Stock and the Note may be transferred by EIS to its affiliates and subsidiaries, as well as any off-balance sheet special purpose entity established by EIS, provided, however, that EIS shall remain liable for its obligations hereunder after any such assignment. Other than as set forth above, no party shall transfer or assign this Agreement, the shares of Series B Preferred Stock and Common Stock being purchased hereunder by EIS, the Note, and the shares of Common Stock underlying the Series B Preferred Stock and the Note, or any interest therein, without the prior written consent of the other party. SECTION 18. Severability. In case any provision of this Agreement ------------ shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not be in any way affected or impaired thereby. 15 IN WITNESS WHEREOF, each of the undersigned has duly executed this Agreement as of the date first written above. TARGETED GENETICS CORPORATION By /s/ Stewart Parker ----------------------------- Name: H. Stewart Parker Title: President & CEO ELAN INTERNATIONAL SERVICES, LTD. By /s/ Kevin Insley ----------------------------- Name: Kevin Insley Title: President & CFO 16 EX-1.2 3 REGISTRATION RIGHTS AGREEMENT EXHIBIT 1.2 Execution Copy TARGETED GENETICS CORPORATION REGISTRATION RIGHTS AGREEMENT ----------------------------- THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made as of July 20th, 1999 by and among Targeted Genetics Corporation, a Washington corporation (the "Company"), and Elan International Services, Ltd., a Bermuda private limited company ("EIS"). R E C I T A L S: A. Pursuant to a securities purchase agreement dated as of the date hereof by and between the Company and EIS (the "Purchase Agreement"), EIS has acquired, or will acquire in the future, certain shares of common stock of the Company (the "Common Stock"), Series B Convertible Exchangeable Preferred Stock of the Company (the "Series B Preferred Stock"), and a convertible promissory note (the "Note"), which Series B Preferred Stock and Note are convertible into shares of Common Stock. B. The execution of the Purchase Agreement has occurred on the date hereof and it is a condition to the closing of the transactions contemplated thereby that the parties execute and deliver this Agreement. C. The parties desire to set forth herein their agreement on the terms and subject to the conditions set forth herein related to the granting of certain registration rights to the Holders (as defined below) relating to the Common Stock held by such Holders and the Common Stock underlying the Series B Preferred Stock and the Note. A G R E E M E N T: The parties hereto agree as follows: 1. Certain Definitions. As used in this Agreement, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the U.S. Securities and Exchange Commission. ---------- "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, ------------ and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time. "Holders" or "Holders of Registrable Securities" shall mean EIS and any ------- --------------------------------- Person who shall have acquired Registrable Securities from EIS as permitted herein, either individually or jointly, as the case may be, in a transaction pursuant to which registration rights are transferred pursuant to Section 10 hereof. "Person" shall mean an individual, a partnership, a company, an ------ association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental or quasi-governmental entity, or any department, agency or political subdivision thereof. "Registrable Securities" means (i) any shares of Common Stock purchased ---------------------- pursuant to the Purchase Agreement, any shares of Common Stock issued or issuable upon conversion of shares of Series B Preferred Stock (or issued as dividends thereon) or the Note, and (ii) any Common Stock issued or issuable in respect of the securities referred to in clause (i) above upon any stock split, stock dividend, recapitalization or similar event; excluding in all cases, however, any Registrable Securities that may be sold under Rule 144 promulgated under the Securities Act, without being subject to the volume limitations under Rule 144, and Registrable Securities sold by a Person in a transaction (including a transaction pursuant to a registration statement under this Agreement and a transaction pursuant to Rule 144 promulgated under the Securities Act) in which registration rights are not transferred pursuant to Section 10 hereof. The terms "register," "registered" and "registration" refer to a -------- ---------- ------------ registration effected by preparing and filing a registration statement in compliance with the Securities Act. "Registration Expenses" shall mean all expenses, other than Selling --------------------- Expenses, incurred by the Company in complying with Sections 2 or 3 hereof, including without limitation, all registration, qualification and filing fees, exchange listing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits incident to or required by any such registration. "Securities Act" shall mean the Securities Act of 1933, as amended. -------------- "Selling Expenses" shall mean all underwriting discounts, selling ---------------- commissions and stock transfer taxes applicable to the securities registered by the Holders and the costs of any accountants or other experts retained by the Holders. 2. Demand Registration. ------------------- (a) Requests for Registration. In the event that (i) the Company receives ------------------------- from the Holders a written request that the Company file a registration statement on Form S-3 (or any successor form to Form S-3), or any similar short- term registration statement, for a public offering of Registrable Securities (a "Demand Registration"), the reasonably anticipated aggregate price to the public of which, net of underwriting discounts and commissions, would be at least $1,000,000 and (ii) the Company is a registrant eligible to use Form S-3 to register 2 the Registrable Securities for such an offering, within 10 days after receipt of any such request, the Company will give written notice of such requested registration to all other Holders of Registrable Securities. The Company shall include such other Holders' Registrable Securities in such offering if they have responded affirmatively within 10 days after the receipt of the Company's notice. The Holders in aggregate will be entitled to request only two Demand Registrations hereunder. A registration will not count as the permitted Demand Registration until it has become effective (unless such Demand Registration has not become effective due solely to the fault of the Holders requesting such registration, including a request by such Holders that such registration be withdrawn). (b) Priority on Demand Registration. If a Demand Registration is an ------------------------------- underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be included in such offering exceeds the number of Registrable Securities which can be sold in such offering without adversely affecting the marketability of the offering, the Company will include in such registration such number of Registrable Securities allocated pro rata among the Holders thereof based upon the number of Registrable Securities owned by each such Holder. No securities other than Registrable Securities hereunder shall be included in such Demand Registration without the prior written consent of Holders who collectively hold Registrable Securities representing at least 50% of the Registrable Securities then outstanding. (c) Restrictions on Demand Registration. The Company may postpone the ----------------------------------- filing or the effectiveness of a registration statement for a Demand Registration if the Company determines in good faith that such Demand Registration would reasonably be expected to have a material adverse effect on any proposal or plan by the Company to engage in any financing, acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction or would require disclosure of any information that the board of directors of the Company determines in good faith the disclosure of which would be detrimental to the Company; provided, however, that in such event, the Holders initially requesting such Demand Registration will be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration will not count as the permitted Demand Registration hereunder and the Company will pay any Registration Expenses in connection with such registration. (d) Selection of Underwriters. The Holders will have the right to select ------------------------- the investment banker(s) and manager(s) to administer an offering pursuant to the Demand Registration, subject to the Company's prior written approval, which will not be unreasonably withheld or delayed. (e) Other Registration Rights. Except as provided in this Agreement, so ------------------------- long as any Holder owns any Registrable Securities, the Company will not grant to any Persons the right to request the Company to register any equity securities of the Company, or any securities convertible or exchangeable into or exercisable for such securities, which conflicts with the rights granted to the Holders hereunder, without the prior written consent of the Holders of at least 50% of the Registrable Securities. 3 3. Piggyback Registrations. (a) Right to Piggyback. At any time ----------------------- ------------------- that the Company shall propose to register Common Stock under the Securities Act (other than in a registration on Form S-3 relating to sales of securities to participants in a Company dividend reinvestment plan, S-4 or S-8 or any successor form or in connection with an acquisition or exchange offer or an offering of securities solely to the existing shareholders or employees of the Company), the Company shall give prompt written notice to all Holders of Registrable Securities of its intention to effect such a registration and, subject to Section 3(b) and the other terms of this Agreement, shall include in such registration all Registrable Securities that are permitted under applicable securities laws to be included in the form of registration statement selected by the Company and with respect to which the Company has received written requests for inclusion therein by the Holders within 10 days after the receipt of the Company's notice (each, a "Piggyback Registration"). ---------------------- (b) Priority on Piggyback Registrations. If a Piggyback Registration ----------------------------------- is an underwritten registration on behalf of the Company, and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company shall include in such registration, only as may be permitted in the reasonable business judgment of the managing underwriters for such registration: (i) first, up to that number of securities the Company proposes to sell; (ii) second, up to that number of Registrable Securities requested to be included in such registration by the Holders and that number of securities requested to be included in such registration by any other Person, pro rata among the Holders of such Registrable Securities and such other Persons, on the basis of the number of shares owned by each of such Holders subject to the rights of such other Persons under agreements existing as of the date hereof; and (iii) third, up to that number of other securities requested to be included in such registration. 4 The Holders of any Registrable Securities included in such a registration shall execute an underwriting agreement in form and substance satisfactory to the managing underwriters. (c) Right to Terminate Registration. If, at any time after giving written ------------------------------- notice of its intention to register any of its securities as set forth in Section 3(a) and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register such securities, the Company may, at its election, give written notice of such determination to each Holder of Registrable Securities and thereupon be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith as provided herein). (d) Selection of Underwriters. The Company shall have the right to select ------------------------- the investment banker(s) and manager(s) to administer an offering pursuant to a Piggyback Registration and, subject to Section 2(d), pursuant to a Demand Registration. 4. Expenses of Registration. Except as otherwise provided herein, all ------------------------ Registration Expenses incurred in connection with registrations pursuant to Section 2 and all Selling Expenses relating to securities registered on behalf of the Holders of Registrable Securities shall be borne by such Holders. All Registration Expenses incurred in connection with registrations pursuant to Section 3 shall be borne by the Company. 5. Holdback Agreements. ------------------- (a) The Company agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, for its own account during the seven days prior to and during the 90-day period beginning on the effective date of any underwritten Demand Registration (except (A) as part of such underwritten registration, (B) pursuant to registration statements on Form S-4 or Form S-8 or any successor form, (C) pursuant to a registration statement then in effect or (D) as required under any existing contractual obligation of the Company), unless the underwriters managing the registered public offering otherwise agree, and (ii) to use reasonable efforts to cause each holder of at least 5% (on a fully-diluted basis) of its outstanding Common Stock, or any securities convertible into or exchangeable or exercisable for Common Stock, purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any public sale or distribution (including sales pursuant to Rule 144) of any such securities during such periods (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree. (b) Each Holder agrees, in the event of a public offering of Common Stock under a registration statement on Form S-1, S-3 or S-4, not to effect any offer, sale, distribution or transfer, including a sale pursuant to Rule 144 (or any similar provision then effect) under the Securities Act (except as part of such registration), beginning on the date of 5 receipt of a written notice from the Company setting forth its intention to effect such registration and ending on the earlier of (i) 180 days from the date of receipt of such written notice or (ii) 90 days from the effective date of such Registration Statement. 6. Registration Procedures. Whenever the Company is under the obligation ----------------------- to register Registrable Securities hereunder, the Company will use all reasonable efforts to effect the registration and the sale of such Registrable Securities, and pursuant thereto the Company will as expeditiously as possible: (a) subject to Section 2(c) and 3(a) hereof, prepare and file with the Commission a registration statement on any form for which the Company qualifies with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company will (i) furnish to the counsel selected by the Holders copies of all such documents proposed to be filed, which documents will be subject to the review of such counsel, and (ii) notify each Holder of Registrable Securities covered by such registration of any stop order issued or threatened by the Commission); (b) subject to Section 2(c), 3(b) and 6(e) hereof, prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for, in the case of a Demand Registration, a period equal to the shorter of (i) 120 days and (ii) the time by which all securities covered by such registration statement have been sold, and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement; (c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (d) use all reasonable efforts to register or qualify such Registrable Securities under the securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 6(d), (ii) subject itself to taxation in any jurisdiction, or (iii) consent to general service of process in any such jurisdiction); 6 (e) notify each seller of such Registrable Securities, 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 contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading; provided, however, that the Company shall not be required to amend the registration statement or supplement the Prospectus for a period of up to six months if the board of directors determines in good faith that to do so would reasonably be expected to have a material adverse effect on any proposal or plan by the Company to engage in any financing, acquisition or disposition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction or would require the disclosure of any information that the board of directors determines in good faith the disclosure of which would be detrimental to the Company, it being understood that the period for which the Company is obligated to keep the Registration Statement effective shall be extended for a number of days equal to the number of days the Company delays amendments or supplements pursuant to this provision. Upon receipt of any notice pursuant to this Section 6(e), the Holders shall suspend all offers and sales of securities of the Company and all use of any prospectus until advised by the Company that offers and sales may resume, and shall keep confidential the fact and content of any notice given by the Company pursuant to this Section 6(e); (f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed; (g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement; (h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the Holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities; (i) make available for inspection by a representative of the Holders of Registrable Securities included in the registration statement, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such seller or underwriter, all pertinent financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; 7 (j) otherwise use its reasonable efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months beginning with the first day of the Company's first full calendar quarter after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (k) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any Common Stock included in such registration statement for sale in any jurisdiction, use all reasonable efforts promptly to obtain the withdrawal of such order; and (l) if the registration is an underwritten offering, use all reasonable efforts to obtain a so-called "cold comfort" letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters. 7. Obligations of Holders. Whenever the Holders of Registrable Securities ---------------------- sell any Registrable Securities pursuant to a Demand Registration, such Holders shall be obligated to comply with the applicable provisions of the Securities Act, including the prospectus delivery requirements thereunder, and any applicable state securities or blue sky laws. 8. Indemnification. (a) In connection with any registration statement for --------------- a Demand Registration in which a Holder of Registrable Securities is participating, the Company agrees to indemnify, to the fullest extent permitted by applicable law, each such Holder of Registrable Securities, its officers and directors and each Person who controls such Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities, expenses or any amounts paid in settlement of any litigation, investigation or proceeding commenced or threatened to which each such indemnified party may become subject under the Securities Act (collectively, "Claims") insofar as such Claim arose out of (i) any untrue or alleged untrue statement of material fact contained, on the effective date thereof, in any such registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such Holder expressly for use therein or by such Holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such Holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company will indemnify the underwriters, their officers and directors and each Person who controls the underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Holders of Registrable Securities. 8 (b) In connection with any registration statements for a Demand Registration in which a Holder of Registrable Securities is participating, each such Holder will furnish to the Company in writing such customary information as the Company reasonably requests for use in connection with any such registration statement or prospectus (the "Seller's Information") and, to the fullest extent permitted by applicable law, will indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any and all Claims to which each such indemnified party may become subject under the Securities Act insofar as such Claim arose out of (i) any untrue or alleged untrue statement of material fact contained, on the effective date thereof, in any such registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or (ii) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that with respect to a Claim arising pursuant to clause (i) or (ii) above, the material misstatement or omission is contained in such Seller's Information; provided, further, that the obligation to indemnify will be individual to each Holder and will be limited to the amount of proceeds received by such Holder from the sale of Registrable Securities pursuant to such registration statement. (c) Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (but the failure to provide such notice shall not release the indemnifying party of its obligation under paragraphs (a) and (b), unless and then only to the extent that, the indemnifying party has been prejudiced by such failure to provide such notice) and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim. (d) The indemnifying party shall not be liable to indemnify an indemnified party for any settlement, or consent to judgment of any such action effected without the indemnifying party's consent (but such consent will not be unreasonably withheld). Furthermore, the indemnifying party shall not, except with the prior written approval 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 each indemnified party of a release from all liability in respect of such claim or litigation without any payment or consideration provided by each such indemnified party. (e) If the indemnification provided for in this Section 8 is unavailable to an indemnified party under clauses (a) and (b) above in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party, in lieu of indemnifying such 9 indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities in such proportion as is appropriate to reflect not only the relative benefits received by the Company (if any), the underwriters, the sellers of Registrable Securities and any other sellers participating in the registration statement from the sale of shares pursuant to the registered offering of securities for which indemnity is sought but also the relative fault of the Company, the underwriters, the sellers of Registrable Securities and any other sellers participating in the registration statement in connection with the statement or omission which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company (if any), the underwriters, the sellers of Registrable Securities and any other sellers participating in the registration statement shall be deemed to be based on the relative relationship of the total net proceeds from the offering (before deducting expenses) to the Company (if any), the total underwriting commissions and fees from the offering (before deducting expenses) to the underwriters and the total net proceeds from the offering (before deducting expenses) to the sellers of Registrable Securities and any other sellers participating in the registration statement. The relative fault of the Company, the underwriters, the sellers of Registrable Securities and any other sellers participating in the registration statement shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the sellers of Registrable Securities and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (f) The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and will survive the transfer of the Registrable Securities. 9. Participation in Underwritten Registrations. No Holder may participate ------------------------------------------- in any registration hereunder which is underwritten unless such Holder (a) agrees to sell such Holder's securities on the basis provided in any underwriting arrangements approved by the Holder or Holders entitled hereunder to approve such arrangements, (b) as expeditiously as possible notifies the Company of the occurrence of any event as a result of which any prospectus contains an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (c) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements. 10. Transfer of Registration Rights. The rights granted to any Holder ------------------------------- under this Agreement may be assigned to any permitted transferee of Registrable Securities, in connection with any transfer or assignment of Registrable Securities by a Holder; provided, however, that: (a) such transfer is otherwise effected in accordance with applicable securities laws, (b) if not already a party hereto, the assignee or transferee agrees in writing prior to such transfer to be bound by the provisions of this Agreement applicable to the transferor, (c) such transferee shall 10 own Registrable Securities representing at least 350,000 shares of Common Stock (as adjusted for any combinations, consolidations, stock distributions, stock dividends or other recapitalizations with respect to such shares), and (d) EIS shall act as agent and representative for such Holder for the giving and receiving of notices hereunder. 11. Information by Holder. Each Holder shall furnish to the Company such --------------------- written information regarding such Holder and any distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement and shall promptly notify the Company of any changes in such information. 12. Exchange Act Compliance. The Company shall comply with all of the ----------------------- reporting requirements of the Exchange Act then applicable to it and shall comply with all other public information reporting requirements of the Commission which are conditions to the availability of Rule 144 for the sale of the Registrable Securities. The Company shall cooperate with each Holder in supplying such information as may be necessary for such Holder to complete and file any information reporting forms presently or hereafter required by the Commission as a condition to the availability of Rule 144. 13. Termination of Registration Rights. All registration rights granted ---------------------------------- under this Agreement shall terminate and be of no further force and effect, as to any particular Holder, at such time as all Registrable Securities held by such Holder can be sold within a four-month period without compliance with the registration requirements of the Securities Act pursuant to Rule 144 (including Rule 144(k)) promulgated thereunder or have been resold pursuant to a Demand Registration. 14. Miscellaneous. ------------- (a) No Inconsistent Agreements. The Company will not hereafter enter into -------------------------- any agreement with respect to its securities which is inconsistent with or violates the rights granted to the Holders of Registrable Securities in this Agreement without the prior written consent of a majority in interest of such Registrable Securities. (b) Remedies. Any Person having rights under any provision of this -------- Agreement will be entitled to enforce such rights specifically to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or other security) for specific performance and for other injunctive relief in order to enforce or prevent violation of the provisions of this Agreement; provided, however, that in no event shall any Holder have the right to enjoin, delay or interfere with any offering of securities by the Company. 11 (c) Amendments and Waivers. Except as otherwise provided herein, the ---------------------- provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Holders of at least 50% of the Registrable Securities; provided, however, that without the prior written consent of all the Holders, no such amendment or waiver shall reduce the foregoing percentage required to amend or waive any provision of this Agreement. (d) Successors and Assigns. All covenants and agreements in this Agreement ---------------------- by or on behalf of any of the parties hereto will bind and inure to the benefit of the respective successors and assigns of the parties hereto, and shall inure to the benefit and be enforceable by each Holder of Registrable Securities from time to time. In addition, whether or not any express assignment has been made, the provisions of this Agreement which are for the benefit of Holders of Registrable Securities are also for the benefit of, and enforceable by, any permitted transferee of Registrable Securities in accordance with Section 10 hereof. (e) Severability. Whenever 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. (f) Counterparts. This Agreement may be executed simultaneously in two or ------------ more counterparts, any one of which need not contain the signatures of more than one party, but all such counterparts taken together will constitute one and the same Agreement. (g) Descriptive Headings. The descriptive headings of this Agreement are -------------------- inserted for convenience only and do not constitute a part of this Agreement. (h) Governing Law. All questions concerning the construction, validity and ------------- interpretation of this Agreement will be governed by the laws of the State of New York without regard to principles of conflicts of laws, except that all issues concerning the relative rights of the Company and its shareholders shall be governed by Washington State Law, without giving effect to the principles thereof relating to conflicts of laws. (i) Notices. All notices, demands and requests of any kind to be delivered ------- to any party in connection with this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered or if sent by nationally- recognized overnight courier or by registered or certified airmail, return receipt requested and postage prepaid or by facsimile transmission, addressed as follows: (i) if to the Company, to: Targeted Genetics Corporation 1100 Olive Way Suite 100 Seattle, Washington 98101 12 Facsimile: (206) 623-7064 Attention: Chief Financial Officer with a copy to: Perkins Coie 1201 Third Avenue, 48th Floor Seattle, Washington 98101 Facsimile: (206) 583-8500 Attention: Stephen M. Graham, Esq. (ii) if to EIS, to: Elan International Services, Ltd. Flatts, Smiths Parish Bermuda, FL 04 Facsimile: (441) 292-2224 Attention: President with a copy to: Brock Silverstein LLC 800 Third Avenue New York, New York 10022 Facsimile: (212) 371-5500 Attention: David Robbins, Esq. (j) Entire Agreement. This Agreement constitutes the full and entire ---------------- understanding and agreement between the parties with regard to the subject matter hereof. [Signature page follows] 13 IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. TARGETED GENETICS CORPORATION By: /s/ Stewart Parker ---------------------------- Name: H. Stewart Parker Title: President & CEO ELAN INTERNATIONAL SERVICES, LTD. By: /s/ Kevin Insley ---------------------------- Name: Kevin Insley Title: President & CFO 14 EX-1.3 4 FUNDING AGREEMENT EXHIBIT 1.3 Execution Copy Funding Agreement Among Elan Corporation, plc And Elan International Services, Ltd. And Targeted Genetics Corporation INDEX ----- CLAUSE 1 SUBSEQUENT FUNDING CLAUSE 2 TERMINATION CLAUSE 3 GENERAL i FUNDING AGREEMENT made this 20th day of July, 1999 among: (1) ELAN CORPORATION, PLC, a public limited company incorporated under the laws of Ireland, and having its registered office at Lincoln House, Lincoln Place, Dublin 2, Ireland ("Elan"); (2) ELAN INTERNATIONAL SERVICES, LTD., a private limited company incorporated under the laws of Bermuda, and having its registered office at Clarendon House, 2 Church St., Hamilton, Bermuda ("EIS"); and (3) TARGETED GENETICS CORPORATION a corporation incorporated under the laws of Washington and having its principal place of business at 1100 Olive Way, Suite 100, Seattle, Washington, United States of America ("TGEN"). RECITALS: A. EIS and TGEN have formed a joint venture Bermuda private limited company to be known as Targeted Genetics Newco, Ltd. ("Newco"). B. As of the date hereof, Elan, EIS, TGEN and Newco have entered into a Subscription, Joint Development and Operating Agreement (the "JDOA") for the purpose of recording the terms and conditions of the joint venture and of regulating their relationship with each other and certain aspects of the affairs of and their dealings with Newco. C. The parties have agreed that capitalized terms when used in the Recitals hereto and in this Agreement shall bear the same meanings as ascribed to such terms in the JDOA. D. Elan is beneficially entitled to the use of certain patents which have been granted or are pending relating to Base Technologies, Drug Delivery Technologies or Gene Delivery Technologies controlled by Elan. E. TGEN is beneficially entitled to the use of certain patents that have been granted or are pending relating to Base Technologies, Gene Delivery Technologies or Drug Delivery Technologies controlled by TGEN. F. As of the date hereof, Elan has entered into a license agreement with Newco, and TGEN has entered into a license agreement with Newco, in connection with the license to Newco of the Elan Intellectual Property and the TGEN Intellectual Property, respectively. G. Elan and TGEN have agreed to co-operate in the establishment and management of a business for the research, development and commercialization of the Products based on their respective technologies. CLAUSE 1 SUBSEQUENT FUNDING 1.1 It is estimated that Newco will require an additional $15,000,000 to develop Platforms and Products based upon the TGEN Intellectual Property, the Elan Intellectual Property and/or the Newco Technology (the "Subsequent Funding"). During the Research and Development Term, EIS and TGEN shall provide to Newco, by way of an unconditional capital contribution to Newco up to an aggregate maximum amount of $15,000,000, such funding to be provided on a pro rata basis in accordance with their respective ownership interest in Newco (i.e., initially, 80.1% by TGEN and 19.9% by EIS). 1.2 The Subsequent Funding shall be provided by EIS and TGEN at such times as shall be necessary for the development of the Platforms and Products, as shall be reasonably determined in good faith by the unanimous decision of the Newco Directors. The Subsequent Funding shall be contributed on the following terms: 1.2.1 The minimum amount of each request for Subsequent Funding shall be U.S.$500,000 (except in the event that an amount less than U.S.$500,000 remains available for funding, in which case such lesser amount may be funded); 1.2.2 There shall be no Event of Default (as defined in the Convertible Note) under the Convertible Note on the date of the Subsequent Funding (except to the extent that any Event of Default has been waived by EIS); and 1.2.3 Each request for Subsequent Funding shall be consistent with the Business Plan and the Research and Development Plan or as otherwise approved by the Newco Directors. 1.3 Each request for Subsequent Funding shall be delivered from the Management Committee to each of the Participants, which notice shall set forth: (i) the amount of the Subsequent Funding requested; (ii) the date requested to fund such amount, which date shall not be earlier than 15 business days from the date such request is made; and (iii) a reasonably detailed narrative and summary of the uses and application thereof, to the extent the request is inconsistent with Newco's budget. 2 CLAUSE 2 TERMINATION 2.1 This Agreement shall govern the funding commitments of EIS and TGEN with respect to Newco until terminated by written agreement of all Parties hereto. CLAUSE 3 GENERAL 3.1 Good Faith: ----------- Each of the Parties hereto undertakes with the others to do all things reasonably within its power that are necessary or desirable to give effect to the spirit and intent of this Agreement. 3.2 Further Assurance: ------------------ At the request of any of the Parties, the other Party or Parties shall (and shall use reasonable efforts to procure that any other necessary parties shall) execute and perform all such documents, acts and things as may reasonably be required subsequent to the signing of this Agreement for assuring to or vesting in the requesting Party the full benefit of the terms hereof. 3.3 No Representation: ------------------ Each of the Parties hereto hereby acknowledges that in entering into this Agreement it has not relied on any representation or warranty except as expressly set forth herein or in any document referred to herein. 3.4 Force Majeure: -------------- No Party to this Agreement shall be liable for delay in the performance of any of its obligations hereunder if such delay is caused by or results from causes beyond its reasonable control, including without limitation, acts of God, fires, strikes, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances or intervention of any relevant government authority, but any such delay or failure shall be remedied by such Party as soon as practicable. 3 3.5 Relationship of the Parties: ---------------------------- Nothing contained in this Agreement is intended or is to be construed to constitute Elan or EIS, on one hand, and TGEN, on the other hand, as partners, or Elan or EIS as an employee or agent of TGEN, or TGEN as an employee or agent of Elan or EIS. No Party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of another Party or to bind another Party to any contract, agreement or undertaking with any third Party. 3.6 Counterparts: ------------- This Agreement may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute this Agreement. 3.7 Notices: -------- All notices, demands and requests of any kind to be delivered to any party in connection with this Agreement shall be in writing and shall be deemed to have been duly given if personally or hand delivered or if sent by an internationally-recognized overnight delivery or by registered or certified mail, return receipt requested and postage prepaid, or by facsimile transmission addressed as follows: if to TGEN, to: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, Washington 98101 Attention: Chief Executive Officer Facsimile: (206) 623-7064 with a copy to: Perkins Coie 1201 Third Avenue, 48th Floor Seattle, Washington 98101 Attn: Stephen M. Graham, Esq. Facsimile: (206) 583-8500 4 Elan at: Lincoln House, Lincoln Place, Dublin 2 Ireland Attention: Vice President & General Counsel Elan Pharmaceutical Technologies, a division of Elan Corporation, plc Telephone: 353-1-709-4000 Fax: 353-1-709-4124 with a copy to: Brock Silverstein LLC 800 Third Avenue, 21st Floor New York, NY 10022 Attention: David Robbins, Esq. Telephone 212-371-2000 Fax: 212-371-5500 EIS at: Elan International Services, Ltd. 102 St. James Court Flatts, Smiths FL04 Bermuda Attention: President Telephone: 441-292-9169 Fax: 441-292-2224 with a copy to: Brock Silverstein LLC 800 Third Avenue, 21st Floor New York, NY 10022 Attention: David Robbins, Esq. Telephone 212-371-2000 Fax: 212-371-5500 or to such other address as the party to whom notice is to be given may have furnished to the other party hereto in writing in accordance with provisions of this Section 3.7. Any such notice or communication shall be deemed to have been effectively given (i) in the case of personal or hand delivery, on the date of such delivery, (ii) in the case of an internationally-recognized overnight delivery service, on the second business day after the 5 date when sent, (iii) in the case of mailing, on the fifth business day following that day on which the piece of mail containing such communication is posted, and (iv) in the case of facsimile transmission, on the date of telephone confirmation of receipt. 3.8 Governing Law: -------------- This Agreement shall be governed by and construed in accordance with the substantive (as opposed to procedural) laws of the State of New York, without giving effect to principles thereof relating to conflicts of laws. Any dispute hereunder shall be adjudicated in a forum set forth in the Securities Purchase Agreement. 3.9 Severability: ------------- If any provision in this Agreement is agreed by the Parties to be, deemed to be or is or becomes invalid, illegal, void or unenforceable under any law that is applicable hereto, such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way. 3.10 Amendments: ----------- No amendment, modification or addition hereto shall be effective or binding on any Party unless set forth in writing and executed by a duly authorized representative of all Parties. 3.11 Waiver: ------- No waiver of any right under this Agreement shall be deemed effective unless contained in a written document signed by the Party charged with such waiver, and no waiver of any breach or failure to perform shall be deemed to be a waiver of any future breach or failure to perform or of any other right arising under this Agreement. 3.12 Assignment: ----------- None of the Parties shall be permitted to assign its rights or obligations hereunder without the prior written consent of the other Parties except as follows: 3.12.1 Elan, EIS and/or TGEN shall have the right to assign their rights and obligations hereunder to their Affiliates or subsidiaries provided, however, that such assignment does not result in adverse tax consequences for any other Parties. 3.13 Whole Agreement/No Effect on Other Agreements: ---------------------------------------------- This Agreement and the other Transaction Documents set forth all of the agreements and understandings between the Parties with respect to the subject matter hereof, and supersedes 6 and terminates all prior agreements and understandings between the Parties with respect to the subject matter hereof. There are no agreements or understandings with respect to the subject matter hereof, either oral or written, between the Parties other than as set forth in this Agreement and the other Transaction Documents. No provision of this Agreement shall be construed so as to negate, modify or affect in any way the provisions of any other agreement between any of the Parties unless specifically referred to, and solely to the extent provided herein. In the event of a conflict between the provisions of this Agreement and the provisions of the License Agreements, the terms of this Agreement shall prevail unless this Agreement specifically provides otherwise. 3.14 Successors: ----------- This Agreement shall be binding upon and inure to the benefit of the Parties hereto, their successors and permitted assigns. [Signature Page Follows] 7 IN WITNESS WHEREOF, the Parties hereto have executed this Funding Agreement on the day first set forth above. SIGNED BY: /s/ Kevin Insley ----------------------- for and on behalf of ELAN CORPORATION, PLC in the presence of: /s/ [illegible] ------------------ SIGNED BY: /s/ Kevin Insley ----------------------- for and on behalf of ELAN INTERNATIONAL SERVICES, LTD. in the presence of: /s/ [illegible] ------------------ SIGNED BY: /s/ Stewart Parker ----------------------- for and on behalf of TARGETED GENETICS CORPORATION in the presence of: /s/ Jim Johnson ------------------ EX-1.4 5 SUBSCRIPTION, JOINT DEVEL. & OPER. AGREEMENT EXHIBIT 1.4 EXECUTION COPY SUBSCRIPTION, JOINT DEVELOPMENT AND OPERATING AGREEMENT ELAN CORPORATION, PLC ELAN INTERNATIONAL SERVICES, LTD. AND TARGETED GENETICS CORPORATION AND TARGETED GENETICS NEWCO, LTD. TABLE OF CONTENTS 1. DEFINITIONS........................................................... 2 2. NEWCO'S BUSINESS...................................................... 11 3. REPRESENTATIONS AND WARRANTIES........................................ 12 4. AUTHORIZATION AND CLOSING............................................. 15 5. CERTAIN ASSIGNMENT RIGHTS............................................. 16 6. NON-COMPETITION....................................................... 16 7. DIRECTORS; MANAGEMENT AND R&D COMMITTEES.............................. 17 8. THE BUSINESS PLAN AND REVIEWS......................................... 20 9. RESEARCH AND DEVELOPMENT WORK......................................... 20 10. INTELLECTUAL PROPERTY RIGHTS.......................................... 22 11. EXPLOITATION OF PRODUCTS OUTSIDE THE FIELD............................ 25 12. COMMERCIALIZATION..................................................... 26 13. MANUFACTURING......................................................... 27 14. TECHNICAL SERVICES AND ASSISTANCE..................................... 27 15. AUDITORS, BANKERS, REGISTERED OFFICE, ACCOUNTING REFERENCE DATE....... 28 16. REGULATORY............................................................ 29 17. TRANSFERS OF SHARES; RIGHT OF FIRST OFFER; TAG ALONG RIGHTS........... 29 18. MATTERS REQUIRING PARTICIPANTS' APPROVAL.............................. 32 19. DISPUTES.............................................................. 35 20. SUBSEQUENT FUNDING.................................................... 36 21. TERMINATION........................................................... 36 22. CONFIDENTIALITY....................................................... 37 23. COSTS................................................................. 40 24. GENERAL............................................................... 40
-i- THIS SUBSCRIPTION, JOINT DEVELOPMENT AND OPERATING AGREEMENT made this 21st day of July, 1999, among: ELAN CORPORATION, PLC, a public limited company incorporated under the laws of Ireland, and having its registered office at Lincoln House, Lincoln Place, Dublin 2, Ireland ("Elan"); ELAN INTERNATIONAL SERVICES, LTD., a private limited company incorporated under the laws of Bermuda, and having its registered office at Clarendon House, 2 Church St., Hamilton, Bermuda ("EIS"); TARGETED GENETICS CORPORATION, a corporation incorporated under the laws of Washington and having its principal place of business at 1100 Olive Way, Suite 100, Seattle, Washington 98101, United States of America ("TGEN"); and TARGETED GENETICS NEWCO, LTD., a private limited company incorporated under the laws of Bermuda, and having its registered office at Clarendon House, 2 Church St., Hamilton, Bermuda ("Newco"). RECITALS: A. Newco desires to issue and sell to the Participants (as defined below), and the Participants desire to purchase from Newco, for aggregate consideration of $15,000,000, apportioned between them as set forth herein, (i) 7,491 shares of Newco's common stock, par value $1.00 per share (the "Common Stock"), allocated 6,000 shares to TGEN and 1,491 shares to EIS, and (ii) 4,509 shares of Newco's preferred stock, par value $1.00 per share (the "Preferred Stock"). allocated 3,612 shares to TGEN and 897 shares to EIS. B. Elan is beneficially entitled to the use of certain patents which have been granted or are pending in relation to Drug Delivery Technologies (as defined below). C. TGEN is beneficially entitled to the use of certain patents that have been granted or are pending in relation to Gene Delivery Technologies (as defined below). D. As of the date hereof, Elan Pharmaceutical Technologies, a division of Elan ("EPT"), has entered into a license agreement with Newco, and TGEN has entered into a license agreement with Newco, in connection with the license to Newco of the Elan Intellectual Property and the TGEN Intellectual Property, respectively (each as defined below). [*] OMITTED, CONFIDENTIAL MATERIAL, WHICH MATERIAL HAS BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. E. Elan and TGEN have agreed to co-operate in the establishment and management of a business for the research, development and commercialization of the Products (as defined below). F. Elan and TGEN have agreed to enter into this Agreement for the purpose of recording the terms and conditions of the joint venture and of regulating their relationship with each other and certain aspects of the affairs of and their dealings with Newco. NOW IT IS HEREBY AGREED AS FOLLOWS: 1. DEFINITIONS A. In this Agreement, the following terms shall, where not inconsistent with the context, have the following meanings respectively. 1.1. "Affiliate" shall mean, with respect to Elan or TGEN, any corporation or entity other than Newco (and entities controlled by it) controlling, controlled by, or under the common control of Elan or TGEN, as the case may be, and, with respect to Newco, any corporation or entity under control of Newco. A corporation or non-corporate entity shall be regarded as in control of another corporation if it owns or directly or indirectly controls more than fifty percent (50%) of the voting stock of the other corporation or (a) in the absence of the ownership of at least fifty percent (50%) of the voting stock of a corporation or (b) in the case of a non-corporate entity, the power to direct or cause the direction of the management and policies of such corporation or non-corporate entity, as applicable. 1.2. "Agreement" means this agreement (which expression shall be deemed to include the Recitals and the Schedules hereto). 1.3. "Antisense" shall mean [*] 1.4. "Base Technologies" shall mean technologies, techniques and formulations for the administration of an active agent to a mammal: (i) in formulations of the active agent with one or more substantially inert ingredients, including, without limitation, tonicity modifiers and bulking agents; or (ii) with or through devices or mechanical targeting systems or mechanical delivery systems (other than Elan's MEDIPAD(R) Drug Delivery System or devices utilizing autoinjector technology). 1.5. "Business" shall mean the business of Newco as described in Clause 2 and as more particularly specified in the Business Plan and such other * Confidential Treatment Requested 2 business as the Participants may agree from time to time in writing should be carried on by Newco. 1.6. "Business Plan" shall mean the business plan and program of development to be agreed by Elan and TGEN within 60 days of the Closing Date, with respect to the research, development, and Commercialization of the Products, which shall include portions relating to the Project that will constitute the "Plan" defined in the License Agreements, and which shall be reviewed and updated by Elan and TGEN on an annual basis, upon mutual written agreement in accordance with Clause 8 hereof. 1.7. "Clinical Phase" shall mean that portion of the Project during which regulatory approval to conduct human clinical trials of one or more Products will be sought in one or more territories and clinical trials will be conducted. 1.8. "Closing Date" shall mean the date upon which the Transaction Documents are executed and delivered by the Parties and the transactions effected thereby are closed. 1.9. "Commercialization" shall mean the manufacture, promotion, distribution, marketing and sale of the Products . 1.10. "Common Stock Equivalents" shall mean any options, warrants, rights or any other securities convertible, exercisable or exchangeable, in whole or in part, for or into Common Stock. 1.11. "Control" shall mean, with respect to Base Technologies, Drug Delivery Technologies, Gene Delivery Technologies or Genes, the ability to grant a license or sublicense as contemplated herein without violating the terms of any agreement with any third party. 1.12. "Convertible Note" shall mean that certain Convertible Promissory Note, of even date herewith, by and between TGEN and EIS. 1.13. "Development Candidate" shall mean a TGEN Proprietary Gene, or a Gene obtained from an Independent Third Party, jointly selected by the Participants and Newco to be developed for incorporation in Products. For the avoidance of doubt, if it is subsequently determined by the Management Committee of Newco that the TGEN Proprietary Gene initially offered for development as Products is not suitable for use in a Product, TGEN shall offer an additional TGEN Proprietary Gene to the extent available, as described in Section 9.5 below, and such additional TGEN Proprietary Gene shall in that instance become the Development Candidate. 3 1.14. "Development Phase" shall mean that portion of the Project during which the Platform will, as implemented for administration of the Development Candidate, be developed, improved, tested (in vitro and in animal models), and evaluated by or for Newco for therapeutic and commercial potential. 1.15. "Directors" shall mean, at any time, the directors of Newco. 1.16. "Drug Delivery Technologies" shall mean formulation and/or excipient systems and technologies for delivery of a therapeutic agent to a mammal, including but not limited to [*] allowing such agent, without limitation on other features that may be sought in addition to or instead of the following, to be administered on an optimized schedule, and/or to be administered with reduced side effects, and/or to be administered with enhanced efficacy, and/or to be administered with better patient compliance, and/or to be administered in reduced dosages. Drug Delivery Technologies shall also include Elan device delivery technologies including the MEDIPAD(R) Drug Delivery System and devices utilizing autoinjector technology. Notwithstanding the foregoing, Drug Delivery Technologies shall not include Base Technologies or Gene Delivery Technologies. 1.17. "EIS Director" shall have the meaning set forth in Clause 7. 1.18. "EIS Exchange Right" shall have the meaning assigned to such term in the TGEN Securities Purchase Agreement. 1.19. "Elan Improvements" shall have the meaning assigned thereto in the Elan License Agreement. 1.20. "Elan Intellectual Property" shall have the meaning assigned thereto in the Elan License Agreement. 1.21. "Elan Know-How" shall have the meaning assigned thereto in the Elan License Agreement. 1.22. "Elan License" shall have the meaning assigned thereto in the Elan License Agreement. 1.23. "Elan License Agreement" shall mean the license agreement between Elan and Newco, of even date herewith, attached hereto as Schedule 1. 1.24. "Elan Patents" shall have the meaning assigned thereto in the Elan License Agreement. * Confidential Treatment Requested 4 1.25. "Elan Program Technology" " shall have the meaning assigned thereto in the Elan License Agreement. 1.26. "Elan Right of First Negotiation" shall have the meaning provided in Section 2.12 of the Elan License Agreement. 1.27. "Encumbrance" shall mean any liens, charges, encumbrances, equities, claims, options, proxies, pledges, security interests, or other similar rights of any nature. 1.28. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 1.29. "Feasibility Phase" shall mean the initial portion of the Project during which the Feasibility Studies will be performed by or for Newco on the Platform and potential Products. 1.30. "Feasibility Studies" shall mean those studies described in the Research and Development Program. Each Feasibility Study will be applicable to one or more Platforms, as is indicated in the Research and Development Program. 1.31. "Field" shall mean the research, development and Commercialization of a Platform for delivery of Genes to mammals. For avoidance of doubt, the Field shall exclude (i) cell therapy, (ii) ex vivo gene therapy, (iii) Antisense delivery and (iv) transcutaneous and/or transdermal delivery (i.e., pertaining to delivery, onto, into and through the skin). 1.32. "Financial Year" shall mean each year commencing on January 1 (or in the case of the first Financial Year, the date hereof) and expiring on December 31 of each year. 1.33. "Fully Diluted Common Stock" shall mean all of the issued and outstanding Common Stock, assuming the conversion, exercise or exchange of all outstanding Common Stock Equivalents. 1.34. "Funding Agreement" shall mean the Funding Agreement, dated as of the date hereof, among Elan, EIS and TGEN. 1.35. "Gene" shall mean any nucleotide sequence that includes a region or regions (or gene cassette(s)) capable of coding, causing or modulating expression of a protein or other genetic element (other than directly modulating 5 expression where the nucleic acid sequence is an Antisense) and includes one or more elements that can control expression of said protein(s) or other genetic element(s). 1.36. "Gene Delivery Technologies" shall mean [*] 1.37. "Independent Third Party" shall mean any person other than Newco, TGEN, Elan or any of their respective Affiliates. 1.38. "Initial Funding" shall mean the amounts contributed to Newco by the Participants pursuant to Section 4.3.1 hereof. 1.39. "License Agreements" shall mean the Elan License Agreement and the TGEN License Agreement. 1.40. "Licensed Technologies" shall mean, together, the Elan Intellectual Property and the TGEN Intellectual Property. 1.41. "MEDIPAD(R) Drug Delivery System" shall mean the ambulatory continuous micro infusion device having a drug reservoir volume ranging from 3.3 to 5.0 ml. and associated technology. 1.42. "Newco Memorandum of Association and Bye-Laws" shall mean the Memorandum of Association and By-Laws of Newco. 1.43. "Newco Patents" shall mean any and all patents and patent applications Controlled by Newco, existing and/or pending as of the Effective Date or hereafter filed or obtained by Newco, other than Elan Patents and TGEN Patents. Newco Patents shall also include all extensions, continuations, continuations-in-part, divisionals, patents-of-additions, re-examinations, re- issues, supplementary protection certificates and foreign counterparts of such patents and patent applications and any patents issuing thereon and extensions of any patents licensed hereunder. 1.44. "Newco Program Technology" shall mean all Program Technology other than Elan Program Technology and TGEN Program Technology. 1.45. "Newco Technology" shall mean all Program Technology and all technology licensed or acquired by Newco or developed by Newco whether or not pursuant to the Research and Development Program, excluding, however, TGEN Intellectual Property and Elan Intellectual Property. 1.46. "Participant" shall mean TGEN or Elan, as the case may be, and "Participants" shall mean both Elan and TGEN. * Confidential Treatment Requested 6 1.47. "Party" shall mean Elan, TGEN, or Newco, as the case may be, and "Parties" means all three together. 1.48. "Person" shall mean an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, governmental entity or authority or other entity of whatever nature. 1.49. "Permitted Transferee" shall mean any Affiliate or subsidiary of Elan, EIS or TGEN, to whom this Agreement may be assigned, in whole or in part, pursuant to the terms hereof or in the case of Elan/EIS, an off-balance sheet special purpose entity created by Elan or EIS. 1.50. "Platform" shall mean the combined utilization of Drug Delivery Technologies and Gene Delivery Technologies for delivery of Genes by any route of administration 1.51. "Product" shall mean a Gene formulated for administration to mammals, including humans, by use of a Platform. 1.52. "Program Technology" shall mean all technology developed by or on behalf of Newco, whether by Elan, TGEN, a third party or jointly by any combination thereof, pursuant to the Research and Development Program. 1.53. "Project" shall mean all activity as undertaken by Elan, TGEN and Newco in order to develop the Platform and Products in accordance with the Business Plan. 1.54. "Registration Rights Agreements" shall mean the Registration Rights Agreements of even date herewith relating to securities of TGEN and Newco, respectively. 1.55. "Regulatory Application" shall mean any regulatory application or any other application for marketing approval for a Product, which Newco will file in any country of the Territory, including any supplements or amendments thereto. 1.56. "Regulatory Approval" shall mean the final approval to market a Product in any country of the Territory, and any other approval which is required to launch the Product in the normal course of business. 1.57. "Research and Development Term" shall mean the period commencing on the Closing Date and continuing for a period of [*] thereafter, or as * Confidential Treatment Requested 7 extended by agreement of the Participants, up to an aggregate of [*]; provided, however, that if a Participant shall be prevented by (i) events beyond the Participant's control, or (ii) by such Participant's delay or negligent act or omission, from performing its obligations under the Transaction Documents within said [*] period (or as extended), then the other Participant at its option, may extend the duration of the Research and Development Term by a term equal in length to the period during which the first Participant was unable to perform its obligations hereunder. 1.58. "RHA" shall mean any relevant government health authority (or successor agency thereof) in any country of the Territory whose approval is necessary to market a Product in the relevant country of the Territory. 1.59. "Securities Act" shall mean the Securities Act of 1933, as amended. 1.60. "Shares" shall mean the shares of Common Stock and Preferred Stock of Newco. 1.61. "Stockholder" shall mean any of EIS, TGEN, any Permitted Transferee or any other Person who subsequently becomes bound by this Agreement as a holder of the Shares, and "Stockholders" refers to all of the Stockholders. 1.62. "Subsequent Funding" shall have the meaning given to such term in the Funding Agreement. 1.63. "Subsidiary" shall mean any company that is a subsidiary of Newco within the meaning of applicable laws. 1.64. "Technological Competitor of Elan" shall mean any entity which has a significant program for the development of Drug Delivery Technology and which is active in promoting and contracting the use of such Drug Delivery Technology to third parties, a listing of which is contained on Schedule 3 hereto, and as such list may be supplemented by Elan from time to time with the consent of TGEN, which consent shall not be unreasonably withheld if the proposed additions are within the parties' contemplation as to the purpose of the original list. 1.65. "Technological Competitor of TGEN" shall mean any entity which has a significant program for the discovery and development of Gene Delivery Technology, a listing of which is contained on Schedule 4 hereto, and as such list may be supplemented by TGEN from time to time with the consent of Elan, which consent shall not be unreasonably withheld if the proposed additions are within the parties' contemplation as to the purpose of the original list. * Confidential Treatment Requested 8 1.66. "Term" shall mean the term of this Agreement. 1.67. "Territory" shall mean all of the countries of the world. 1.68. "TGEN Directors" shall have the meaning set forth in Clause 7. 1.69. "TGEN Improvements" shall have the meaning given to such term in the TGEN License Agreement. 1.70. "TGEN Intellectual Property" shall have the meaning given to such term in the TGEN License Agreement. 1.71. "TGEN Know-How" shall have the meaning given to such term in the TGEN License Agreement. 1.72. "TGEN License" shall have the meaning given to such term in the TGEN License Agreement. 1.73. "TGEN License Agreement" shall mean the license agreement between TGEN and Newco, of even date herewith, attached hereto as Schedule 2. 1.74. "TGEN Patents" shall have the meaning given to such term in the TGEN License Agreement. 1.75. "TGEN Program Technology" shall have the meaning given to such term in the TGEN License Agreement. 1.76. "TGEN Proprietary Gene" shall mean any Gene Controlled by TGEN. 1.77. "TGEN Right of First Negotiation" shall have the meaning provided in Section 2.12 of the TGEN License Agreement. 1.78. "TGEN Securities Purchase Agreement" shall mean that certain securities purchase agreement, of even date herewith, by and between TGEN and EIS. 1.79. "Transaction Documents" shall mean this Agreement, the Funding Agreement, the Elan License Agreement, the TGEN License Agreement, the Convertible Note, the TGEN Securities Purchase Agreement, the Registration Rights Agreements and associated documentation of even date herewith, by and between TGEN, Elan, EIS, EPT and Newco, as applicable. 9 1.80. "United States Dollar" and "US$" and "$" shall mean the lawful currency of the United States of America. B. In addition, the following definitions shall have the meanings in the Clauses corresponding thereto, as set forth below. Definition Clause ---------- ------ "Closing"................................. 4.2 "Common Stock"............................ Recital "Confidential Information"................ 22.1 "Co-sale Notice".......................... 17.3 "Elan".................................... Recital "Elan Right of First Negotiation"......... 12.4 "EIS"..................................... Recital "EPT"..................................... Recital "Management Committee".................... 7.2.1 "Newco"................................... Recital "Notice of Exercise"...................... 17.2 "Notice of Intention"..................... 17.2 "Offered Shares".......................... 17.2 "Offering Price".......................... 17.2 "R&D Committee"........................... 7.2.2 "Remaining Stockholders".................. 17.3 "Relevant Event".......................... 20.2 "Research and Development Program"........ 9.1 "Selling Stockholder"..................... 17.2 "Tag-Along Right"......................... 17.3 "TGEN".................................... Recital "TGEN Right of First Negotiation"......... 12.5 "Transaction Proposal".................... 17.2 "Transfer"................................ 17.1 "Transferee Terms"........................ 17.3 "Transferring Stockholders"............... 17.3 1.1. Words importing the singular shall include the plural and vice versa. 1.2. Unless the context otherwise requires, reference to a recital, article, paragraph, provision, Clause or schedule is to a recital, article, paragraph, provision, Clause or schedule of or to this Agreement. 10 1.3. Reference to a statute or statutory provision includes a reference to it as from time to time amended, extended or re-enacted. 1.4. The headings in this Agreement are inserted for convenience only and do not affect its construction. 1.5. Unless the context or subject otherwise requires, references to words in one gender include references to the other genders. 1.6. Capitalized terms used but not defined herein shall have the meanings ascribed in the Transaction Documents, if defined therein. 2. NEWCO'S BUSINESS 2.1 The primary objective of Newco and any Subsidiaries is to carry on the business of the development, testing, registration, manufacture, commercialization and licensing of Products in the Territory and to achieve the objectives set out in this Agreement. The focus of the collaborative venture will be to develop the Products using the Elan Intellectual Property, the TGEN Intellectual Property and the Newco Technology to agreed-upon specifications and timelines. 2.2 Except as the Participants otherwise agree in writing and except as may be provided in this Agreement, the Business Plan or the License Agreements, the Participants shall exercise their respective powers in relation to Newco so as to ensure that the Business is carried on in a proper and prudent manner. 2.3 Each Participant shall use all commercially reasonable and proper means at its disposal and within its power to maintain, extend and improve the Business of Newco, within the limits of this Agreement, and to further the reputation and interests of Newco. 2.4 The central management and control of Newco shall be exercised in Bermuda and shall be vested in the Directors and such Persons as they may delegate the exercise of their powers in accordance with the Newco Memorandum of Association and Bye-Laws. The Participants shall use commercially reasonable efforts to ensure that to the extent required pursuant to the laws of Bermuda, and to ensure the sole residence of Newco in Bermuda, all meetings of the Directors are held in Bermuda or other jurisdictions outside the United States and generally to ensure that Newco is treated as resident for taxation purposes in Bermuda. 11 3. REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of Newco: Newco hereby represents and --------------------------------------- warrants to each of the Stockholders as follows, as of the date hereof: 3.1.1 Organization: Newco is an exempted company duly organized, ------------ validly existing and in good standing under the laws of Bermuda, and has all the requisite corporate power and authority to own and lease its properties, to carry on its business as presently conducted and as proposed to be conducted, to execute this Agreement, which has been duly authorized and is enforceable against Newco in accordance with its terms, and to carry out the transactions contemplated hereby. 3.1.2 Capitalization: As of the date hereof, the authorized capital -------------- stock of Newco consists of 7,491 shares of Common Stock and 4,509 shares of Preferred Stock. Prior to the date hereof, no shares of capital stock of Newco have been issued. 3.1.3 Authorization: The execution, delivery and performance by ------------- Newco of this Agreement, including the issuance of the Shares, have been duly authorized by all requisite corporate actions; this Agreement has been duly executed and delivered by Newco and is the valid and binding obligation of Newco, enforceable against it in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors' rights generally, and by general equity principles and limitations on the availability of equitable relief, including specific performance. The Shares, when issued as contemplated hereby, will be validly issued and outstanding, fully paid and non- assessable and not subject to preemptive or any other similar rights of the Stockholders or others. 3.1.4 No Conflicts: The execution, delivery and performance by Newco ------------ of this Agreement, the issuance, sale and delivery of the Shares, and compliance with the provisions hereof by Newco, will not: (i) violate any provision of applicable law, statute, rule or regulation applicable to Newco or any ruling, writ, injunction, order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to Newco or any of its properties or assets; (ii) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute (with notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under its charter or organizational documents or any material contract to which Newco is a 12 party, except where such violation, conflict or breach would not, individually or in the aggregate, have a material adverse effect on Newco; or (iii) result in the creation of, any Encumbrance upon any of the properties or assets of Newco, except as contemplated by the Transaction Documents. 3.1.5 Approvals: As of the date hereof, no permit, authorization, --------- consent or approval of or by, or any notification of or filing with, any Person is required in connection with the execution, delivery or performance of this Agreement by Newco. Newco has full authority to conduct its business as contemplated in the Business Plan and the Transaction Documents. 3.1.6 Disclosure: This Agreement does not contain any untrue ---------- statement of a material fact or omit to state any material fact necessary to make the statements contained herein not misleading. Newco is not aware of any material contingency, event or circumstance relating to its business or prospects, which could have a material adverse effect thereon, in order for the disclosure herein relating to Newco not to be misleading in any material respect. 3.1.7 No Business; No Liabilities: Newco has not conducted any --------------------------- business or incurred any liabilities or obligations prior to the date hereof, except solely in connection with its organization and formation. 3.2 Representations and Warranties of the Stockholders: Each of the -------------------------------------------------- Stockholders hereby severally represents and warrants to Newco as follows as of the date hereof: 3.2.1 Organization: Such Stockholder is a corporation duly organized ------------ and validly existing under the laws of its jurisdiction of organization and has all the requisite corporate power and authority to own and lease its respective properties, to carry on its respective business as presently conducted and as proposed to be conducted and to carry out the transactions contemplated hereby. 3.2.2 Authority: Such Stockholder has full corporate power and --------- authority to enter into this Agreement and to perform its obligations hereunder, which have been duly authorized by all requisite corporate action of such Stockholder. This Agreement is the valid and binding obligation of such Stockholder, enforceable against it in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors' rights generally, and by general equity principles and limitations on the availability of equitable relief, including specific performance. 13 3.2.3 No Conflicts: The execution, delivery and performance by such ------------ Stockholder of this Agreement, purchase of the Shares, and compliance with the provisions hereof by such Stockholder will not: (i) violate any provision of applicable law, statute, rule or regulation known by and applicable to such Stockholder or any ruling, writ, injunction, order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to such Stockholder or any of its properties or assets; (ii) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute (with notice or lapse of time or both) a default (or give rise to any right of termination, cancellation or acceleration) under the charter or organizational documents of such Stockholder or any material contract to which such Stockholder is a party, except where such violation, conflict or breach would not, individually or in the aggregate, have a material adverse effect on the transactions contemplated hereunder; or (iii) result in the creation of, any Encumbrance upon any of the properties or assets of such Stockholder, except as contemplated by the Transaction Documents. 3.2.4 Approvals: As of the date hereof, no material permit, --------- authorization, consent or approval of or by, or any notification of or filing with, any Person is required in connection with the execution, delivery or performance of this Agreement by such Stockholder. 3.2.5 Investment Representations: Such Stockholder is capable of -------------------------- evaluating the merits and risks of its investment in Newco. Such Stockholder has not been formed solely for the purpose of making this investment and such Stockholder is acquiring the Common Stock for investment for its own account, not as a nominee or agent, and not with the view to, or for resale in connection with, any distribution of any part thereof. Such Stockholder understands that the Shares have not been registered under the Securities Act or applicable state and foreign securities laws by reason of a specific exemption from the registration provisions of the Securities Act and applicable state and foreign securities laws, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of such Stockholders' representations as expressed herein. Such Stockholder understands that no public market now exists for any of the Shares and that there is no assurance that a public market will ever exist for such Shares. 14 3.3 Survival: The representations and warranties in this Clause 3 shall -------- survive for a period of two years from and after the date hereof. 4. AUTHORIZATION AND CLOSING 4.1 Newco has authorized the issuance to (i) EIS of 2,388 shares of Common Stock and (ii) TGEN of 6,000 shares of Common Stock and 3,612 shares of Preferred Stock, issuable as provided in Clause 4.3 hereof. 4.2 The closing (the "Closing") shall take place at the offices of Brock Silverstein LLC at 153 East 53/rd/ Street, New York, New York 10022 on the date hereof or such other place if any, as the Parties may agree and shall occur contemporaneously with the closing under the TGEN Securities Purchase Agreement. 4.3 At the Closing, 4.3.1 Newco shall issue and sell to EIS, and EIS shall purchase from Newco, upon the terms and subject to the conditions set forth herein, 1,491 shares of Common Stock for an aggregate purchase price of $240,234 and 897 shares of Preferred Stock for an aggregate purchase price of $2,743,923 for a total aggregate purchase price for all Shares of $2,984,157. Newco shall issue and sell to TGEN, and TGEN shall purchase from Newco, upon the terms and conditions set forth herein, 6,000 shares of Common Stock for an aggregate purchase price of $966,735 and 3,612 shares of Preferred Stock for an aggregate purchase price of $11,049,108 for a total aggregate purchase price for all Shares of $12,015,843. 4.3.2 The Parties shall execute and deliver to each other, as applicable, certificates in respect of the Common Stock and Preferred Stock described above and any other certificates, resolutions or documents which the Parties shall reasonably require. 4.4 Exemption from Registration: --------------------------- The Shares will be issued under an exemption or exemptions from registration under the Securities Act. Accordingly, the certificates evidencing the Shares shall, upon issuance, contain the following legend: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER BERMUDA LAW, THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND NO INTEREST SHALL BE SOLD, TRANSFERRED OR 15 OTHERWISE DISPOSED OF UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS OR THIS CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES SATISFACTORY TO THIS CORPORATION THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT TO THE RESTRICTIONS CONTAINED IN THAT CERTAIN SUBSCRIPTION, JOINT DEVELOPMENT AND OPERATING AGREEMENT, DATED JULY 20, 1999, BY AND AMONG ELAN CORPORATION, PLC, ELAN INTERNATIONAL SERVICES, INC., TARGETED GENETICS CORPORATION AND TARGETED GENETICS NEWCO, LTD. 5. CERTAIN ASSIGNMENT RIGHTS At any time after exercise of the EIS Exchange Right and upon 1 month's prior notice in writing from Elan to Newco and TGEN, Newco shall assign the Newco Technology from Newco to a wholly-owned subsidiary of Newco to be incorporated in Ireland, which company shall be newly incorporated by Elan on behalf of Newco to facilitate such assignment; provided, however, that such assignment shall not have a direct or indirect tax or other material adverse effect on any of the Parties. 6. NON-COMPETITION 6.1 The Parties acknowledge and agree to be bound by the provisions of Clause 11 of the Elan License Agreement and the provisions of Clause 11 of the TGEN License Agreement which set forth the agreement between the parties thereto in relation to the non-competition obligations of Elan and TGEN, respectively. 6.2 Nothing contained herein or in either the TGEN License Agreement or the Elan License Agreement (including, without limitation, the respective Sections 11 of those agreements) shall be construed as limiting (i) the activities of TGEN to utilize or pursue the creation of products (other than Products in the Field) incorporating Excluded TGEN Technology; (ii) the activities of Elan to utilize or pursue the creation of products (other than Products in the Field) incorporating Excluded Elan 16 Technology or NanoCrystal(TM) technology licensed to a Independent Third Party for use with proprietary compounds Controlled by such Independent Third Party; or (iii) the activities of TGEN or Elan to utilize or pursue the creation of products (other than Products in the Field) incorporating (A) cell therapy, ex vivo gene therapy, Antisense, and/or transcutaneous and/or transdermal delivery or (B) Base Technologies. 7. DIRECTORS; MANAGEMENT AND R&D COMMITTEES Directors: --------- Prior to the exercise of the EIS Exchange Right, the Board of Directors of Newco shall be composed of four Directors. TGEN shall have the right to nominate three directors of Newco ("TGEN Directors"), provided that one such director is a resident of Bermuda, and EIS shall have the right to nominate one Director of Newco ("EIS Director"). TGEN may appoint one of the TGEN Directors to be the chairman of Newco. Each Participant agrees to vote its shares of Common Stock and Preferred Stock in favor of the election of the nominees of the other Participant to the Board of Directors. 7.1.1 If the chairman is unable to attend any meeting of the Board, the TGEN Directors shall be entitled to appoint another Director to act as chairman in his place at the meeting. 7.1.2 If EIS removes the EIS Director, or TGEN removes any of the TGEN Directors, EIS or TGEN, as the case may be, shall indemnify the other Stockholder against any claim by such removed Director arising from such removal. 7.1.3 The Directors shall meet not less than three times in each Financial Year and all Directors' meetings shall be held in Bermuda to the extent required pursuant to the laws of Bermuda or to ensure the sole residence of Newco in Bermuda. 7.1.4 At any such meeting, the presence of the EIS Director and one of the TGEN Directors shall be required to constitute a quorum and, subject to Clause 18 hereof, the affirmative vote of a majority of the Directors present at a meeting at which such a quorum is present shall constitute an action of the Directors. In the event any meeting shall lack a quorum, the meeting shall be adjourned for a period of seven days. A notice shall be sent to the EIS Director and the TGEN Directors specifying the date, time and place where such adjourned meeting is to be held and reconvened. 17 7.1.5 The chairman of Newco shall hold office until the first meeting of the Directors after the exercise by EIS of the EIS Exchange Right. In the event that the EIS Exchange Right is exercised at any time by EIS, each of TGEN, and EIS shall cause the board of Directors of Newco to be reconfigured so that an equal number of Directors are designated by EIS and TGEN. Thereafter, each of EIS and TGEN, beginning with EIS, shall have the right, exercisable alternatively, of nominating one Director to be chairman of Newco for a term of one year. If the chairman of Newco is unable to attend any meeting of the Directors, the Directors shall be entitled to appoint another Director to act as chairman of Newco in his place at the meeting. 7.1.6 In case of an equality of votes at a meeting of the board of Directors of Newco, the chairman of Newco shall not be entitled to a second or casting vote. In the event of continued deadlock, the board of Directors shall resolve the deadlock pursuant to the provisions set forth in Clause 19. 7.2 Management and R&D Committees: ----------------------------- 7.2.1 The Directors shall appoint a management committee (the "Management Committee") to perform certain operational functions, such delegation to be consistent with the Directors' right to delegate powers pursuant to the Newco Memorandum of Association of Bye-Laws. The Management Committee shall initially consist of four members, two of whom will be nominated by EIS and two of whom will be nominated by TGEN, and each of whom shall be entitled to one vote, whether or not present at any Management Committee meeting during which such operational functions are discussed. Except as otherwise provided herein or in the License Agreements, decisions of the Management Committee shall require approval by at least one EIS nominee on the Management Committee and one TGEN nominee on the Management Committee. Each of EIS and TGEN shall be entitled to remove any of their 18 nominees to the R&D Committee and appoint a replacement in place of any nominees so removed. 7.2.3 The Management Committee shall be responsible for, inter alia, devising, implementing and reviewing strategy for the Business of Newco, and the operation of Newco, and in particular, devising Newco's strategy for research and development and to monitor and supervise the implementation of Newco's strategy for research and development. 7.2.4 The R&D Committee shall be responsible for: 7.2.4.1 designing that portion of the Business Plan that relates to the Project for consideration by the Management Committee; 7.2.4.2 establishing a joint Project team consisting of an equal number of team members from Elan and TGEN, including one Project leader from each of Elan and TGEN; and 7.2.4.3 implementing such portion of the Business Plan that relates to the Project, as approved by the Management Committee. 7.2.5 In the event of any dispute amongst the R&D Committee, the R&D Committee shall refer such dispute to the Management Committee whose decision on the dispute shall be binding on the R&D Committee. If the Management Committee cannot resolve the matter, the dispute will be referred to the President of EPT and the Chief Executive Officer of TGEN pursuant to Clause 19 hereof. 7.2.6 Not more than one time in each Financial Year, nor more than once with respect to any accounting period, Elan and TGEN shall permit representatives of an internationally-recognized firm of independent certified accountants selected by Newco to have access, on reasonable notice and at any reasonable time during normal business hours to inspect and audit the accounts and records of Elan or TGEN and any other book, record, voucher, receipt or invoice relating to the calculation or the cost of the Research and Development Program and to the accuracy of the reports which accompanied them. Any such inspection of Elan's or TGEN's records, as the case may be, shall be at the expense of Newco, except that if such inspection reveals an overpayment in the amount paid to Elan or TGEN, as the case may be, for the Research and Development Program hereunder in any Financial Year of 5% or more of the amount due to Elan or TGEN, as the case may be, then the expense of such inspection shall be borne solely by Elan or TGEN, as the case may be, instead of by Newco. Any surplus over the sum properly payable 19 by Newco to Elan or TGEN, as the case may be, shall be paid promptly by Elan or TGEN, as the case may be, to Newco. If such inspection reveals a deficit in the amount of the sum properly payable to Elan or TGEN, as the case may be, by Newco, Newco shall pay the deficit to Elan or TGEN, as the case may be. 8. THE BUSINESS PLAN AND REVIEWS 8.1 The Directors shall meet as soon as reasonably practicable after the Closing Date hereof and shall agree upon and approve the Business Plan for the current Financial Year within 60 days of the date hereof. In subsequent Financial Years, the Directors shall meet prior to the accounting reference date specified in Clause 15 and agree upon and approve the Business Plan for the following Financial Year, or any amendment or modification to the Business Plan. EIS and TGEN agree that they will cause their respective Directors at all times when preparing and voting upon the Business Plan to consider in good faith Newco's budgeting and funding requirements and the progress of the Research and Development Program and the prospects for results therefrom in determining whether, and at what level, to continue the development funding for the Research and Development Program. 8.2 The Participants agree that the Management Committee shall submit to the Directors on February 15th, May 15th, August 15th, and November 15/th/ or as soon as reasonably practicable thereafter in each Financial Year a report on the performance of the Business and research and development activities of Newco, and the Directors shall hold such meeting as may be necessary to review the performance of Newco against the Business Plan for the relevant year. 9. RESEARCH AND DEVELOPMENT WORK 9.1 During the Research Term, Newco will diligently pursue the research and development of the Elan Intellectual Property, TGEN Intellectual Property and Newco Technology in accordance with the Research and Development Program. The "Research and Development Program" will be the program for (a) the development of the Platform, and (b) the development of one or more Products in the Field, including without limitation, screening, in-vitro pharmacology, toxicology, stability, prototype dosage form development, formulation, optimization, clinical and regulatory activities. Such work shall be agreed to and conducted by Elan and/or TGEN under contract with Newco as provided in the Business Plan. 9.2 The Research and Development Program shall include a Feasibility Phase, a Development Phase and a Clinical Phase. During the Feasibility Phase, Newco will diligently pursue the research and development of the Feasibility Studies 20 and the Program Technology. The objectives of this initial phase of research and development work will be to develop the Platform which can be broadly applied in the delivery of a variety of Products. The foregoing shall be provided for in the Research and Development Program. 9.3 On successful completion of the Feasibility Phase and the designation of one or more Products to be developed by Newco, Elan and TGEN shall meet to discuss the development and commercial strategy for Newco and the further exploitation of the technologies and Products vested in Newco. For example, TGEN and Elan shall discuss strategy and terms relating to product and clinical development, corporate partnering, licensing and supply agreements. 9.4 TGEN and Elan shall provide such research and development services as may be reasonably required by Newco in accordance with the provisions in the License Agreements. Newco shall pay TGEN and Elan for any research and development work carried out by them on behalf of Newco at the end of each month during the Research and Development Program, subject to the proper vouching of research and development work and expenses. An invoice shall be issued to Newco by TGEN or Elan, as applicable, by the 15/th/ day of the month following the month in which work was performed, or as soon thereafter as practicable. Newco shall pay the amounts invoiced within thirty days following its receipt of the invoice. The payments by Newco to TGEN or Elan, as the case may be, shall be at the rates prescribed in the respective License Agreement. Research and development activities that are outsourced to third party providers shall be charged to Newco at [*] 9.5 In the event the Management Committee, by unanimous vote of its members, shall determine that preclinical toxicology or pharmacology studies indicate that clinical trials of the Development Candidate should not be undertaken, or the Management Committee determines that development of the Development Candidate is not economically viable, TGEN in good faith shall offer, and the Management Committee, by unanimous vote of its members shall approve, one additional TGEN Proprietary Gene that the Management Committee deems economically viable as a substituted Development Candidate, if and to the extent there are then any TGEN Proprietary Genes that would be appropriate to serve as the Development Candidate and that are not then otherwise restricted by agreement with an Independent Third Party (it being understood that it shall be within TGEN's discretion, subject only to its compliance with Clause 11 of the TGEN License Agreement, to so restrict any TGEN Proprietary Genes), and subject to the agreement of the Participants, negotiating in good faith, to changes concerning the budget, Business Plan, license terms and funding of Newco; provided, however, in no event shall license terms include any * Confidential Treatment Requested 21 obligation of Newco to make up front cash payments by Newco with respect to any TGEN Proprietary Gene. 9.6 Except as otherwise provided herein and as provided in the TGEN License Agreement, upon designation of a TGEN Proprietary Gene as a substituted Development Candidate, (i) all rights to the unsuitable Development Candidate if it is a TGEN Proprietary Gene shall revert to TGEN and (ii) all provisions contained herein and in the TGEN License Agreement other than in the preceding Clause (i) relating to the Development Candidate shall be deemed to apply to the substituted Development Candidate. 10. INTELLECTUAL PROPERTY RIGHTS 10.1 Title and all other ownership rights, including patent rights, relating to the Elan Intellectual Property shall belong to Elan. Title and all other ownership rights, including patent rights relating to the TGEN Intellectual Property shall belong to TGEN. Title and all other ownership rights, including patent rights, relating to the Newco Technology shall belong to Newco. 10.2 The Participants shall discuss in good faith all material issues relating to filing, prosecution and maintenance of Elan Patents and TGEN Patents insofar as such patent rights are of relevance to the License Agreements and any patentable inventions and discoveries within the Elan Intellectual Property, TGEN Intellectual Property and Newco Technology that relate to the License Agreements. Subject to mutual agreement to the contrary by TGEN and Elan the following provisions shall apply: 10.2.1 Elan, at its expense, shall make a good faith effort (i) to secure the grant of any material patent applications within the Elan Patents that relate to the Field; (ii) to defend all such applications against third party oppositions and interferences; and (iii) to maintain in force any material issued letters patent within the Elan Patents that relate to the Field (including any letters patent that may issue covering any such Elan Improvements that relate to the Field). Elan shall have the right in its discretion to control such filing, prosecution, defense and maintenance provided that Newco and TGEN at their request shall be provided with copies of all documents relating to such filing, prosecution, defense and maintenance in sufficient time to review such documents and comment thereon prior to filing. 10.2.2 TGEN, at its expense, shall make a good faith effort (i) to secure the grant of any material patent applications within the TGEN Patents that relate to the Field; (ii) to defend all such applications against third party oppositions and interferences; and (iii) to maintain in force any material issued letters patent 22 within the TGEN Patents that relate to the Field (including any letters patent that may issue covering any such TGEN Improvements that relate to the Field). TGEN shall have the right in its discretion to control such filing, prosecution, defense and maintenance provided that Elan and Newco at their request shall be provided with copies of all documents relating to such filing, prosecution, defense and maintenance in sufficient time to review such documents and comment thereon prior to filing. 10.2.3 It is understood that the respective owners of the technologies and rights described herein shall retain the discretion, in their sole judgment, as to whether and where to file or to prosecute patent applications on any such technologies or rights. 10.2.4 Elan and TGEN, at their joint expense on behalf of Newco, shall (i) file and prosecute patent applications on patentable inventions and discoveries within the Newco Technology; (ii) defend all such applications against third party oppositions and interferences; and (iii) maintain in force any issued letters patent within the Newco Patents (including any patents that issue on patentable inventions and discoveries within the Newco Technology). Elan and TGEN, directly or through the Management Committee, shall control such filing, prosecution, defense and maintenance. Elan and TGEN agree to negotiate in good faith on the course of action to be taken with respect to Newco Technology. 10.2.5 Newco, Elan and TGEN shall promptly inform each other in writing of any alleged infringement of any patents within the Elan Patents, the TGEN Patents or Newco Patents or any alleged misappropriation of trade secrets within the Elan Intellectual Property, the TGEN Intellectual Property or the Newco Technology by a third party of which it becomes aware and provide the others with any available evidence of such infringement or misappropriation insofar as such infringements or misappropriation relate solely to the Field. 10.2.6 Newco shall have the right to prosecute at its own expense and for its own benefit any infringements of the Elan Patents, the TGEN Patents or misappropriation of the Elan Intellectual Property and the TGEN Intellectual Property, insofar as such infringements or misappropriation relate solely to the Field. In the event that Newco takes such action, Newco shall do so at its own cost and expense. At Newco's request, the Participants shall cooperate with such action. Any recovery remaining after the deduction by Newco of the reasonable expenses (including attorney's fees and expenses) incurred in relation to such infringement proceeding shall belong to Newco. Should Newco decide not to pursue such infringers, within a reasonable period but in any event within twenty (20) days after receiving written notice of such alleged infringement or misappropriation each of the Participants may 23 in its discretion initiate such proceedings in its own name, at its expense and for its own benefit, and at such Participant's request, Newco shall cooperate with such action. Alternatively, the Participants may agree to institute such proceedings in their joint names and shall reach agreement as to the proportion in which they shall share the proceeds of any such proceedings, and the expense of any costs not recovered, or the costs or damages payable to the third party. If the infringement of the Elan Patents or the TGEN Patents affects both the Field as well as other products being developed or commercialized by TGEN or Elan or its commercial partners outside the Field, TGEN or Elan, as the case may be, shall endeavor to agree with Newco as to the manner in which the proceedings should be instituted and as to the proportion in which they shall share the proceeds of any such proceedings, and the expense of any costs not recovered, or the costs or damages payable to the third party. 10.2.7 Newco shall have the first right but not the obligation to bring suit or otherwise take action against any alleged infringement of the Newco patents or alleged misappropriation of the Newco Technology. If any such alleged infringement or misappropriation occurs that gives rise to a cause of action both inside and outside the Field, Newco, in consultation with the Participants, shall determine the cause of action to be taken. In the event that Newco takes such action, Newco shall do so at its own cost and expense and all damages and monetary award recovered in or with respect to such action shall be the property of Newco. Newco shall keep Elan and TGEN informed of any action in a timely manner so as to enable TGEN and Elan to provide input in any such action and Newco shall reasonably take into consideration any such input. At Newco's request, the Participants shall cooperate with any such action at Newco's cost and expense. 10.2.8 In the event that Newco does not bring suit or otherwise take action against an infringement of the Newco Patents or misappropriation of the Newco Technology, then (i) if only one Participant determines to pursue such suit or take such action at its own cost and expense, it shall be entitled to all damages and monetary award recovered in or with respect to such action and (ii) if the Participants pursue such suit or action outside of Newco, they shall negotiate in good faith an appropriate allocation of costs, expenses and recovery amounts. 10.2.9 In the event that a claim is, or proceedings are, brought against Newco by a third party alleging that the sale, distribution or use of a Product in the Territory or use of the Elan Intellectual Property or the TGEN Intellectual Property, as the case may be, infringes the intellectual property rights of such party, Newco shall promptly advise the other Participants of such threat or suit. 24 10.2.10 Newco shall indemnify, defend and hold harmless Elan or TGEN, as the case may be, against all actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys fees) relating directly or indirectly to all such claims or proceedings referred to herein, provided that Elan or TGEN, as the case may be, shall not acknowledge to the third party or to any other person the validity of any claims of such a third party, and shall not compromise or settle any claim or proceedings relating thereto without the prior written consent to Newco, not to be unreasonably withheld or delayed. At its option, Elan or TGEN, as the case may be, may elect to take over the conduct of such proceedings from Newco provided that Newco's indemnification obligations shall continue; the costs of defending such claim shall be borne by Elan or TGEN, as the case may be and such Participant shall not compromise or settle any such claim or proceeding without the prior written consent of Newco, such consent not to be unreasonably withheld, conditioned or delayed. 10.3 Newco shall not encumber any of its rights under the Licenses or the Newco Technology without the prior written consent of Elan and TGEN. Newco shall not be permitted to assign or sublicense any of its rights under the Licenses or the Program Technology without the prior written consent of Elan and TGEN, respectively, which may be withheld in Elan's or TGEN's sole discretion, as the case may be. Notwithstanding the foregoing, subject to the Elan Right of First Negotiation and the TGEN Right of First Negotiation, neither Elan nor TGEN shall unreasonably withhold their consent to the licensing of rights to Commercialize Products to Independent Third Parties who are not, with respect to Elan, Technological Competitors of Elan or, with respect to TGEN, Technological Competitors of TGEN. Any permitted agreement between Newco and any permitted third party for the development or exploitation of the Elan Intellectual Property and/or TGEN Intellectual Property in the Field shall require such third party to maintain the confidentiality of all information concerning the Elan Intellectual Property and the TGEN Intellectual Property. 11. EXPLOITATION OF PRODUCTS OUTSIDE THE FIELD 11.1 Licenses to Elan Program Technology and TGEN Program Technology. --------------------------------------------------------------- Subject to the provisions of the License Agreements, Newco shall grant to Elan an exclusive, royalty free and sublicensable license in the Territory to Elan Program Technology outside of the Field, and to TGEN an exclusive, royalty free and sublicensable license in the Territory to the TGEN Program Technology outside of the Field. Such license shall be effective and exclusive on a country-by-country basis for the life of any patents on such Elan Program Technology or TGEN Program Technology, as the case may be, in such country, or, to the extent the Elan Program Technology or TGEN Program Technology is not patented or covered by pending 25 patent applications in any country, for fifteen years from the date any products are first introduced on the market in such country by Elan or TGEN, as the case may be, under such license, or for such shorter period as shall be required under the applicable law of any country in the Territory. 11.2 Licenses for Newco Program Technology. Newco shall negotiate in good ------------------------------------- faith with Elan and TGEN, respectively, for the grant of exclusive or non- exclusive licenses for the rights to Newco Program Technology (other than TGEN or Elan Program Technology) outside the Field in the Territory. All such licenses shall contain such customary terms contained in similar licenses in the industry, as agreed to by the licensee and the unanimous decision of the Management Committee, acting in good faith. 12. COMMERCIALIZATION 12.1 The Participants shall assist Newco in diligently pursuing the research, development, prosecution and commercialization of Products in accordance with the Business Plan. It is contemplated that TGEN, either as agent for Newco or through its representatives on the Management Committee, shall, during and after the Research and Development Term, locate and negotiate with Independent Third Party development and/or marketing partners for the Product(s), and Elan and Newco agree to refer all inquiries and prospects to TGEN for such purposes. In the course of such representation, TGEN shall keep Newco and Elan fully informed of its efforts and progress with respect to the foregoing; provided that Elan shall be entitled to participate in discussions with such Independent Third Parties and that the Management Committee of Newco shall make all decisions concerning any agreements with any such parties; and provided further, however, that any such information shall be kept confidential and shall not be disclosed to the Elan Pharmaceutical Division (excluding senior executive personnel of Elan who are bound to this confidentiality provision). 12.2 In the event TGEN shall propose to Newco the development of one or more Products containing a TGEN Proprietary Gene, the Management Committee, by unanimous decision, shall determine whether or not to develop any such Product. 12.3 In the event an Independent Third Party shall propose to Newco the development of a Product containing a proprietary Gene of an Independent Third Party, the Management Committee, by unanimous decision, shall determine whether or not to develop any such Product. Any agreements with Independent Third Parties shall be on commercially reasonable terms (e.g., royalties, milestones, development fees, manufacturing rights) for developing and licensing Products. 26 13. MANUFACTURING 13.1 Elan and TGEN shall have preferential rights to negotiate agreements with Newco whereby Elan and/or TGEN will manufacture Products to meet Newco's requirements. Newco shall evaluate each such manufacturing agreement in light of which of Elan or TGEN (or neither, or both) has the capability and the committed resources to perform such manufacturing services in the best interests of Newco. If the parties cannot come to mutual agreement on who is best qualified to perform such manufacturing services, the matter will be resolved through the dispute resolution procedures contained in Clause 19 of this Agreement. To the extent Elan or TGEN performs any manufacturing services to Newco, it shall be paid a price equal to [ * ] and other terms and conditions customary in a supply agreements shall apply. 13.2 Subject to the foregoing rights, and the right of Newco to develop or Commercialize Products where the project was offered to, but not agreed upon, with Elan under the Elan Right of First Negotiation, or with TGEN under the TGEN Right of First Negotiation, Newco shall not be permitted to contract the manufacture or Commercialization of any Product without the prior written consent of Elan and TGEN, which consent will not be unreasonably withheld or delayed; provided that such reasonableness standard, in the case of Elan, shall not be applicable in the case of a proposed sublicense to any Technological Competitor of Elan and in the case of TGEN, shall not be applicable in the case of a proposed sublicense to any Technological Competitor of TGEN. 14. TECHNICAL SERVICES AND ASSISTANCE 14.1 Whenever commercially and technically feasible, Newco shall contract with TGEN or Elan, as the case may be, to perform such other services as Newco may require, other than those specifically dealt with hereunder or in the License Agreements. In determining which Party should provide such services, the Management Committee shall take into account the respective infrastructure, capabilities and experience of Elan and TGEN. 14.2 Newco shall, if appropriate, conclude an administrative support agreement with Elan and/or TGEN on such terms as the Parties thereto shall in good faith negotiate. The administrative services shall include one or more of the following administrative services as requested by Newco: 14.2.1 accounting, financial and other services; * Confidential Treatment Requested 27 14.2.2 tax services; 14.2.3 insurance services; 14.2.4 human resources services; 14.2.5 legal and company secretarial services; 14.2.6 patent and related intellectual property services; and 14.2.7 all such other services consistent with and of the same type as those services to be provided pursuant to this Agreement, as may be required. The foregoing list of services shall not be deemed exhaustive and may be changed from time to time upon written request by Newco. 14.3 The Parties agree that each Party shall effect and maintain comprehensive general liability insurance in respect of all clinical trials and other activities performed by them on behalf of Newco. The Stockholders and Newco shall ensure that the industry standard insurance policies shall be in place for all activities to be carried out by Newco. 14.4 If Elan or TGEN so requires, TGEN or Elan, as the case may be, shall receive, at times and for periods mutually acceptable to the Parties, employees of the other Party (such employees to be acceptable to the receiving Party in the matter of qualification and competence) for instruction in respect of the Elan Intellectual Property or the TGEN Intellectual Property, as the case may be, as necessary to further the Project. 14.5 The employees received by Elan or TGEN, as the case may be, shall be subject to obligations of confidentiality no less stringent than those set out in Clause 22 and such employees shall observe the rules, regulations and systems adopted by the Party receiving the said employees for its own employees or visitors. 15. AUDITORS, BANKERS, REGISTERED OFFICE, ACCOUNTING REFERENCE DATE Unless otherwise agreed by the Stockholders and save as may be provided to the contrary herein: 15.1 the auditors of Newco shall be Ernst & Young; 28 15.2 the bankers of Newco shall be Bank of Bermuda or such other bank as may be mutually agreed from time to time; and 15.3 the accounting reference date of Newco shall be December 31st in each Financial Year. 16. REGULATORY 16.1 Newco shall keep the other Parties promptly and fully advised of Newco's regulatory activities, progress and procedures. Newco shall inform the other Parties of any dealings it shall have with an RHA, and shall furnish the other Parties with copies of all correspondence relating to the Products. The Parties shall collaborate to obtain any required regulatory approval of the RHA to market the Products. 16.2 To the extent provided in the Business Plan, Newco shall, at its own cost, file, prosecute and maintain any and all Regulatory Applications for the Products in the Territory. 16.3 Any and all Regulatory Approvals obtained hereunder for any Product shall remain the property of Newco, provided that Newco shall allow Elan and TGEN access thereto solely to enable Elan and TGEN to fulfill their respective obligations and exercise their respective rights under this Agreement to the extent provided in the Business Plan. Newco shall maintain such Regulatory Approvals at its own cost. 16.4 It is hereby acknowledged that there are inherent uncertainties involved in the registration of pharmaceutical products with the RHAs insofar as obtaining approval is concerned and such uncertainties form part of the business risk involved in undertaking the form of commercial collaboration as set forth in this Agreement. Therefore, except for liabilities resulting from failure to use reasonable efforts, none of Elan, EIS or TGEN shall have any liability to Newco solely as a result of any failure of a Product to achieve the approval of any RHA. 17. TRANSFERS OF SHARES; RIGHT OF FIRST OFFER; TAG ALONG RIGHTS 17.1 General: ------- No Stockholder shall, directly or indirectly, sell or otherwise transfer (each, a "Transfer") any Shares held by it except in accordance with this Agreement. Newco shall not, and shall not permit any transfer agent or registrar for any Shares to, transfer upon the books of Newco any Shares from any Stockholder to any transferee, in any 29 manner, except in accordance with this Agreement, and any purported transfer not in compliance with this Agreement shall be void. 17.2 Rights of First Offer: --------------------- If at any time after the end of the Term, a Stockholder shall desire to Transfer any Shares owned by it (a "Selling Stockholder"), in any transaction or series of related transactions other than a Transfer to an Affiliate or subsidiary or in the case of EIS to an off-balance sheet special purpose entity established by EIS, then such Selling Stockholder shall deliver prior written notice of its desire to Transfer (a "Notice of Intention") (i) to Newco and (ii) to the Stockholders who are not the Selling Stockholder (and any transferee thereof permitted hereunder, if any), as applicable, setting forth such Selling Stockholder's desire to make such Transfer, the number of Shares proposed to be transferred (the "Offered Shares") and the proposed form of transaction (the "Transaction Proposal"), together with any available documentation relating thereto and the price at which such Selling Stockholder proposes to Transfer the Offered Shares (the "Offer Price"). The "Right of First Offer" provided for in this Clause 17 shall be subject to any "Tag Along Right" benefiting a Stockholder which may be provided for by Clause 17, subject to the exceptions set forth therein. Upon receipt of the Notice of Intention, the Stockholders who are not the Selling Stockholder shall have the right to purchase at the Offer Price the Offered Shares, exercisable by the delivery of notice to the Selling Stockholder (the "Notice of Exercise"), with a copy to Newco, within 10 business days from the date of receipt of the Notice of Intention. If no such Notice of Exercise has been delivered by the Stockholders who are not the Selling Stockholder within such 10-business day period, or such Notice of Exercise does not relate to all of the Offered Shares covered by the Notice of Intention, then the Selling Stockholder shall be entitled to Transfer all of the Offered Shares to the intended transferee. In the event that all of the Offered Shares are not purchased by the non-selling Stockholders, the Selling Stockholder shall sell the available Offered Shares within 30 days after the delivery of such Notice of Intention on terms no more favorable to a third party than those presented to the non-selling Stockholders. If such sale does not occur, the Offered Shares shall again be subject to the Right of First Offer set forth in Clause 17.2. In the event that any of the Stockholders who are not the Selling Stockholder exercises its right to purchase all of the Offered Shares (in accordance with this Clause 17), then the Selling Stockholder shall sell all of the Offered Shares to such Stockholder(s), in the amounts set forth in the Notice of Intention, after not less than 10 business days and not more than 25 business days from the date of the delivery of 30 the Notice of Exercise. In the event that more than one of the Stockholders who are not the Selling Stockholders wish to purchase the Offered Shares, the Offered Shares shall be allocated to such Stockholders on the basis of their pro rata equity interests in Newco. The rights and obligations of each of the Stockholders pursuant to the Right of First Offer provided herein shall terminate upon the date that the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act. At the closing of the purchase of all of the Offered Shares by the Stockholders who are not the Selling Stockholder (scheduled in accordance with Clause 17), the Selling Stockholder shall deliver certificates evidencing the Offered Shares being sold, duly endorsed, or accompanied by written instruments of transfer in form reasonably satisfactory to the Stockholders who are not the Selling Stockholder, duly executed by the Selling Stockholder, free and clear of any adverse claims, against payment of the purchase price therefor in cash, and such other customary documents as shall be necessary in connection therewith. 17.3 Tag Along Rights: ---------------- Subject to Clause 17.2, a Stockholder (the "Transferring Stockholder") shall not Transfer (either directly or indirectly), in any one transaction or series of related transactions, to any Person or group of Persons, any Shares, unless the terms and conditions of such Transfer shall include an offer to the other Stockholders (the "Remaining Stockholders"), to sell Shares at the same price and on the same terms and conditions as the Transferring Stockholder has agreed to sell its Shares (the "Tag Along Right"). In the event a Transferring Stockholder proposes to Transfer any Shares in a transaction subject to this Clause 17.3, it shall notify, or cause to be notified, the Remaining Stockholders in writing of each such proposed Transfer. Such notice shall set forth: (i) the name of the transferee and the amount of Shares proposed to be transferred, (ii) the proposed amount and form of consideration and terms and conditions of payment offered by the transferee (the "Transferee Terms") and (iii) that the transferee has been informed of the Tag Along Right provided for in this Clause 17, if such right is applicable, and the total number of Shares the transferee has agreed to purchase from the Stockholders in accordance with the terms hereof. The Tag Along Right may be exercised by each of the Remaining Stockholders by delivery of a written notice to the Transferring Stockholder (the "Co-sale Notice") within 10 business days following receipt of the notice specified in the preceding 31 subsection. The Co-sale Notice shall state the number of Shares owned by such Remaining Stockholder which the Remaining Stockholder wishes to include in such Transfer; provided, however, that without the written consent of the Transferring Stockholder, the amount of such securities belonging to the Remaining Stockholder included in such Transfer may not be greater than such Remaining Stockholder's percentage beneficial ownership of Fully Diluted Common Stock multiplied by the total number of shares of Fully Diluted Common Stock to be sold by both the Transferring Stockholder and all Remaining Stockholders. Upon receipt of a Co-sale Notice, the Transferring Stockholder shall be obligated to transfer at least the entire number of Shares set forth in the Co- sale Notice to the transferee on the Transferee Terms; provided, however, that the Transferring Stockholder shall not consummate the purchase and sale of any Shares hereunder if the transferee does not purchase all such Shares specified in all Co-sale Notices. If no Co-sale Notice has been delivered to the Transferring Stockholder prior to the expiration of the 10 business day period referred to above and if the provisions of this Section have been complied with in all respects, the Transferring Stockholder shall have the right for a 45-day calendar day period to Transfer Shares to the transferee on the Transferee Terms without further notice to any other party, but after such 45-day period, no such Transfer may be made without again giving notice to the Remaining Stockholders of the proposed Transfer and complying with the requirements of this Clause 17. At the closing of any Transfer of Shares subject to this Clause 17, the Transferring Stockholder, and the Remaining Stockholder, in the event such Tag Along Right is exercised, shall deliver certificates evidencing such securities as have been Transferred by each, duly endorsed, or accompanied by written instruments of transfer in form reasonably satisfactory to the transferee, free and clear of any adverse claim, against payment of the purchase price therefor. Notwithstanding the foregoing, this Clause 17 shall not apply to any sale of Common Stock pursuant to an effective registration statement under the Securities Act in a bona fide public offering. The rights and obligations of each of the Stockholders pursuant to the "Tag Along Right" provided herein shall terminate upon the date that the Common Stock is registered under Section 12(b) or 12(g) of the Exchange Act. 18. MATTERS REQUIRING PARTICIPANTS' APPROVAL 18.1 In consideration of TGEN and Elan agreeing to enter into the License Agreements, the Parties hereby agree that Newco shall not during the 54-month period beginning on the Closing Date, without the prior approval of the EIS Director and at 32 least two of the TGEN Directors, but subject to any agreements in any Transaction Documents whereby consent to certain of the following is not to be unreasonably withheld, conditioned or delayed: 18.1.1 engage in any activity other than the Business; 18.1.2 acquire or dispose of assets of a value in excess of US $25,000 or sell the principal assets, undertaking or Business of Newco; 18.1.3 create any fixed or floating charge, lien (other than a lien arising by operation of law) or other encumbrance over the whole or any part of the undertaking, property or assets of Newco or of any Subsidiary; 18.1.4 borrow any sum in excess of a maximum aggregate sum outstanding at any time of US $25,000; 18.1.5 make any loan or advance or give any credit (other than normal trade credit) in excess of US$25,000 to any Person; 18.1.6 give any guarantee or indemnity to secure the liabilities or obligations of any Party other than those which it is usual to give in the ordinary course of a business similar to the Business; 18.1.7 enter into any contract, arrangement or commitment involving expenditure on capital account or the realization of capital assets if the amount or the aggregate amount of such expenditure or realization by Newco would exceed US$50,000 in any one year or in relation to any one project, and for the purpose of this paragraph the aggregate amount payable under any agreement for hire, hire purchase or purchase on credit sale or conditional sale terms shall be deemed to be capital expenditure incurred in the year in which such agreement is entered into; 18.1.8 issue any unissued Shares or create or issue any new shares; 18.1.9 alter any rights attaching to any class of share in the capital of Newco or alter the Newco Memorandum of Association and Bye-Laws; 18.1.10 consolidate, sub-divide or convert any of Newco's share capital or in any way alter the rights attaching thereto; 18.1.11 dispose of Newco or of any shares in Newco; 33 18.1.12 enter into any partnership or profit sharing agreement with any Person other than arrangements with trade representatives and similar Persons in the ordinary course of business; 18.1.13 do or permit or suffer to be done any act or thing whereby Newco may be wound up (whether voluntarily or compulsorily), save as otherwise expressly provided for in this Agreement; 18.1.14 issue any debentures or other securities convertible into shares or debentures or any share warrants or any options in respect of shares in Newco; 18.1.15 enter into any contract or transaction except in the ordinary and proper course of the Business on arm's length terms; 18.1.16 acquire, purchase or subscribe for any shares, debentures, mortgages or securities (or any interest therein) in any company, trust or other Person; 18.1.17 adopt any employee benefit program or incentive schemes; 18.1.18 engage any new employee at remuneration of greater than US$60,000 per annum; 18.1.19 pay any remuneration to the Directors by virtue of holding such office other than Directors who hold executive office; 18.1.20 license or sub-license any of the Elan Intellectual Property, TGEN Intellectual Property, or Newco Technology; 18.1.21 amend or vary the terms of the TGEN License Agreement or the Elan License Agreement; 18.1.22 change the authorized signatories on Newco bank accounts; 18.1.23 amend or vary the Business Plan or approve the Budget; 18.1.24 alter the number of Directors; 18.1.25 pay dividends or distributions in respect of, or redeem or repurchase, the equity of Newco; 18.1.26 enter into joint venture agreements or any similar arrangements with any Person; or 34 18.1.27 create, acquire or dispose of any Subsidiary or of any shares in any Subsidiary. 19. DISPUTES 19.1 Should any dispute or difference arise between Elan and TGEN, or between Elan or TGEN and Newco, during the period that this Agreement is in force, then any Party may forthwith give notice to the other Parties that it wishes such dispute or difference to be referred to the Chief Executive Officer of TGEN and the President of EPT. 19.2 In any event of a notice being served in accordance with Clause 19.1, each of the Participants shall within 14 days of the service of such notice prepare and circulate to the Chief Executive Officer of TGEN and the President of EPT a memorandum or other form of statement setting out its position on the matter in dispute and its reasons for adopting that position. Each memorandum or statement shall be considered by the Chief Executive Officer of TGEN and the President of EPT who shall endeavor to resolve the dispute. If the chief executive officers of the Participants agree upon a resolution or disposition of the matter, they shall each sign a statement which sets out the terms of their agreement. The Participants agree that they shall exercise the voting rights and other powers available to them in relation to Newco to procure that the agreed terms are fully and promptly carried into effect. 19.3 In the event the chief executive officers of the Participants are unable to resolve such dispute, then any Party may forthwith give notice to the other Parties that it wishes such dispute or difference to be referred to non- binding arbitration and conciliation by a mediator jointly selected by the Participants. 19.4 Any dispute hereunder relating to the interpretation of this Agreement or the claim for misrepresesntation or breach of obligation that is not settled by mutual consent or through such non-binding arbitration and conciliation shall be finally adjudicated by binding arbitration in accordance with the rules of the American Arbitration Association to be conducted in the County, City and State of New York before a panel of three arbitrators, one (1) of whom shall be selected by Elan, one (1) by TGEN and the third by the two (2) previously selected arbitrators. Each of the Parties agrees that the decisions of the arbitrators shall be final and binding upon it. The costs of any arbitration shall be shared equally by TGEN and Elan. 35 20. SUBSEQUENT FUNDING 20.1 The Subsequent Funding shall be provided by EIS and TGEN in accordance with the Funding Agreement at such times as shall be necessary for the development of Products, as shall be reasonably determined in good faith by the Newco Board of Directors, including the EIS Director (or after the exercise of the Exchange Right by at least one of the EIS Directors) and at least two of the TGEN directors, that such Subsequent Funding is required for the development of Products, whether in accordance with the Business Plan or otherwise. 20.2 In the event that (a) one Participant determines not to fund any amounts required to develop and commercialize a particular Product, as opposed to generally failing to fund as described under Section 20.1, above, and (b) the other Participant desires to fund such Product, the Participant so desiring to provide such funding shall have the right to cause Newco to transfer such Product to it (and to enter into any appropriate license or assignment agreements) on then-standard market terms and conditions, including as to pricing. 21. TERMINATION 21.1 This Agreement shall govern the operation and existence of Newco until (i) terminated by written agreement of all Parties hereto or (ii) otherwise terminated in accordance with this Clause 21. 21.2 For the purpose of this Clause 21, a "Relevant Event" is committed or suffered by a Participant if: 21.2.1 it commits a material breach of its obligations under this Agreement or the applicable License, which breach remains uncured 60 days after written notice thereof; provided, however, that (x) if the breaching Participant has proposed a course of action to rectify the breach and is acting in good faith to rectify same but has not cured the breach by the 60th day, such period shall be extended by such period as is reasonably necessary to permit the breach to be rectified and (y) if there is a good faith dispute as to the existence of the breach or as to its materiality, or regarding the amount of any required payment, provided, in the case of disputes as to the amount due, that any undisputed amount is paid, the right of the non-breaching Party to terminate this Agreement shall be stayed for a reasonable period during which a good faith resolution of the dispute will be obtained, either by agreement or, failing that, through the dispute resolution provisions under Clause 19 of this Agreement; 36 21.2.2 a distress, execution, sequestration or other process is levied or enforced upon or sued out against a material part of its property which is not discharged or challenged within 30 days; 21.2.3 it is unable to pay its debts in the normal course of business; 21.2.4 it ceases wholly or substantially to carry on its business, otherwise than for the purpose of a reconstruction or amalgamation, without the prior written consent of the other Participant (such consent not to be unreasonably withheld); 21.2.5 the appointment of a liquidator, receiver, administrator, examiner, trustee or similar officer of such Participant or over all or substantially all of its assets under the law of any applicable jurisdiction, including without limitation, the United States of America, Bermuda or Ireland; 21.2.6 an application or petition for bankruptcy, corporate re- organization, composition, administration, examination, arrangement or any other procedure similar to any of the foregoing under the law of any applicable jurisdiction, including without limitation, the United States of America, Bermuda or Ireland, is filed, and is not discharged within 60 days, or a Participant applies for or consents to the appointment of a receiver, administrator, examiner or similar officer of it or of all or a material part of its assets, rights or revenues or the assets and/or the business of a Participant are for any reason seized, confiscated or condemned. 21.3 If either Participant commits a Relevant Event, the other Stockholder shall have in addition to all other legal and equitable rights and remedies hereunder, the right to terminate this Agreement upon 30 days' written notice. 21.4 The provisions of Clauses 1, 3, 7.1, 7.2.6, 11.1, 15, 17, 19 (but only with respect to disputes relating to this Agreement and not necessarily all disputes arising after the Term that may otherwise relate to Newco), 21.4, 22, 23 and 24 shall survive the termination of this Agreement; all other terms and provisions of this Agreement shall cease to have effect and be null and void upon the termination of this Agreement. 22. CONFIDENTIALITY 22.1 The Parties and/or Newco acknowledge and agree that it may be necessary, from time to time, to disclose to each other confidential and/or proprietary information, including without limitation, inventions, works of authorship, trade secrets, specifications, designs, data, know-how and other information, relating to the Field, the Products, present or future products, the Newco Technology, the Elan 37 Intellectual Property or the TGEN Intellectual Property, as the case may be, or otherwise as to methods, compounds, research projects, work in process, services, sales suppliers, customers, employees and/or business of the disclosing Party, whether in oral, written, graphic or electronic form (collectively "Confidential Information"). 22.2 Any Confidential Information revealed by a Party to another Party shall be maintained as confidential and shall be used by the receiving Party exclusively for the purposes of fulfilling the receiving Party's rights and obligations under this Agreement, and for no other purpose. Confidential Information shall not include: 22.2.1 information that is generally available to the public; 22.2.2 information that is made public by the disclosing Party; 22.2.3 information that is independently developed by the receiving Party, as evidenced by such Party's written records, without the aid, application or use of the disclosing Party's Confidential Information; 22.2.4 information that is published or otherwise becomes part of the public domain without any disclosure by the receiving Party, or on the part of the receiving Party's directors, officers, agents, representatives or employees; 22.2.5 information that becomes available to the receiving Party on a non-confidential basis, whether directly or indirectly, from a source other than the disclosing Party, which source did not acquire this information on a confidential basis; 22.2.6 information which the receiving Party is required to disclose pursuant to: (i) a valid order of a court or other governmental body or any political subdivision thereof or as otherwise required by law, rule or regulation; or (ii) other requirement of law; provided, however, that if the receiving Party becomes legally required to disclose any Confidential Information, the receiving Party shall give the disclosing Party prompt notice of such fact so that the disclosing Party may obtain a protective order or seek confidential treatment or other appropriate remedy concerning any such disclosure. The receiving Party shall fully co-operate with the disclosing Party in connection with the disclosing Party's efforts to obtain any such order or other remedy. If any such order or other remedy does not fully preclude disclosure, the receiving Party shall make such disclosure only to the extent that such disclosure is legally required; 38 22.2.7 information which was already in the possession of the receiving Party at the time of receiving such information, as evidenced by its written records, provided such information was not previously provided to the receiving Party from a source which was under an obligation to keep such information confidential; or 22.2.8 information that is the subject of a written permission to disclose, without restriction or limitation, by the disclosing Party. 22.3 Each Party agrees to disclose Confidential Information of another Party only to those employees, representatives and agents requiring knowledge thereof in connection with their duties directly related to the fulfilling of the Party's obligations under this Agreement, so long as such persons are under an obligation of confidentiality no less stringent than as set forth herein. Each Party further agrees to inform all such employees, representatives and agents of the terms and provisions of the Transaction Documents and their duties hereunder and to obtain their consent hereto as a condition of receiving Confidential Information. Each Party agrees that it will exercise the same degree of care and protection, but no less than a reasonable degree of care and protection, to preserve the proprietary and confidential nature of the Confidential Information disclosed by a Party, as the receiving Party would exercise to preserve its own Confidential Information. Each Party agrees that it will, upon request of another Party, return all documents and any copies thereof containing Confidential Information belonging to or disclosed by such other Party. Each Party shall promptly notify the other Parties upon discovery of any unauthorized use or disclosure of the other Parties' Confidential Information. 22.4 Notwithstanding the above, each Party may use or disclose Confidential Information disclosed to it by another Party to the extent such use or disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with patent applications, prosecuting or defending litigation, complying with applicable governmental regulations, including without limitation those relating to securities regulations and disclosures or otherwise submitting information to tax or other governmental authorities, conducting clinical trials, or granting a permitted sub-license or otherwise exercising its rights hereunder. 22.5 Nothing contained herein other than Clause 6 ("Non-Competition") shall obligate or restrict any Party from utilizing public, non-proprietary information which is not subject to the protection of applicable patent laws. 22.6 The provisions relating to confidentiality in this Clause 22 shall remain in effect during the Term and for a period of seven years following the termination of this Agreement. 39 22.7 The Parties agree that the obligations of this Clause 22 are necessary and reasonable in order to protect the Parties' respective businesses, and each Party expressly agrees that monetary damages would be inadequate to compensate a Party for any breach by the other Party of its covenants and agreements set forth herein. Accordingly, the Parties agree and acknowledge that any such violation or threatened violation will cause irreparable injury to a Party and that, in addition to any other remedies that may be available, in law or in equity or otherwise, any Party shall be entitled to obtain injunctive relief against the threatened breach of the provisions of this Clause 22, or a continuation of any such breach by the other Party, specific performance and other equitable relief to redress such breach together with its damages and reasonable counsel fees and expenses to enforce its rights hereunder, without the necessity of proving actual or express damages. 23. COSTS 23.1 Each Stockholder shall bear its own legal and other costs incurred in relation to preparing and concluding this Agreement and the other Transaction Documents. 23.2 All other costs, legal fees, registration fees and other expenses relating to the transactions contemplated hereby, including the costs and expenses incurred in relation to the incorporation of Newco, shall be borne by Newco. 24. GENERAL 24.1 Good Faith: ---------- Each of the Parties hereto undertakes with the others to do all things reasonably within its power that are necessary or desirable to give effect to the spirit and intent of this Agreement. 24.2 Further Assurance: ----------------- At the request of any of the Parties, the other Party or Parties shall (and shall use reasonable efforts to procure that any other necessary parties shall) execute and perform all such documents, acts and things as may reasonably be required subsequent to the signing of this Agreement for assuring to or vesting in the requesting Party the full benefit of the terms hereof. 24.3 Reliance on Representation and Warranties: ----------------------------------------- 40 Each of the Parties hereto hereby acknowledges that in entering into this Agreement it has not relied on any representation or warranty except as expressly set forth herein or in any document referred to herein. 24.4 Force Majeure: ------------- Neither Party to this Agreement shall be liable for delay in the performance of any of its obligations hereunder if such delay is caused by or results from causes beyond its reasonable control, including without limitation, acts of God, fires, strikes, acts of war (whether war be declared or not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances or intervention of any relevant government authority, but any such delay or failure shall be remedied by such Party as soon as practicable. 24.5 Relationship of the Parties: --------------------------- Nothing contained in this Agreement is intended or is to be construed to constitute Elan/EIS and TGEN as partners, or Elan/EIS as an employee or agent of TGEN, or TGEN as an employee or agent of Elan/EIS. No Party hereto shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of another Party or to bind another Party to any contract, agreement or undertaking with any third Party. 24.6 Counterparts: ------------ This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 24.7 Notices: ------- Any notice to be given under this Agreement shall be sent in writing by registered or recorded delivery post or reputable overnight courier such as Federal Express or telefaxed to: 41 Elan at: Lincoln House, Lincoln Place, Dublin 2 Ireland Attention: Vice President & General Counsel, Elan Pharmaceutical Technologies, a division of Elan Corporation, plc Fax: 353-1-709-4124 with a copy to: Brock Silverstein LLC One Citicorp Center, 56th Floor New York, NY 10022 Attention: David Robbins, Esq. Fax: 212-371-5500 EIS at: Elan International Services, Ltd. 102 St. James Court Flatts, Smiths Parish FL04 Bermuda Attention: President Fax: 441-292-2224 with a copy to: Brock Silverstein LLC One Citicorp Center, 56th Floor New York, NY 10022 Attention: David Robbins, Esq. Fax: 212-371-5500 TGEN at: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, Washington 98101 Attention: Chief Executive Officer Telefax: (206) 623-7064 42 with a copy to: Perkins Coie LLP 411-108/th/ Avenue N.E., Suite 1800 Bellevue, Washington 98004-5584 Attention: Roger M. Tolbert, Esq. Telefax: (425) 453-7350 Newco at: Targeted Genetics Newco, Ltd. c/o Conyers Dill & Pearman Clarendon House, Church Street P.O. Box HM 666 Hamilton HM CX Bermuda Attention: David Doyle Fax: 44-1-292-4720 with a copy to each of TGEN, EIS and their respective counsel at the addresses indicated above; or to such other address(es) as may from time to time be notified by any Party to the others hereunder. Any notice sent by mail shall be deemed to have been delivered within seven (7) business days after dispatch or delivery to the relevant courier and any notice sent by telecopy shall be deemed to have been delivered upon confirmation of receipt by telephone. Notices of change of address shall be effective upon receipt. 24.8 Governing Law ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to any conflict of law provision or rule. 24.9 Severability: ------------ If any provision in this Agreement or of any Transaction Document is agreed by the Parties to be, deemed to be or becomes invalid, illegal, void or unenforceable under any law that is applicable hereto, such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so 43 amended without materially altering the intention of the Parties, it will be deleted, with effect from the date of such agreement or such earlier date as the Parties may agree, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way. 24.10 Amendments: ---------- No amendment, modification or addition hereto shall be effective or binding on any Party unless set forth in writing and executed by a duly authorized representative of all Parties. 24.11 Waiver: ------ No waiver of any right under this Agreement shall be deemed effective unless contained in a written document signed by the Party charged with such waiver, and no waiver of any breach or failure to perform shall be deemed to be a waiver of any future breach or failure to perform or of any other right arising under this Agreement. 24.12 Assignment: ---------- None of the Parties shall be permitted to assign its rights or obligations hereunder without the prior written consent of the other Parties except as follows: 24.12.1 Elan, EIS and/or TGEN shall have the right to assign their rights and obligations hereunder to their Affiliates, provided, however, that such assignment does not result in adverse tax consequences for any other Parties. 24.12.2 Elan and EIS shall have the right to assign their rights and obligations hereunder to an off-balance sheet special purpose entity established by Elan or EIS; provided, however, that such assignment does not result in adverse tax consequences for any other Parties. 24.12.3 Elan, EIS and/or TGEN shall have the right to assign or otherwise transfer their rights and obligations hereunder in connection with a sale of all or substantially all of the business of such Party to which the transaction Documents relate, whether by merger, sale of stock, sale of assets or otherwise. Notwithstanding any assignment hereof, each Party will remain fully liable hereunder. 24.13 Whole Agreement/No Effect on Other Agreements: --------------------------------------------- 44 This Agreement (including the Schedules attached hereto) and the other Transaction Documents set forth all of the agreements and understandings between the Parties with respect to the subject matter hereof, and supersedes and terminates all prior agreements and understandings between the Parties with respect to the subject matter hereof. There are no agreements or understandings with respect to the subject matter hereof, either oral or written, between the Parties other than as set forth in this Agreement and the other Transaction Documents. In the event of any ambiguity or conflict arising between the terms of this Agreement and those of the Newco Memorandum of Association and Bye-Laws, the terms of this Agreement shall prevail. No provision of this Agreement shall be construed so as to negate, modify or affect in any way the provisions of any other agreement between any of the Parties unless specifically referred to, and solely to the extent provided herein. In the event of a conflict between the provisions of this Agreement and the provisions of the License Agreements, the terms of this Agreement shall prevail unless this Agreement or the License Agreement specifically provides otherwise. 24.14 Successors: ---------- This Agreement shall be binding upon and inure to the benefit of the Parties hereto, their successors and permitted assigns. [Signature Page Follows] 45 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the day first set forth above. SIGNED BY: /s/ Kevin Insley ----------------------- for and on behalf of ELAN CORPORATION, PLC in the presence of: /s/ [illegible] ----------------- SIGNED BY: /s/ Kevin Insley ----------------------- for and on behalf of ELAN INTERNATIONAL SERVICES, LTD. in the presence of: /s/ [illegible] ----------------- SIGNED BY: /s/ Stewart Parker ----------------------- for and on behalf of TARGETED GENETICS CORPORATION in the presence of: /s/ Jim Johnson ----------------- SIGNED BY: /s/ Stewart Parker ----------------------- for and on behalf of TARGETED GENETICS NEWCO, LTD. in the presence of: /s/ Jim Johnson ----------------- 46 EX-1.5 6 CONVERTIBLE PROMISSORY NOTE EXHIBIT 1.5 Execution Copy THIS CONVERTIBLE PROMISSORY NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT UNDER ANY CIRCUMSTANCES BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS ALSO SUBJECT TO THE RESTRICTIONS CONTAINED IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT, DATED JULY 21, 1999, BY AND BETWEEN TARGETED GENETICS CORPORATION AND ELAN INTERNATIONAL SERVICES, LTD. TARGETED GENETICS CORPORATION CONVERTIBLE PROMISSORY NOTE U.S. $12,015,000 July 21, 1999 New York, New York The undersigned, Targeted Genetics Corporation, a Washington corporation with offices at 1100 Olive Way, Suite 100, Seattle, Washington 98101 (the "Company"), unconditionally promises to pay to Elan International Services, ------- Ltd., a Bermuda private limited company ("EIS"), or its permitted assigns, --- transferees and successors as provided herein (collectively, the "Holder"), on ------ July 21, 2005 (the "Maturity Date"), at such place as may be designated by the ------------- Holder to the Company, the principal amount outstanding hereunder (not to exceed U.S.$12,015,000), together with interest thereon accrued at a rate per annum equal to 12.0%, from and after the date of the initial disbursement of funds hereunder (the "Original Issue Date"), compounded on a semi-annual basis, the ------------------- initial such compounding to commence on the date that is six months from and after the Original Issue Date (each such date, a "Compounding Date"). ---------------- SECTION 1. SECURITIES PURCHASE AGREEMENT AND FUNDING AGREEMENT. This Note is issued pursuant to a Securities Purchase Agreement dated as of the date hereof, by and between the Company and EIS (as amended at any time, the "Securities Purchase Agreement"), and is intended to be ----------------------------- afforded the benefits thereof, including the representations and warranties set forth therein. The Company shall use the proceeds of the issuance and sale of this Note solely in accordance with the provisions set forth therein and in a certain Funding Agreement, dated as of the date hereof ----------------- (as amended at any time, the "Funding Agreement"), by and among Elan Corporation, plc, an Irish public limited company and the parent corporation of EIS, EIS and the Company, and as described in Section 6 below. Capitalized terms used but not otherwise defined herein shall have the meanings given such terms in the Securities Purchase Agreement. SECTION 2. DISBURSEMENTS. (a) From and after the date hereof and until July 21, 2002, disbursements shall be made by the Holder to the Company hereunder in minimum increments of U.S.$500,000 (except in the event that an amount less than U.S.$500,000 shall be remaining and available for funding hereunder, in which case such lesser amount may be funded hereunder); provided, that the Company shall deliver notice of a request therefor to the Holder in the form attached hereto as Exhibit A (the "Disbursement Notice"), together with an Officer's --------- ------------------- Certificate confirming that as of such date no Event of Default exists hereunder; the Holder shall, subject to the terms and conditions hereof, fund such amount within 10 business days of the receipt of the Disbursement Notice, subject to the receipt by the Holder of any required approvals under the Mergers and Takeovers (Control) Acts 1978-1996. A "business day" is any day that commercial banks are open for the transaction of business in the City of New York. (b) Subject to the remainder of this Section 2, if the Holder and the Company agree to extend the Research and Development Term, as defined in the Joint Development and Operating Agreement dated as of the date hereof, then disbursements shall be made by the Holder to the Company hereunder until the end of the Research and Development Term. (c) The Holder shall not be required to disburse more than a maximum principal amount, excluding accruals of interest, of U.S.$12,015,000. SECTION 3. PAYMENTS AND COVENANTS. (a) Unless earlier converted in accordance with the terms of Section 4 below, or prepaid in accordance with the terms hereof, the entire outstanding principal amount of this Note, together with any accrued and unpaid interest thereon, shall be due and payable on the Maturity Date. (b) Accrued interest hereon shall be paid, at the Company's option, either (i) in cash or (ii) shall be capitalized and added to the principal amount outstanding hereunder on each Compounding Date. (c) This Note may be prepaid by the Company, in whole or in part on a per tranche basis, at any time, upon not less than 15 days' prior written notice to EIS, in cash, by causing to be paid to the Holder an amount equal to the higher of (x) the fair market value of the Company's Common Stock, par value $.01 per share (the "Common Stock") based on a price per share equal to the ------------ average of the closing price of the Common Stock for the 60 trading days ending two 2 business days prior to the date of repayment, underlying such tranche at the time of such repayment, and (y) the outstanding principal amount of such tranche and any and all accrued and unpaid interest thereon. (d) This Note may be prepaid by the Company, in whole or in part on a per tranche basis, at any time, upon not less than 15 days' prior written notice to EIS, in shares of the Common Stock, by causing to be issued to the Holder the number of shares of Common Stock equal to the outstanding principal amount of such tranche and any and all accrued and unpaid interest thereon divided by the lesser of (1) the price equal to the average of the closing price of the Common Stock for the 60 trading days ending two business days prior to the date or of repayment and (2) the Conversion Price (as defined below). SECTION 4. CONVERSION. (a) Conversion Right. ---------------- (i) From and after the Original Issue Date and until this Note is repaid in full, the Holder shall have the right from time to time, in its sole discretion, to convert the outstanding principal amount and accrued and unpaid interest then-outstanding hereunder, on a per tranche basis (each, a "Conversion Right"), into such number of shares ---------------- of Common Stock that shall be obtained by dividing the sum of the outstanding principal amount of such tranche and all accrued and unpaid interest thereon by a per share price calculated as 150% of the average of the closing price of the Common Stock for the 60 trading days ending two business days prior to the date that disbursement of such tranche is requested by the Company (each, a "Conversion Price"). ---------------- For the purposes of calculating the Conversion Price, each accrual of interest shall constitute a new tranche hereunder. (ii) The Holder shall be entitled to exercise a Conversion Right upon at least five days' prior written notice to the Company, such notice to be in the form attached hereto as Exhibit B. Within 10 days --------- of the conversion date specified in such notice, the Company shall issue stock certificates to EIS representing the aggregate number of shares of Common Stock due to EIS as a result of such conversion. (b) Reclassification, Etc. In case of (i) any reclassification, --------------------- reorganization, change or conversion of securities of the class issuable upon conversion of the outstanding principal amount and accrued and unpaid interest then-outstanding hereunder (other than a change in par value, or from par value to no par value), or (ii) any consolidation of the Company with or into another entity (other than a merger or consolidation with another entity in which the Company is the surviving entity and that does not result in any reclassification or change of the class of securities issuable upon the conversion of the outstanding principal amount and accrued and unpaid interest then-outstanding hereunder), or (iii) any sale of all or substantially all the assets of the Company (excluding the transactions contemplated by the Transaction Documents), then the Company, or such successor or purchasing entity, as the case may be, shall duly execute and deliver to the Holder a new Note or a supplement hereto (in form and substance reasonably satisfactory to the 3 Holder of this Note), so that the Holder shall have the right to receive, at a total purchase price not to exceed the outstanding principal amount and accrued and unpaid interest then-outstanding hereunder, and in lieu of the shares of Common Stock theretofore issuable upon the conversion of such outstanding principal amount and accrued and unpaid interest then-outstanding hereunder, the kind and amount of shares of stock and other securities, money and property receivable upon such reclassification, reorganization, change, merger, consolidation or conversion by a holder of the number of shares of Common Stock then issuable under this Note. Such new Note shall provide for adjustments that shall be as nearly equivalent as may be practicable to the adjustments provided for in this Section 4. The provisions of this Section 4(b) shall similarly attach to successive reclassifications, reorganizations, changes, mergers, consolidations, transfers or conversions. (c) No Impairment. The Company will not, by amendment of its Articles of ------------- Incorporation or bylaws or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of EIS against impairment. This provision shall not restrict the Company from otherwise amending and/or restating its Articles of Incorporation in accordance with Washington Business Corporation Act. (d) Notice of Adjustments. Whenever the consideration issuable upon a --------------------- conversion hereunder shall be changed pursuant to this Section 4, the Company shall prepare a certificate setting forth, in reasonable detail, the event requiring the change and the kind and amount of shares of stock and other securities, money and property subsequently issuable upon a conversion hereof. Such certificate shall be signed by its chief financial officer and shall be delivered to EIS. (e) Fractional Shares; Rounding. No fractional shares of Common Stock will --------------------------- be issued in connection with any exercise hereunder, but in lieu of such fractional shares the Company shall make a cash payment therefor based on the applicable Conversion Price. All calculations under this Section 4 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. SECTION 5. EXCHANGE RIGHT. (a) In the event that EIS shall exercise the EIS Exchange Right, EIS shall cause to be paid to the Company, within 30 days of such exercise, an amount equal to 30.1% of the total amount of Subsequent Funding (as such term is defined in the Funding Agreement dated as of the date hereof) to date provided by each of the parties to Newco, in accordance with the terms of the Funding Agreement, together with all accrued interest thereon. 4 SECTION 6. USE OF PROCEEDS. The Company shall use the proceeds of this Note solely for developmental funding of Newco, including the reimbursement of the Company for any amounts previously advanced for such developmental funding, provided that the Board of Directors of Newco has determined that such developmental funding is necessary (which shall include the consent of at least one of the Company's directors and the EIS director). Accordingly, total disbursements hereunder shall not exceed the amount of Subsequent Funding paid by the Company to Newco pursuant to the Funding Agreement. SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following events shall constitute an event of default (an "Event of Default"): ---------------- (a) a default in the payment of the principal amount of this Note, when and as the same shall become due and payable; (b) a default in the payment of any accrued and unpaid interest on this Note, when and as the same shall become due and payable; (b) a material breach by the Company of its obligations under the JDOA or the Company License Agreement, which breach remains uncured 60 days after written notice thereof by EIS; (c) a distress, execution, sequestration or other process is levied or enforced upon the Company or sued out against a material part of its property which is not discharged or challenged within 30 days; (d) the Company is unable to pay its debts in the normal course of business; (e) the Company ceases wholly or substantially to carry on its business, otherwise than for the purpose of a reconstruction or amalgamation, without the prior written consent of the EIS (such consent not to be unreasonably withheld); (f) the appointment of a liquidator, receiver, administrator, examiner, trustee or similar officer of the Company or over all or substantially all of its assets under the law; or (g) any other termination of the JDOA. SECTION 8. REMEDIES IN THE EVENT OF DEFAULT. (a) In the case of any Event of Default by the Company, the Holder, may in its sole discretion, demand that the aggregate amount of funds advanced to the Company under this Note and outstanding hereunder and accrued and unpaid interest thereon shall, in addition to all other rights and remedies of the Holder hereunder and under applicable law, be and become 5 immediately due and payable upon written notice delivered by the Holder to the Company. Notwithstanding the preceding sentence, the rights of the Holder as set forth in Section 4 hereunder shall survive any such acceleration and payment. If the Holder shall accelerate and be paid and then elect to exercise the Conversion Right, the Holder shall pay the Company for shares of Common Stock issued under such Conversion Right. (b) The Company hereby waives demand and presentment for payment, notice of nonpayment, protest and notice of protest, diligence, filing suit, and all other notice and promises to pay the Holder its costs of collection of all amounts due hereunder, including reasonable attorneys' fees. (c) In the case of any Event of Default under this Note by the Company this Note shall continue to bear interest after such default at the interest rate otherwise in effect hereunder plus 3% per annum (but in any event not in excess of the maximum rate of interest permitted by applicable law). SECTION 9. SENIORITY. The Company shall not, without the prior written consent of the Holder, incur any indebtedness for money borrowed that shall rank senior(in right or priority of payment or otherwise)to the Note, other than (a)financing under bank credit agrements or similar financing failities, up to a maximum aggregate outstanding principal and committed amountof $5 million,(b) secured financing and capital lease obligations in connection with the acquisition of assets, to the extent such obligations are secured by the assets acquired and the lender's recourse to the Company other than in respect of such assets (which may be senior to the Note) is subordinate to or pari passu with the Note, and (c) any financing extended by Medeva plc (or its affiliates) to fund the construction by the Company of any manufacturing facility, so long as such funding is not secured by other assets (which may be senior to the Note) is subordinate to or pari passu with the Note, provided, that the Company may incur additional indebtedness that ranks pari passu with the obligations evidenced hereby. SECTION 10. MISCELLANEOUS. (a) EIS may assign this Note to its affiliates and subsidiaries, as well as any off-balance sheet special purpose entity established by EIS. This Note and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided, however, that EIS and the Company shall remain liable for their respective obligations hereunder after any such assignment. (b) All notices, demands and requests of any kind to be delivered to any party in connection with this Agreement shall be in writing and shall be deemed to have been duly given if personally delivered or if sent by nationally- recognized overnight courier or by registered or 6 certified mail, return receipt requested and postage prepaid, or by facsimile transmission, addressed as follows: (i) if to the Company: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, Washington 98101 Attention: Chief Executive Officer Facsimile: (206) 623-7064 with a copy to: Perkins Coie 1201 Third Avenue, 48th Floor Seattle, Washington 98101 Attn: Stephen M. Graham, Esq. Facsimile: (206) 583-8500 (ii) if to EIS, to: Elan International Services, Ltd. 102 St. James Court Flatts, Smiths Parish Bermuda SL04 Attention: President Fax: 441-292-2224 with a copy to: Brock Silverstein LLC 800 Third Avenue New York, New York 10022 Attention: David Robbins, Esq. Fax: 212-371-5500 Each party, by written notice given to the other in accordance with this Section 10(b) may change the address to which notices, other communication or documents are to be sent to such party. All notices, other communications or documents shall be deemed to have been duly given when received. Any such notice or communication shall be deemed to have been effectively given, (a) in the case of personal delivery, on the date of such delivery, (b) in the case of nationally-recognized overnight courier, on the second business day after the date when sent, (c) in the case of mailing, on the fifth business day following that day on which the piece of mail containing such communication is posted, and (d) in the case of facsimile transmission, on the date of transmission. 7 (c) This Note may not be modified or amended, or any of the provisions hereof waived, except by written agreement of the Company and EIS. (d) This Note shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles thereof relating to conflicts of laws. (e) This Note may be executed in any number of counterparts, and each such counterpart hereof shall be deemed to be an original instrument, but all such counterparts together shall constitute one note. The Note may be signed and delivered to the other party by a facsimile transmission; such transmission shall be deemed a valid signature. (f) Each of the parties shall be responsible for its own costs and expenses incurred in connection with the transactions contemplated hereby. (g) This Note is a registered instrument. A manually signed copy of this Note shall be evidence of the rights of EIS only and is not a bearer instrument. The Company will keep books of registry in which it will register by book entry the interest of EIS in this Note and register by book entry any transfer of the rights of EIS or any subsequent holder in this Note or the payments due hereunder. No transfer by EIS or any subsequent holder of this Note of any interest in this Note shall be permitted unless a book entry of such transfer is made upon such registry and such transfer is effected in compliance with this Section 10(g). Prior to the registration of any transfer by EIS or any subsequent holder of an interest in this Note, the Company shall deem and treat the registered owner of this Note, or any portion thereof, as the owner hereof for all purposes. 8 IN WITNESS WHEREOF, the Company and EIS have executed this Note on the date first above written. TARGETED GENETICS CORPORATION By: /s/ Stewart Parker --------------------------- Name: H. Stewart Parker Title: President & CEO ELAN INTERNATIONAL SERVICES, LTD. By: /s/ Kevin Insley --------------------------- Name: Kevin Insley Title: President & CFO EXHIBIT A NOTICE OF REQUEST FOR DISBURSEMENT ---------------------------------- Date: To: Elan International Services, Ltd. From: Targeted Genetics Corporation Re: Disbursement Request ______________________________________________________________________________ Pursuant to the terms of the Convertible Promissory Note (the "Note") issued by Targeted Genetics Corporation (the "Company") to Elan International Services, Ltd. ("EIS"), dated ______, 1999, the Company hereby notifies EIS of its request for a disbursement thereunder in the amount of $_________. Please provide funding in the requested amount to the Company in accordance with the following wire instructions [ ] Sincerely, TARGETED GENETICS CORPORATION By: ____________________ Name: Title: EXHIBIT B NOTICE OF ELECTION TO EXERCISE A CONVERSION RIGHT ------------------------------------------------- Date: To: Targeted Genetics Corporation From: Elan International Services, Ltd. Re: Exercise of a Conversion Right ________________________________________________________________________________ Pursuant to the terms of the Convertible Promissory Note (the "Note") issued by Targeted Genetics Corporation (the "Company") to Elan International Services, Ltd. ("EIS"), dated July 21, 1999, specifically Section 4 thereof, EIS hereby notifies the Company of its intention to exercise a right of conversion. Pursuant to Section 4 of the Note, EIS hereby elects to convert [$__________]* in aggregate principal amount and all accrued and unpaid interest thereon for shares of the Company's Common Stock, par value $.001 per share, effective [__________, ____] We have instructed our attorneys to contact the Company to discuss the timing and documentation of the conversion. Sincerely, ELAN INTERNATIONAL SERVICES, LTD. By: ___________________________ Name: Title: - -------------------- * Amount must represent one or more tranches drawn down by the Company under the Note. EX-1.6 7 LICENSE AGREEMENT DATE JULY 21, 1999 EXHIBIT 1.6 EXECUTION COPY LICENSE AGREEMENT BY AND BETWEEN TARGETED GENETICS NEWCO, LTD. A Bermuda Limited Company AND TARGETED GENETICS CORPORATION A Washington Corporation July 21, 1999 TABLE OF CONTENTS 1. DEFINITIONS................................................ 1 2. GRANT OF RIGHTS............................................ 9 3. IMPROVEMENTS AND AFTER ACQUIRED TECHNOLOGY................. 14 4. DEVELOPMENT OF PRODUCTS.................................... 15 5. REGULATORY APPROVALS....................................... 15 6. FINANCIAL PROVISIONS....................................... 16 7. CONFIDENTIAL INFORMATION................................... 20 8. WARRANTIES/INDEMNITIES..................................... 22 9. INTELLECTUAL PROPERTY OWNERSHIP RIGHTS..................... 26 10. RIGHTS EXPLOITATION OUTSIDE THE FIELD...................... 28 11. NON-COMPETITION............................................ 28 12. TERM AND TERMINATION OF AGREEMENT.......................... 30 13. IMPOSSIBILITY OF PERFORMANCE - FORCE MAJEURE............... 33 14. SETTLEMENT OF DISPUTES; GOVERNING LAW...................... 33 15. ASSIGNMENT................................................. 34 16. NOTICES.................................................... 34 17. MISCELLANEOUS CLAUSES...................................... 35
LICENSE AGREEMENT dated as of July 21, 1999 between Targeted Genetics Newco, Ltd., a Bermuda limited company, and Targeted Genetics Corporation, a Washington corporation. RECITALS: A. Contemporaneously herewith, Elan and TGEN (capitalized terms used herein are defined below) are entering into the Development Agreement for the purpose of recording the terms and conditions of a joint venture and of regulating their relationship with each other and certain aspects of the affairs of and their dealings with Newco. B. TGEN is beneficially entitled to the use of certain know-how and certain patents that have been granted or are pending in relation to the development and production of various Gene Delivery Technologies. C. Newco desires to enter into this Agreement with TGEN so as to permit Newco to utilize the TGEN Intellectual Property in the research, development, manufacture, distribution and sale of the Products in the Field and in the Territory. D. Elan, EIS and TGEN entered into a letter agreement dated June 30, 1999 (the "Letter Agreement") pursuant to which they agreed to enter into definitive documents, including this Agreement, and the Elan License Agreement relating to Newco's use of the Elan Intellectual Property. NOW THEREFORE IT IS HEREBY AGREED AS FOLLOWS: 1. DEFINITIONS A. In this Agreement, the following definitions shall apply: 1.1. "Affiliate" shall mean, with respect to Elan or TGEN, any corporation or entity other than Newco (and entities controlled by it) controlling, controlled by or under the common control of Elan or TGEN, as the case may be, and, with respect to Newco, any corporation or entity under control of Newco. A corporation or non-corporate entity shall be regarded as in control of another corporation if it owns or directly or indirectly controls more than fifty percent (50%) of the voting stock of the other corporation or (a) in the absence of the ownership of at least fifty percent (50%) of the voting stock of a corporation or (b) in the case of a non-corporate entity, the [*] OMITTED, CONFIDENTIAL MATERIAL, WHICH MATERIAL HAS BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. power to direct or cause the direction of the management and policies of such corporation or non-corporate entity, as applicable; 1.2. "Agreement" shall mean this agreement (which expression shall be deemed to include the Recitals and the Schedules hereto); 1.3. "Antisense" shall mean [*]; 1.4. "Base Technologies" shall mean technologies, techniques and formulations for the administration of an active agent to a mammal: (i) in formulations of the active agent with one or more substantially inert ingredients, including, without limitation, tonicity modifiers and bulking agents; or (ii) with or through devices or mechanical targeting systems or mechanical delivery systems (other than Elan's MEDIPAD(R) Drug Delivery System or devices utilizing autoinjector technology); 1.5. "cGCP", "cGLP" and "cGMP" shall mean current Good Clinical Practices, current Good Laboratory Practices and current Good Manufacturing Practices respectively; 1.6. "Commercialization" shall mean the manufacture, promotion, distribution, marketing and sale of the Products; 1.7. "Control" shall mean the ability to grant a license or sublicense as contemplated herein without violating the terms of any agreement with any Independent Third Party; 1.8. "Definitive Documents" shall have the same meaning as given to the term "Transaction Documents" in the Development Agreement; 1.9. "Development Agreement" shall mean the Subscription, Joint Development and Operating Agreement of even date entered into among TGEN, Elan, EIS and Newco; 1.10. "Development Candidate(s)" shall mean a TGEN Proprietary Gene, or a Gene obtained from an Independent Third Party, jointly selected by the Participants and Newco to be developed for incorporation in Products. For the avoidance of doubt, if it is subsequently determined by the Management Committee of Newco that the TGEN Proprietary Gene initially offered for development as a Product is not suitable for use in a Product, TGEN shall offer an additional TGEN Proprietary Gene to the extent available, as described in Section 9.5 of the Development Agreement, and such additional TGEN Proprietary Gene shall in that instance become the Development Candidate; * Confidential Treatment Requested -2- 1.11. "Drug Delivery Technologies" shall mean formulation and/or excipient systems and technologies for delivery of a therapeutic agent to a mammal, including but not limited to [*] allowing such agent, without limitation on other features that may be sought in addition to or instead of the following, to be administered on an optimized schedule, and/or to be administered with reduced side effects, and/or to be administered with enhanced efficacy, and/or to be administered with better patient compliance, and/or to be administered in reduced dosages. Drug Delivery Technologies shall also include Elan device delivery technologies including the MEDIPAD(R) Drug Delivery System and devices utilizing autoinjector technology. Notwithstanding the foregoing, Drug Delivery Technologies shall not include Base Technologies or Gene Delivery Technologies; 1.12. "Effective Date" shall mean the "Closing Date" as such term is defined in the Development Agreement; 1.13. "EIS" shall mean Elan International Services, Ltd., a Bermuda limited company; 1.14. "Elan" shall mean Elan Pharmaceutical Technologies, a division of Elan Corporation, plc, a public limited company incorporated under the laws of Ireland, its, successors and permitted assigns; and, shall also include, for purposes of the option contained in Section 2.2 below and the inclusion of the NanoCrystal technology covered by such option and referenced in the definition of "Elan Intellectual Property," Elan Pharma International Limited; 1.15. "Elan Improvements" shall have the meaning set forth in the Elan License Agreement; 1.16. "Elan Intellectual Property" shall have the meaning set forth in the Elan License Agreement; 1.17. "Elan License" shall have the meaning set forth in the Elan License Agreement; 1.18. "Elan License Agreement" shall mean that certain license agreement, of even date herewith, entered into between Elan and Newco; 1.19. "Elan Patents" shall have the meaning set forth in the Elan License Agreement; 1.20. "Elan Program Technology" shall mean all Program Technology that relates solely to Drug Delivery Technologies or Antisense whether conceived or made * Confidential Treatment Requested -3- by Elan and/or its agents or TGEN or Newco and/or its agents pursuant to the Research and Development Program; 1.21. "Elan Right of First Negotiation" shall have the meaning set forth in the Elan License Agreement; 1.22. "Enabling Gene" shall mean a Gene selected by the Research Committee for research purposes only. 1.23. "Excluded Elan Technology" shall mean transdermal or transcutaneous Drug Delivery Technology (i.e., pertaining to delivery, onto, into and through the skin); 1.24. "Excluded TGEN Technology" shall mean inventions, patents and know- how: (a) to the extent relating to transdermal or transcutaneous drug delivery technology (as above described); (b) to the extent relating to the treatment of cystic fibrosis or the delivery of Genes directed therefor; (c) to the extent relating to Antisense; or (d) that are subject to contractual obligations of TGEN to third parties as of the Effective Date to the extent the licensing of such inventions, patents and know-how is restricted or limited. 1.25. "FDA" shall mean the United States Food and Drug Administration or any successors or agency the approval of which is necessary to market a product in the United States of America; 1.26. "Field" shall mean the research, development and Commercialization of a Platform for delivery of Genes to mammals. For avoidance of doubt, the Field shall exclude (i) cell therapy, (ii) ex vivo gene therapy, (iii) Antisense delivery and (iv) transcutaneous and/or transdermal delivery (as above described); 1.27. "Gene" shall mean any nucleotide sequence that includes a region or regions (or gene cassette(s)) capable of coding, causing or modulating the expression of a protein or other genetic element (other than directly modulating expression where the nucleic acid sequence is an Antisense) and includes one or more elements that can control expression of said protein(s) or other genetic element(s); 1.28. "Gene Delivery Technologies" shall mean [*]; 1.29. "Independent Third Party" shall mean any person other than Newco, TGEN, Elan or any of their respective Affiliates; * Confidential Treatment Requested -4- 1.30. "In market" shall mean sales of Products whether by Newco or its Affiliates, or where applicable by a sublicensee, to an Independent Third Party being a wholesaler, distributor, managed care organization, hospital, pharmacy and/or the like; 1.31. "Licensed Technologies" shall mean the Elan Intellectual Property and the TGEN Intellectual Property; 1.32. "Licenses" shall mean the Elan License and the TGEN License; 1.33. "Lien" shall mean any and all liens, security interests, restrictions, claims, encumbrances or rights of third parties of every kind and nature; 1.34. "Management Committee" shall have the meaning given to such term in the Development Agreement; 1.35. "Marketing Authorization" shall mean the procurement of registrations and permits required by applicable government authorities in a country in the Territory for the marketing, sale, and distribution of a Product in such country; 1.36. "MEDIPAD(R) Drug Delivery System" shall mean the ambulatory continuous micro infusion device having a drug reservoir volume ranging from 3.3 to 5.0 ml. and associated technology; 1.37. "Net Proceeds" shall mean the net amount realized by Newco or its Affiliates in the form of upfront payments, milestones or royalty payments from Independent Third Parties with respect to Products or the grant of rights therein or to the Commercialization thereof, after deduction of all costs, commissions and fees payable by Newco or its Affiliates associated with or incurred with respect to such upfront payments, milestones or royalties, including without limitation royalties and other compensations paid or payable to any Independent Third Party (or to either of the Participants, where such Participant has separately licensed any rights or intellectual properties to Newco on a royalty-bearing basis). 1.38. "Net Sales" shall mean the amount billed or invoiced for sales of a Product by Newco or its Affiliates to an Independent Third Party, less, to the extent included in such invoice price the total of: (1) ordinary and customary trade, quantity or cash discounts and nonaffiliated brokers' or agents' commissions, including government managed care and other contract rebates, pharmacy incentive programs, including chargebacks of pharmacy or hospital performance incentive programs or similar programs; (2) credits, rebates and returns (including, but not limited to, wholesaler and retailer returns); (3) freight, postage and duties separately identified on -5- the invoice or other documentation maintained in the ordinary course of business, and (4) import, export and sales taxes, excise taxes, other consumption taxes, customs duties, tariffs and compulsory payments to governmental authorities separately identified on the invoice or other documentation maintained in the ordinary course of business and based on sales or turnover or delivery of the Products. Net Sales shall also include the amount or fair market value of all other consideration received by Newco or its Affiliates in respect of sales of Products by Newco or its Affiliates to an Independent Third Party, whether such consideration is payment in kind, exchange or another form, less the applicable deductions, as described above. If a Product is provided to an Independent Third Party by Newco or its Affiliates without charge or provision of invoice and used by such Independent Third Party, then Newco or its Affiliates shall be treated as having sold such Product to such Independent Third Party for an amount equal to the fair market value of such Product. Sales between or among Newco and its respective Affiliates or authorized licensees shall be excluded from the computation of Net Sales; 1.39. "Newco" shall mean Targeted Genetics Newco, Ltd., a Bermuda limited company; 1.40. "Newco Program Technology" shall mean all Program Technology other than Elan Program Technology and TGEN Program Technology; 1.41. "Newco Technology" shall mean all Program Technology and all technology licensed or acquired by Newco or developed by Newco whether or not pursuant to the Research and Development Program, excluding, however, TGEN Intellectual Property and Elan Intellectual Property; 1.42. "Participant" shall mean Elan or TGEN, as the case may be. "Participants" shall mean both Elan and TGEN; 1.43. "Parties" shall mean TGEN and Newco; 1.44. "Person" shall mean an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, or other entity of whatever nature; 1.45. "Plan" shall mean that portion of the Business Plan defined in the Development Agreement that relates to the Project and Newco's program of development agreed to by Elan and TGEN within sixty (60) days of the date hereof, with respect to the research, development and Commercialization of the Products, -6- which Plan shall be reviewed and mutually agreed to in writing by Elan and TGEN on an annual basis; 1.46. "Platform" shall mean the combined utilization of Drug Delivery Technologies and Gene Delivery Technologies for delivery of Genes by any route of administration; 1.47. "Product" shall mean a Gene formulated for administration to mammals, including humans, by use of a Platform; 1.48. "Program Technology" shall mean all technology developed by or on behalf of Newco, whether by Elan, TGEN, a third party or jointly by any combination thereof, pursuant to the Research and Development Program; 1.49. "Project" shall mean all activity as undertaken by Elan, TGEN and Newco to develop the Platform and Products in accordance with the Plan; 1.50. "Regulatory Authority" shall mean any regulatory authority outside the United States of America, the approval of which is necessary to market a Product; 1.51. "Research and Development Program" shall have the same meaning given to such term in the Development Agreement; 1.52. "Research and Development Term" shall mean the period commencing on the Effective Date and continuing for a period of [*] thereafter, or as extended by agreement of the Participants, up to an aggregate of [*]; provided, however, that if a Participant shall be prevented by (i) events beyond the Participants' control, or (ii) by such Participant's delay or negligent act or omission, from performing its obligations under the Definitive Documents within said [*] period (or as extended), then the other Participant at its option, may extend the duration of the Research and Development Term by a term equal in length to the period during which the first Participant was unable to perform its obligations hereunder; 1.53. "Technological Competitor of TGEN" shall mean any entity which has a significant program for the discovery and development of Gene Delivery Technology, a listing of which is contained on Schedule 4 to the Development Agreement, and as such list may be supplemented by TGEN from time to time with the consent of Elan, which consent shall not be unreasonably withheld if the proposed additions are within the parties' contemplation as to the purpose of the original list; 1.54. "Term" shall have the meaning given to it in Clause 12 below; * Confidential Treatment Requested -7- 1.55. "Territory" shall mean all the countries of the world; 1.56. "TGEN" shall mean Targeted Genetics Corporation, a Washington corporation; 1.57. "TGEN Improvements" shall mean, other than Excluded TGEN Technology, any improvements to the TGEN Patents and TGEN Know-How developed by TGEN independently or in collaboration with an Independent Third Party, which improvements TGEN at any time during the Research and Development Term Controls within the Field (other than pursuant to the Research and Development Program); 1.58. "TGEN Intellectual Property" shall mean the TGEN Patents, TGEN Know- How and TGEN Improvements; 1.59. "TGEN Know-How" shall mean, other than Excluded TGEN Technology, any and all rights (i) Controlled by TGEN as of the Effective Date to any discovery, invention (whether or not patentable), know-how, substances, data, techniques, processes, systems, formulations and designs relating to Base Technologies, Gene Delivery Technologies or Drug Delivery Technologies and useful for the conduct of the Project or Commercialization of Products and (ii) any discovery, invention (whether or not patentable), know-how, substances, data, techniques, processes, systems, formulations and designs relating to Base Technologies, Gene Delivery Technologies or Drug Delivery Technologies and useful for the conduct of the Project or Commercialization of Products developed by TGEN independently or in collaboration with an Independent Third Party after the Effective Date; 1.60. "TGEN License" shall mean the license of TGEN Intellectual Property to Newco pursuant to Section 2.1 hereof; 1.61. "TGEN Patents" shall mean, other than Excluded TGEN Technology, any and all patents and patent applications relating to Base Technologies, Gene Delivery Technologies or Drug Delivery Technologies (i) Controlled by TGEN on the Effective Date and (ii) Controlled by TGEN and hereafter filed or obtained (to the extent covering inventions made by TGEN independently or in collaboration with an Independent Third Party). TGEN Patents shall also include all extensions, continuations, continuations-in-part, continuing prosecution applications divisionals, patents-of-additions, re-examinations, re-issues, supplementary protection certificates and foreign counterparts of such patents and patent applications and any patents issuing thereon and extensions of any patents licensed hereunder; -8- 1.62. "TGEN Program Technology" shall mean all Program Technology which relates solely to Gene Delivery Technologies, whether conceived or made by TGEN and/or its agents or Elan or Newco pursuant to the Research and Development Program; 1.63. "TGEN Proprietary Gene" shall mean any Gene Controlled by TGEN; 1.64. "TGEN Right of First Negotiation" shall have the meaning provided in Section 2.12 hereof; 1.65. "Trademark" shall mean the trademark(s) belonging to TGEN as may be selected by Newco or its permitted sub-licensees, with TGEN's consent, for use in connection with the Products; 1.66. "United States Dollar" and "US$" shall mean the lawful currency for the time being of the United States of America; B. Interpretation. In this Agreement the following shall apply: -------------- 1.1 The singular includes the plural and vice versa, the masculine includes the feminine and vice versa. 1.2. Any reference to a Clause, Section or Schedule shall, unless otherwise specifically provided, be to a Clause, Section or Schedule of this Agreement. 1.3. The headings of this Agreement are for ease of reference only and shall not affect its construction or interpretation. 2. GRANT OF RIGHTS 2.1 TGEN hereby grants to Newco a license in the Territory to TGEN's rights in (i) the TGEN Intellectual Property for all research, development, and Commercialization purposes solely in the Field, and (ii) the Enabling Gene for all research and development purposes solely in the Field, in each case subject to contractual obligations that TGEN may have as of the Effective Date, and, unless prohibited by the Section 11 ("Non-Competition"), contractual obligations that TGEN may enter into after the Effective Date (the "TGEN License"). The TGEN License shall be nonexclusive to Newco during the Research and Development Term, and thereafter during the License Term shall be exclusive to the extent applicable to the Commercialization (i) of a Product or Products which has (have) been successfully developed by Newco during -9- the Research and Development Term, and (ii) of any Product containing the same Gene that would be competitive (i.e., directed at the same indication) with any Product being Commercialized by Newco. Otherwise, the TGEN License shall be nonexclusive during the License Term after the Research and Development Term. 2.2 If the inclusion of any TGEN Patents, TGEN Know-How, the Enabling Gene or TGEN Improvements with respect to any of the foregoing in the license of TGEN Intellectual Property is restricted or limited by a third party agreement, TGEN shall use reasonable commercial efforts to exclude or where applicable minimize any such restriction or limitation. 2.3 To the extent royalty or other compensation obligations to Independent Third Parties that are payable with respect to TGEN Intellectual Property would be triggered by a proposed use of such TGEN Intellectual Property in connection with the Project, TGEN will inform Newco and Elan of such royalty or compensation obligation. If Newco and Elan agree to utilize such TGEN Intellectual Property in connection with the Project, Newco will be responsible for the payment of such royalty or other compensation obligations relating thereto. 2.4 Except as expressly provided herein, all proprietary rights and rights of ownership with respect to the TGEN Intellectual Property shall at all times remain solely with TGEN. TGEN shall disclose to Newco inventions made by or on behalf of TGEN in connection with the performance of the Project, any patentable inventions and discoveries within the TGEN Intellectual Property that relate to the Field and any patentable TGEN Improvements developed by or on behalf of TGEN. 2.5 Notwithstanding anything contained herein to the contrary, TGEN shall have the right, outside the scope of the exclusivity under the TGEN License, and subject to Section 11 below, to fully exploit and grant licenses and sublicenses with respect to the TGEN Intellectual Property. 2.6 Notwithstanding the grant of the TGEN License, TGEN will not be required to disclose to Elan or Newco proprietary manufacturing know-how, unless and until it is determined, as described in Sections 2.13 and 2.14 below, that a party other than TGEN will perform relevant manufacturing services for Newco, and then such disclosures may be limited to those that are required to support such manufacturing services by such other party. -10- 2.7 Newco shall not be permitted to (a) encumber any of its rights under the Licenses or the Newco Technology without the prior written consent of TGEN; (b) assign or sublicense any of its rights under the licenses for the Licensed Technologies and the Newco Technology without the prior written consent of TGEN, which consent may be withheld in TGEN's sole discretion. Notwithstanding the foregoing, subject to the TGEN Right of First Negotiation, TGEN shall not unreasonably withhold, condition or delay its consent to the licensing of rights to Commercialize Products to Independent Third Parties who are not Technological Competitors of TGEN. Any agreement between Newco and any permitted Independent Third Party for the development or exploitation of the TGEN Intellectual Property shall require such Independent Third Party to maintain the confidentiality of all information concerning the TGEN Intellectual Property and shall permit an assignment of rights by Newco to TGEN in accordance with the terms of this Agreement. Rights of permitted third party sublicensees in and to TGEN Intellectual Property shall survive the termination of the license and sublicense agreements granting said intellectual property rights to Newco; and Newco and TGEN shall in good faith agree upon the form most advantageous to TGEN in which the rights of the sublicensor under any such sublicenses are to be held (which form may include continuation of Newco solely as the holder of such licenses or assignment of such rights to a third party or parties, including an assignment to TGEN). 2.8 Newco will use its reasonable commercial efforts to exploit the Elan Intellectual Property, the TGEN Intellectual Property and Newco Technology in accordance with this Agreement, the Elan License Agreement and the Plan. Newco and/or its contractors or licensees/sublicensees shall employ reasonably diligent efforts to research, develop, register, and Commercialize the Products in appropriate regions in the Territory. Newco and/or its contractors or licensees/sublicensees shall employ or have employed on its or their behalf a level of advertising, sales, marketing, and promotion efforts in each country in the Territory where Marketing Authorization for Product has been obtained which is: (i) commensurate with that used by other pharmaceutical marketers for products of similar market potential in that country in the Territory, and (ii) consistent with the market potential for the Product as depicted in the Plan and as determined by the Management Committee in accordance with the Development Agreement. 2.9 Newco will be solely responsible for ensuring that it or its sublicensees manufacture and Commercialize the Products within each country of the -11- Territory strictly in accordance with all the legal and regulatory requirements of each country of the Territory. 2.10 Upon the request of Newco and with the consent of TGEN, TGEN shall grant to Newco during the Term a non-exclusive royalty free license in the Territory, solely for use in connection with the sale of the Products, to use one or more Trademark, on the following terms: 2.10.1 Newco shall as soon as it becomes aware of any infringement of a Trademark give to TGEN in writing full particulars of any use or proposed use by any other person, firm or company of a service mark, trade name or trademark or promotional or advertising activity which may constitute infringement. 2.10.2 If Newco becomes aware that any other person, firm or company alleges that such Trademark is invalid or that the use of such Trademark infringes any rights or constitutes an unauthorized use of intellectual property of another party or that the Trademark is otherwise attacked or attackable, Newco shall immediately give to TGEN full particulars thereof in writing and shall make no comment or admission to any third party in respect thereof. 2.10.3 TGEN shall have the right to conduct all proceedings relating to such Trademark and shall in its sole discretion decide what action, if any, to take in respect of any actual, threatened or alleged infringement of such Trademark or any other claim or counter-claim brought or threatened relating to the use or registration of such Trademark. Any such proceedings shall be conducted at TGEN's expense and for its own benefit. 2.10.4 Nothing contained in this Agreement shall grant to Newco any right, title, or interest in or to such Trademark, whether or not specifically recognized or perfected under applicable laws, except for the non-exclusive license described herein. At no time during or after the term of this Agreement shall Newco challenge or assist others to challenge any such Trademark or the registration thereof or attempt to register any trademarks, service marks, or trade names confusingly similar to any such trademark. All displays of any such Trademark that Newco intends to adopt shall first be submitted to TGEN for approval (which shall not be unreasonably withheld, conditioned or delayed) of design, color, and other details, or shall be exact copies of those used by TGEN or -12- previously approved by it for the same uses. In addition, Newco shall fully comply with all reasonable guidelines communicated by TGEN concerning the use of any such Trademark as well as all rules and regulations of such use throughout the Territory. 2.10.5 The rights granted to Newco under this Section 2.10 shall automatically terminate with respect to a Product in a country in the Territory upon termination of Newco's right to market such Product in any such country. 2.11 When packaged, and to the extent permitted by law, a product label shall include an acknowledgement that the Product is made under license from TGEN unless the incorporation of TGEN Intellectual Property is so limited that such acknowledgment would be unreasonable. Any such acknowledgment shall take into consideration regulatory requirements and Newco's reasonable commercial requirements. In such event, Newco shall wherever possible give due acknowledgement and recognition to TGEN in all printed promotional and other material regarding the Product such as stating that the Product is under license from TGEN and that the applicable TGEN Intellectual Property has been applied to the Products. Newco shall consult with and obtain the written approval of TGEN as to the format and content of the promotional and other material insofar as it relates to a description of, or other reference to, the application of the TGEN Intellectual Property, such approval not to be unreasonably withheld, conditioned or delayed. The further consent of TGEN shall not be required where the format and content of such materials is substantively similar as the materials previously furnished to and approved in writing by TGEN. 2.12 Notwithstanding anything contained in this Agreement to the contrary, at such time, during or within [*] following the end of the Research and Development Term as Newco intends to develop and Commercialize Products [*] TGEN shall have [*] on the following terms and conditions: 2.12.1 If Newco intends to [*] then Newco immediately shall notify TGEN in writing that TGEN may elect to [*] referred to in this Section. TGEN shall indicate its desire to [*] pursuant to this Section by delivering written notice to Newco within forty-five (45) days of TGEN's receipt of the written notification from Newco to TGEN. If TGEN elects to [*], the Parties shall [*]. * Confidential Treatment Requested -13- 2.12.2 If, [*] TGEN and Newco do not [*] within [*] from the notification in writing by Newco to TGEN, then Newco shall be free [*]__ 2.12.3 Following the [*] period described in Section 2.12.2, [*] 2.13 Elan and TGEN shall have preferential rights to negotiate agreements with Newco whereby Elan and/or TGEN will manufacture Products to meet Newco's requirements. Newco shall evaluate each such manufacturing agreement in light of which of Elan or TGEN (or neither, or both) has the capability and the committed resources to perform such manufacturing services in the best interests of Newco. If the parties cannot come to mutual agreement on who is best qualified to perform such manufacturing services, the matter will be resolved through the dispute resolution procedures of the Joint Development and Operating Agreement. To the extent Elan or TGEN performs any manufacturing services to Newco, it shall be paid a price equal to [*] and other terms and conditions customary in a supply agreements shall apply. 2.14 Subject to the rights of Newco as provided in Section 2.12 herein and the rights of Elan and TGEN as provided in Section 2.13 herein, Newco shall not be permitted to contract the development or Commercialization of any Product without the prior written consent of TGEN, which consent will not be unreasonably withheld, conditioned or delayed; provided that such reasonableness standard, shall not be applicable in the case of a proposed sublicense to any Technological Competitor of TGEN. 3. IMPROVEMENTS AND AFTER ACQUIRED TECHNOLOGY 3.1 Subject to contractual restrictions permissible under Section 11 ("Non- Competition"), TGEN Improvements shall be deemed, immediately upon development, to be included in the license of the TGEN Intellectual Property granted to Newco hereunder. 3.2 For the avoidance of doubt, and without limitation on the applicability of the same exclusion as to other TGEN Intellectual Property, it is understood that the TGEN License specifically excludes any right to use TGEN Improvements outside of the Field. 3.3 If the inclusion of an TGEN Improvement in the license of TGEN Intellectual Property granted to Newco hereunder is restricted or limited by a third party * Confidential Treatment Required -14- agreement, then TGEN shall use reasonable commercial efforts to exclude, or where applicable, to minimize any such restriction or limitation. 3.4 All rights, title, and interest to any TGEN Improvements shall be the property of TGEN. Newco, Elan and any such third party shall execute and deliver documents, and take such other actions as TGEN may reasonably request, to effect or evidence such ownership. 3.5 If, after the Effective Date, TGEN acquires know-how or patent rights relating to the Field, through acquisition of or merger with an Independent Third Party that has know-how or patent rights relating to the Field, then TGEN shall offer, as soon as practicable, to license such know-how and patent rights to Newco (subject to existing contractual obligations binding on such Independent Third Party at the time of such acquisition or merger), on such terms as would be offered to an Independent Third Party negotiating in good faith on an arms-length basis, and if Elan determines that Newco should not acquire such license, then TGEN shall be free (subject to the provisions of Section 11, below) to fully exploit such know-how and patent rights (without the TGEN Intellectual Property then licensed to Newco, other than outside the scope of the exclusivity of the TGEN License), and to grant to third parties licenses and sublicenses with respect thereto. 4. DEVELOPMENT OF PRODUCTS 4.1 During the Research and Development Term, Newco will diligently pursue the research and development of the Elan Intellectual Property, TGEN Intellectual Property and Newco Technology in accordance with the Research and Development Program. The objectives of this research and development work will be (a) to develop the Platform, and (b) to develop one or more Products in the Field. 4.2 Subject to contractual commitments made prior to, on, or after the Effective Date (which it is understood shall be within TGEN's discretion, subject only to its compliance with Section 11 hereof), TGEN agrees to offer to Newco the opportunity to designate a TGEN Proprietary Gene to be the Development Candidate. The selection of any Gene to be a Development Candidate shall be by unanimous vote of the Management Committee. Subject to the provisions of Section 9.5 of the Development Agreement, TGEN shall be under no obligation to provide more than one TGEN Proprietary Gene to serve as a Development Candidate. The obligations of TGEN under this Section 4.2 shall terminate on such date as Newco Commercializes a Product. -15- 5. REGULATORY APPROVALS 5.1 Newco shall, or shall cause its sublicensees to, at its or their sole cost file and shall use its reasonable best efforts to prosecute to approval, the Marketing Authorizations for the Products in appropriate countries in the Territory in accordance with the Plan. During any Marketing Authorization registration procedure, Newco shall keep TGEN promptly and fully advised of Newco's registration activities, progress and procedures. Each Party shall inform the other Party and Elan of any dealings such Party has with the FDA and any other Regulatory Authority. The Parties and Elan shall collaborate in relation to obtaining any approval of the FDA or Regulatory Authority for final approved labeling. 5.2 Subject to agreement to the contrary, any and all Marketing Authorizations filed hereunder for Products shall, to the extent owned by Newco, remain the property of Newco, provided that Newco shall allow TGEN access thereto solely to enable TGEN to fulfill its obligations and exercise its rights under this Agreement and the Development Agreement. Newco shall maintain or cause its sublicensees to maintain such Marketing Authorizations at its or their own cost. 5.3 Newco shall indemnify and hold harmless TGEN, its agents and employees from and against all claims, damages, losses, liabilities and expenses to which TGEN, its agents, and employees may become subject related to or arising out of Newco's bad faith, negligence or intentional misconduct in connection with the filing or maintenance of the Marketing Authorizations. 6. FINANCIAL PROVISIONS 6.1 In consideration of the license to the TGEN Patents, Newco shall pay to TGEN the following amounts: 6.1.1 Product based upon the Development Candidates. Newco shall make the --------------------------------------------- following payments with respect to Products based upon the Development Candidates: (a) Development Work - Initial research and development work ---------------- pursuant to the Research and Development Program regarding the development of the Platform and one or more Development Candidates contracted by Newco to TGEN and/or Elan shall be payable by Newco to each of TGEN and Elan based on [*] (or * Confidential Treatment Requested -16- less, where the terms of a third party agreement do not support such fees, and are otherwise acceptable to the Management Committee). (b) Upfront or Milestone Payments - If any Independent Third Party ----------------------------- shall make upfront or milestone payments (e.g., for NDA filing, approvals, etc.) to Newco, then [*] of the Net Proceeds from such upfront or milestone payments shall be retained by Newco, and Newco shall pay to each of Elan and TGEN, in proportion to their respective ownership interests in Newco, royalties in the amount of the remaining [*] of such Net Proceeds. (c) Royalties payable to Elan and TGEN Upon Sales of the Products ------------------------------------------------------------- based upon the Development Candidates - If Newco makes any In ------------------------------------- market sales of such Products, Newco shall pay Elan a royalty on Net Sales derived therefrom, at a rate to be determined by the Management Committee prior to the market launch thereof to be appropriate under the circumstances with respect to each such Product. Newco shall retain [*] of the Net Proceeds from all royalties derived from sales of Products based upon the Development Candidates, and shall pay to each of Elan and TGEN the remaining [*] of all such Net Proceeds in proportion to their respective ownership interests in Newco. (d) Special Provisions for TGEN Proprietary Genes. Notwithstanding --------------------------------------------- the foregoing, in the event a Product is based upon a Development Candidate which incorporates a TGEN Proprietary Gene, [*] of the aggregate Net Proceeds from all upfront, milestone and royalty payments made to Newco by an Independent Third Party with respect to such Product shall be paid as an additional royalty to TGEN, and the remaining [*] of such Net Proceeds shall be paid as an additional royalty to Elan. Thereafter, such amounts shall be allocated as provided above. 6.1.2 Products Based Upon TGEN Proprietary Genes. In the event Newco shall ------------------------------------------ desire to develop a Product incorporating a TGEN Proprietary Gene other than a Product based upon the Development Candidate, Newco, Elan and TGEN shall negotiate in good faith the terms for the licensing of such Gene and royalties to be paid to each of TGEN and Elan; provided, however, that with respect to Newco, the terms of such license shall be no less favorable than those that would have be obtained * Confidential Treatment Requested -17- in an arm's length transaction between unrelated parties and, with respect to TGEN, the terms of such license shall be no less favorable than those granted to any other licensor to Newco 6.1.3 Products Based on Proprietary Genes of Independent Third Parties. Newco ---------------------------------------------------------------- shall make the following payments with respect to Products based on proprietary Genes of Independent Third Parties: (a) Development Work - Research and development work related to ---------------- Products based upon proprietary Genes of Independent Third Parties performed by Elan or TGEN for Newco, as the case may be, shall be payable to such Participant at [*] (or less, where the terms of a third party agreement do not support such fees, and are otherwise acceptable to the Management Committee). [*] of any profit received by Newco for direct charges for such development following payment of Elan's or TGEN's charges shall be payable as an additional royalty by Newco to Elan and TGEN, in proportion to their respective ownership interests in Newco. (b) Upfront or Milestone Payments - If any Independent Third Party ---------- ------------------ shall make upfront or milestone payments (e.g., for NDA filing, approvals, etc.) to Newco with respect to Products based upon proprietary Genes of such third party, then [*] of the Net Proceeds from such upfront or milestone payments shall be retained by Newco, and Newco shall pay to each of Elan and TGEN the remaining [*] of such Net Proceeds in proportion to their respective ownership interests in Newco. (c) Royalty Payments to Participants - If Newco makes any In market -------------------------------- sales of such Products, Newco shall pay TGEN a royalty on Net Sales derived therefrom, at a rate to be determined by the Management Committee prior to the market launch thereof to be appropriate under the circumstances with respect to each such Product. Newco shall retain [*] of Net Proceeds derived by it from all royalties paid to it by Independent Third Parties with respect to Products based upon proprietary Genes of such parties, and shall pay to each of Elan and TGEN the remaining [*] of all such Net Proceeds in proportion to their respective ownership interests in Newco. * Confidential Treatment Requested -18- 6.2 Payment of those royalties that are payable to TGEN pursuant to Clauses 6.1.1-6.1.3, if any, shall be made quarterly in arrears within forty-five (45) days after the expiry of the calendar quarter. The method of payment shall be by wire transfer to an account specified by TGEN and shall be nonrefundable to Newco. Each payment made to TGEN shall be accompanied by a true accounting of all Products sold by Newco, its Affiliates and its permitted sublicensees, if any, during such quarter. Such accounting shall show, on a country-by-country and Product-by-Product basis, Net Sales and Net Proceeds invoiced and received by Newco (and the calculation thereof) and each calculation of royalties with respect thereto, including the calculation of all adjustments and currency conversions. 6.3 Newco shall maintain and keep clear, detailed, complete, accurate and separate records for a period of three (3) years following the completion of such records so: (i) as to enable any royalties which shall have accrued hereunder to be determined; and (ii) that any deductions made in arriving at the Net Sales and Net Proceeds can be determined. 6.4 All payments due hereunder shall be made in United States Dollars. Payments due on Net Sales of any Product and Net Proceeds with respect to any Product invoiced and received by Newco for each calendar quarter made in a currency other than United States Dollars shall first be calculated in the foreign currency and then converted to United States Dollars on the basis of the average exchange rate in effect for such quarter for the purchase of United States Dollars with such foreign currency quoted in the Wall Street Journal (or comparable publication if not quoted in the Wall Street Journal) with respect to the currency of the country of origin of such payment, determined by averaging the rates so quoted on each business day of such quarter. 6.5 If, at any time, legal restrictions in the Territory prevent the prompt payment when due of royalties payable hereunder to TGEN or any portion thereof, the Parties shall meet to discuss suitable and reasonable alternative methods of reimbursing TGEN the amount of such royalties. In the event that Newco is prevented from making any payment under this Agreement by virtue of the statutes, laws, codes or government regulations of the country from which the payment is to be made, then such payments may be paid by depositing them in the currency in which they accrue to TGEN's account in a bank acceptable to TGEN in the country the currency of which is involved or as otherwise agreed by the Parties. -19- 6.6 TGEN and Newco agree to co-operate in all respects necessary to take advantage of any double taxation agreements or similar agreements as may, from time to time, be available. 6.7 Any taxes payable by TGEN on any payment made to TGEN pursuant to this Agreement shall be for the account of TGEN. If so required by applicable law, any payment made pursuant to this Agreement shall be made by Newco after deduction of the appropriate withholding tax, in which event the Parties shall co-operate to obtain the appropriate tax clearance as soon as is practicable. On receipt of such clearance, Newco shall forthwith procure that the amount so withheld is paid to TGEN. 6.8 Newco shall, not more than once in each calendar year, nor more than once with respect to any accounting period, permit representatives of an internationally-recognized firm of independent certified accountants selected by TGEN upon reasonable notice and at any reasonable time during normal business hours to have access to inspect and audit the accounts and records of Newco and any other book, record, voucher, receipt or invoice relating to the calculation of the royalty payments on Net Sales and Net Proceeds submitted to TGEN. Any such inspection of Newco's records shall be at the expense of TGEN, except that if any such inspection reveals a deficiency in the amount of the royalty actually paid to TGEN hereunder in any calendar quarter of five percent (5%) or more of the amount of any royalty actually due to TGEN hereunder, then the expense of such inspection shall be borne solely by Newco. Any amount of deficiency shall be paid promptly to TGEN by Newco. If such inspection reveals a surplus in the amount of royalties actually paid to TGEN by Newco, TGEN shall reimburse Newco the surplus within fifteen (15) days after determination. 6.9 In the event of any unresolved dispute regarding any alleged deficiency or overpayment of royalty payments hereunder, the matter will be subject to resolution in accordance with Clause 19 of the Development Agreement, which is incorporated by reference and shall for such purposes survive termination of the Development Agreement. 7. CONFIDENTIAL INFORMATION 7.1 The Parties acknowledge that it may be necessary, from time to time, to disclose to each other confidential and proprietary information, including without limitation, inventions, works of authorship, trade secrets, specifications, designs, data, know-how and other information relating to the -20- Field, the Products, Elan Intellectual Property, TGEN Intellectual Property or the Newco Technology, as the case may be, or otherwise as to processes, services or business of the disclosing Party. The foregoing shall be referred to collectively as "Confidential Information". Any Confidential Information revealed by a Party to another Party shall be used by the receiving Party exclusively for the purposes of fulfilling the receiving Party's obligations under this Agreement and the Development Agreement and for no other purpose. 7.2 Each Party agrees to disclose Confidential Information of another Party only to another Participant and to those employees, representatives and agents of Newco or such participant requiring knowledge thereof in connection with their duties directly related to the fulfilling of the Party's obligations under this Agreement, the Development Agreement or the Elan License Agreement. Each Party further agrees to inform all such Participants and employees, representatives and agents of the terms and provisions of this Agreement and their duties hereunder and to obtain their consent hereto as a condition of receiving Confidential Information. Each Party agrees that it will exercise the same degree of care, but in no event less than a reasonable degree of care, to protect and preserve the proprietary and confidential nature of the Confidential Information disclosed by a Party, as the receiving Party would exercise to preserve its own proprietary and confidential information. Each Party agrees that it will, upon request of a Party, return all documents and any copies thereof containing Confidential Information belonging to or disclosed by, such Party, and that it will obtain the same agreement from the other Participant. 7.3 Notwithstanding the above, each Party may use or disclose Confidential Information disclosed to it by another party to the extent such use or disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with patent applications, complying with applicable governmental regulations, including without limitation those relating to securities regulations and disclosures, or otherwise submitting information to tax or other governmental authorities, conducting clinical trials, or making a permitted sub-license or otherwise exercising its rights hereunder. 7.4 Confidential Information shall not be deemed to include: (i) information that is generally available to the public; (ii) information which is made public by the disclosing Party; -21- (iii) information which is independently developed by a Party as evidenced by such Party's written records, without the aid, application or use of the disclosing Party's Confidential Information; (iv) information that is published or otherwise becomes part of the public domain without any disclosure by a Party, or on the part of a Party's directors, officers, agents, representatives or employees; (vii) information that becomes available to a Party on a non-confidential basis, whether directly or indirectly, from a source other than a Party, which source did not acquire this information on a confidential basis; (viii) information which the receiving Party is required to disclose pursuant to: (A) a valid order of a court or other governmental body or any political subdivision thereof or otherwise required by law; or (B) any other requirement of law; provided that if the receiving Party becomes legally required to disclose any Confidential Information, the receiving Party shall give the disclosing Party prompt notice of such fact so that the disclosing Party may obtain a protective order or other appropriate remedy concerning any such disclosure. The receiving Party shall fully cooperate with the disclosing Party in connection with the disclosing Party's efforts to obtain any such order or other remedy. If any such order or other remedy does not fully preclude disclosure, the receiving Party shall make such disclosure only to the extent that such disclosure is legally required; (v) information which was already in the possession of the receiving Party at the time of receiving such information, as evidenced by its written records, provided such information was not previously provided to the receiving Party from a source which was under an obligation to keep such information confidential; or (vi) information that is the subject of a written permission to disclose, without restriction or limitation, by the disclosing Party. -22- 7.5 The provisions relating to confidentiality in this Clause 7 shall remain in effect during the term of this Agreement, and for a period of seven (7) years following the expiration or earlier termination of this Agreement. 7.6 The Parties agree that the obligations of this Clause 7 are necessary and reasonable in order to protect the Parties' respective businesses, and each Party expressly agrees that monetary damages would be inadequate to compensate a Party for any breach by the other Party of its covenants and agreements set forth herein. Accordingly, the Parties agree and acknowledge that any such violation or threatened violation will cause irreparable injury to a Party and that, in addition to any other remedies that may be available, in law and equity or otherwise, any Party shall be entitled to obtain injunctive relief against the threatened breach of the provisions of this Clause 7, or a continuation of any such breach by the other Party, specific performance and other equitable relief to redress such breach together with its damages and reasonable counsel fees and expenses to enforce its rights hereunder, without the necessity of proving actual or express damages. 8. WARRANTIES/INDEMNITIES 8.1 TGEN represents and warrants to Newco and Elan, as a third party beneficiary, that: (a) TGEN is a corporation duly organized under the laws of its jurisdiction of organization and has all the requisite corporate power and authority to own and lease its respective properties, to carry on its respective business as presently conducted and as proposed to be conducted and to carry out the transactions contemplated hereby; (b) TGEN has full corporate power and authority to enter into this Agreement and to perform its obligations hereunder, which have been duly authorized by all requisite corporate action of TGEN. This Agreement is the valid and binding obligation of TGEN, enforceable against it in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors' rights generally, and by general equity principles and limitations on the availability of equitable relief, including specific performance; (c) The execution, delivery and performance by TGEN of this Agreement will not: (i) violate any provision of applicable law, statute, rule or -23- regulation known by and applicable to TGEN or any ruling, writ, injunction, order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to TGEN or any of its properties or assets; or (ii) conflict with or result in any breach of any of the terms, conditions or provisions of the charter or organizational documents of TGEN; (d) To TGEN's best knowledge, except as set forth on Schedule 2 hereto, as of the Effective Date: (i) TGEN has the right to grant the TGEN License and any other rights granted herein, (ii) Schedule 1 contains primary examples of the Elan Intellectual Property existing as of the Effective Date, which listing is not necessarily exhaustive, (iii) there are no agreements between Elan and any third parties that conflict with the TGEN License which would have a material adverse effect on the ability of Newco to conduct the Project, and (iv) TGEN is the owner or licensee of all rights, title and interest in the TGEN Intellectual Property. 8.2 Newco represents and warrants to TGEN that: (a) Newco is duly and validly existing in good standing in the jurisdiction of its incorporation and each other jurisdiction in which the conduct of its business requires such qualification (except where such failure to so qualify shall not have a material adverse affect on the business and assets of Newco), and Newco is in compliance with all applicable laws, rules, regulations or orders relating to its business and assets; (b) Newco has full corporate authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby; this Agreement has been duly executed and delivered and constitutes the legal and valid obligations of Newco and is enforceable against Newco in accordance with its terms; and the execution, delivery and performance of this Agreement and the transactions contemplated hereby will not violate or result in a default under or creation of lien or encumbrance under Newco's certificate of incorporation, by-laws or other organic documents, any material agreement or instrument binding upon or affecting Newco, or its properties or assets or any applicable laws, rules, regulations or orders affecting Newco or its properties or assets; (c) Newco is not in default of its charter or by-laws, any applicable laws or regulations or any material contract or agreement binding upon or -24- affecting it or its properties or assets and the execution, delivery and performance of this Agreement and the transactions contemplated hereby will not result in any such violation; (d) The execution of this Agreement by Newco and the full performance and enjoyment of the rights of Newco under this Agreement will not breach the terms and conditions of any license, contract, understanding or agreement, whether express, implied, written or oral between Newco and any third party; (e) Newco has the sole, exclusive and unencumbered right to grant the licenses and rights herein granted to TGEN and that it has not granted and will not grant any option, license, right or interest in or to the TGEN Intellectual Property, the Newco Technology, or other property to any third party which would conflict with the rights granted by this Agreement and the Definitive Documents; (f) The Products shall be developed, manufactured, transported, stored, handled, packaged, marketed, promoted, distributed, offered for sale and sold in accordance with all regulations and requirements of the FDA and foreign regulatory authorities including, without limitation, cGCP, cGLP, cGMP regulations. The Products shall not be adulterated or misbranded as defined by the Federal Food, Drug and Cosmetic Act (or applicable foreign law) and shall not be a product which would violate any section of such Act if introduced in interstate commerce; and (g) It is fully cognizant of all applicable statutes, ordinances and regulations of the United States of America and countries in the Territory with respect to the manufacture of the Products including, but not limited to, the U.S. Federal Food, Drug and Cosmetic Act and regulations thereunder and similar statutes in countries outside of the United States. Newco shall manufacture or procure the manufacture of the Products in conformity with the Marketing Authorizations and in a manner which fully complies with all United States of America and foreign statutes, ordinances, regulations and practices. 8.3 In addition to any other indemnifications provided for herein, TGEN shall indemnify and hold harmless Newco, Elan and their Affiliates and their respective employees, agents, partners, officers and directors from and against any claims, losses, liabilities or damages (including reasonable attorney's fees and expenses) incurred or sustained by Newco arising out of or in connection -25- with any (a) breach of any representation, covenant, warranty or obligation by TGEN hereunder, or (b) any act or omission on the part of TGEN or any of its agents or employees in the performance of this Agreement. 8.4 In addition to any other indemnifications provided for herein, Newco shall indemnify and hold harmless TGEN and its Affiliates and their respective employees, agents, partners, officers and directors from and against any claims, losses, liabilities or damages (including reasonable attorney's fees and expenses) incurred or sustained by TGEN arising out of or in connection with any (a) breach of any representation, covenant, warranty or obligation by Newco hereunder, or (b) any act or omission on the part of Newco or any of its agents or employees in the performance of this Agreement. 8.5 The Person seeking an indemnity shall: 8.5.1 fully and promptly notify the indemnifying Party of any claim or proceeding, or threatened claim or proceeding; 8.5.2 permit the indemnifying Party to take full care and control of such claim or proceeding; 8.5.3 cooperate in the investigation and defense of such claim or proceeding; 8.5.4 not compromise or otherwise settle any such claim or proceeding without the prior written consent of the indemnifying Party, which consent shall not be unreasonably withheld, conditioned or delayed; and 8.5.5 take all reasonable steps to mitigate any loss or liability in respect of any such claim or proceeding. 8.6 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER TGEN NOR NEWCO SHALL BE LIABLE TO THE OTHER PARTY, BY REASON OF ANY REPRESENTATION OR WARRANTY, CONDITION OR OTHER TERM OR ANY DUTY OF COMMON LAW, OR UNDER THE EXPRESS TERMS OF THIS AGREEMENT, FOR ANY CONSEQUENTIAL OR INCIDENTAL LOSS OR DAMAGE (WHETHER FOR LOSS OF PROFIT OR OTHERWISE) AND WHETHER OCCASIONED BY THE APPLICABLE PARTY'S NEGLIGENCE OR THAT OF ITS EMPLOYEES OR AGENTS OR OTHERWISE -26- 8.7 EXCEPT AS SET FORTH IN THIS SECTION 8, TGEN IS GRANTING THE TGEN LICENSE HEREUNDER ON AN "AS IS" BASIS WITHOUT RECOURSE, REPRESENTATION OR WARRANTY WHETHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR INFRINGEMENT OF THIRD PARTY RIGHTS, AND ALL SUCH WARRANTIES ARE EXPRESSLY DISCLAIMED. 9. INTELLECTUAL PROPERTY OWNERSHIP RIGHTS 9.1 Subject to the terms and conditions of this Agreement, Newco shall own the legal and equitable title to the Newco Technology. 9.2 TGEN shall own the legal and equitable title to the TGEN Intellectual Property, including without limitation, TGEN Improvements. 9.3 Newco shall permanently mark or otherwise use reasonable efforts to cause any third party to permanently mark all Products and/or the packaging therefor with such license or patent notices to comply with the laws of the country of sale or otherwise to generally communicate the existence of any TGEN Patents for the countries of the Territory and in such manner as TGEN may reasonably request in writing prior to the sale or commercial use thereof. 9.4 TGEN, at its expense, shall make a good faith effort (i) to secure the grant of any material patent applications within the TGEN Patents that relate to the Field; (ii) to defend all such applications against third party oppositions and interferences; and (iii) to maintain in force any material issued letters patent within the TGEN Patents that relate to the Field (including any letters patent that may issue covering any such Elan Improvements that relate to the Field). TGEN shall have the right in its discretion to control such filing, prosecution, defense and maintenance provided that Newco and Elan at their request shall be provided with copies of all documents relating to such filing, prosecution, defense and maintenance in sufficient time to review such documents and comment thereon prior to filing. Notwithstanding the foregoing, it is understood that TGEN retains the discretion, in its sole judgment, as to whether and where to file or to prosecute patent applications on any such technologies or rights relating to the TGEN Intellectual Property. 9.5 Newco, TGEN and Elan shall promptly inform each other in writing of any alleged infringement of any patents within the Elan Patents, the TGEN Patents, or any Newco patents or any alleged misappropriation of trade secrets within -27- the TGEN Intellectual Property or the TGEN Intellectual Property by a third party of which it becomes aware and provide the others with any available evidence of such infringement or misappropriation insofar as such infringements or misappropriation relate solely to the Field. 9.6 Newco shall have the right to prosecute at its own expense and for its own benefit any infringements of the TGEN Patents or misappropriation of the TGEN Intellectual Property, insofar as such infringements or misappropriation relate solely to the Field. In the event that Newco takes such action, Newco shall do so at its own cost and expense. At Newco's request, TGEN shall cooperate with such action. Any recovery remaining after the deduction by Newco of the reasonable expenses (including attorney's fees and expenses) incurred in relation to such infringement proceeding shall belong to Newco. Should Newco decide not to pursue such infringers, within a reasonable period but in any event within twenty (20) days after receiving written notice of such alleged infringement or misappropriation TGEN may in its discretion initiate such proceedings in its own name, at its expense and for its own benefit, and at TGEN's request, Newco shall cooperate with such action. Alternatively, the Participants may agree to institute such proceedings in their joint names and shall reach agreement as to the proportion in which they shall share the proceeds of any such proceedings, and the expense of any costs not recovered, or the costs or damages payable to the third party. If the infringement of the TGEN Patents affects both the Field as well as other products being developed or commercialized by TGEN or its commercial partners outside the Field, Newco and TGEN shall endeavor to agree as to the manner in which the proceedings should be instituted and as to the proportion in which they shall share the proceeds of any such proceedings, and the expense of any costs not recovered, or the costs or damages payable to the third party. 9.8 Newco shall indemnify, defend and hold harmless Elan and TGEN, against all actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys fees) relating directly or indirectly to all such claims or proceedings referred to herein, provided that TGEN, shall not acknowledge to the third party or to any other person the validity of any claims of such a third party, and shall not compromise or settle any claim or proceedings relating thereto without the prior written consent to Newco, not to be unreasonably withheld, conditioned or delayed. At its option, Elan or TGEN, as the case may be, may elect to take over the conduct of such proceedings from Newco provided that Newco's indemnification obligations shall continue; the costs of defending such claim shall be borne by Elan or TGEN, as the case may be and -28- such Participant shall not compromise or settle any such claim or proceeding without the prior written consent of Newco, such consent not to be unreasonably withheld, conditioned or delayed. 10. RIGHTS EXPLOITATION OUTSIDE THE FIELD 10.1 Licenses to TGEN Program Technology. Newco hereby grants to TGEN an ----------------------------------- exclusive, royalty free and sublicensable license to TGEN Program Technology outside of the Field. Such license shall be effective and exclusive on a country-by-country basis for the life of any patents on such TGEN Program Technology in such country, or, to the extent the TGEN Program Technology is not patented or covered by pending patent applications in any country, for fifteen years from the date any products are first introduced on the market in such country by TGEN under such license, or for such shorter period as shall be required under the applicable law of any country in the Territory. 10.2 Licenses for Newco Program Technology Outside the Field. Newco shall ------------------------------------------------------- negotiate in good faith with Elan and TGEN, respectively, for the grant of exclusive or non-exclusive licenses for the rights to Newco Program Technology (other than TGEN Program Technology or Elan Program Technology) outside the Field in the Territory. All such licenses shall contain such customary terms contained in similar licenses in the industry, as agreed to by the licensee and the unanimous decision of the Management Committee, acting in good faith. 11. NON-COMPETITION 11.1 During the Research and Development Term (and any extensions thereto), subject to the other provisions of this Agreement, TGEN (subject, however, to Section 11.2 hereof and Section 20.2 of the Development Agreement) shall not (i) market, sell, develop, or assist in the development for the use, manufacture, distribution or sale of Products in the Field, except (a) for or on behalf of Newco, or (b) with Newco's prior written consent, (ii) develop, or assist in the development of, [*] in the Field or (iii) market, sell, develop, or assist in the development for the use, manufacture or distribution of products having the same [*] with such Product. Following termination of the Research and Development Term, TGEN shall not during the License Term market, sell, develop, or assist in the development for the use, manufacture, distribution of products having the same Gene which is part of a Product being Commercialized by Newco [*] * Confidential Treatment Requested -29- 11.2 If an Independent Third Party desires that TGEN shall, in connection with the development of a Product, apply Gene Delivery Technologies to such party's proprietary Gene or to a TGEN Proprietary Gene that is not incorporated into a Product developed or under development by Newco, then: (a) TGEN, Elan and Newco shall determine in their reasonable and good faith judgment whether Newco is capable of developing such Product or acquiring and assimilating Drug Delivery Technologies necessary to develop such Product within the time period required by such Independent Third Party. (b) In the event that (i) the Elan Intellectual Property or Newco Technology is not applicable to such proposed Product, or (ii) Newco cannot, within the time period required by such Independent Third Party, acquire and/or assimilate the Drug Delivery Technologies necessary to develop such Product, or (iii) such Independent Third Party is unwilling to enter into an agreement with Newco for development of such Product, or (iv) the Management Committee, acting in good faith, determines that Newco should not develop such Product, TGEN may, at its sole discretion, enter into and perform such an agreement with such Independent Third Party. (c) In the event Newco desires to develop such Product and (i) the Elan Intellectual Property or Newco Technology is applicable to such proposed Product, or Newco can, within the time period required by such Independent Third Party, acquire and/or assimilate the Drug Delivery Technologies necessary to develop such Product, and (ii) such Independent Third Party is willing to enter into an agreement with Newco for development of such Product, TGEN may not enter into such an agreement with such Independent Third Party to the extent doing so would be otherwise prohibited by TGEN's agreement under Section 11.1 above. -30- 12. TERM AND TERMINATION OF AGREEMENT 12.1 The term of this Agreement and the term of the Licenses granted hereunder with respect to a Product utilizing or based on the Licensed Technologies shall commence as of the Effective Date and continue, on a Product-by- Product basis and country by country basis, for the life of the patent rights upon which such Product is based or which such Product utilizes in such country (the "Term"); provided, however, that all royalty and fee obligations contained herein shall survive for the greater of (i) the Term or (ii) 15 years from the first commercial sale of such Product. 12.2 Except as otherwise provided in Section 11 hereof, nothing contained herein shall obligate or restrict any party from utilizing public, non-proprietary information which is not subject to the protection of applicable patent laws. 12.3 If either Party materially breaches any provision of this Agreement and if such breach is (i) not capable of being cured or (ii) is capable of being cured but is not cured within sixty (60) days after the non-breaching party gives written notice of the breach to the breaching party, the non- breaching party may terminate this Agreement immediately by giving notice of the termination, effective on the date of the notice, provided, however, -------- ------- that (x) if any such curable breach is not capable of being cured within such sixty (60) day period, so long as the breaching party commences to cure the breach promptly after receiving notice of the breach from the non- breaching party and thereafter diligently prosecutes the cure to completion as soon as is practicable, the non-breaching Party may not terminate this Agreement so long as the breaching party is acting in good faith to rectify such breach and (y) if there is a good faith dispute as to the existence of the breach or as to its materiality, or regarding the amount of any required payment, provided, in the case of disputes as to the amount due, that any undisputed amount is paid, the right of the non-breaching Party to terminate this Agreement shall be stayed for a reasonable period during which a good faith resolution of the dispute will be obtained, either by agreement or, failing that, through the dispute resolution provisions under Clause 19 of the Development Agreement. 12.4 In the event that a Change of Control Event shall occur, at the sole option of Elan and upon written notice to TGEN and Newco, the Elan License shall be terminated. Upon written notice from TGEN to Elan of a proposed Change of Control Event or the occurrence of a Change of Control Event, Elan shall have thirty (30) days from such notice or occurrence to provide written notice to TGEN as to whether it intends to terminate the Elan License immediately. In -31- the event Elan does not provide written notice to TGEN during such thirty (30) day period of its intention to terminate the Elan License, such termination right shall be deemed waived with respect to such proposed Change of Control Event or such occurrence of a Change of Control Event. 12.5 In the event that the Elan License Agreement shall be terminated, at the sole option of TGEN and upon written notice to Elan and Newco, the TGEN License shall be immediately terminated. 12.6 Upon the occurrence of an Event of Bankruptcy with respect to Newco or TGEN, the other Party may, upon written notice to TGEN and the Party with respect to which such Event of Bankruptcy has occurred, immediately terminate the TGEN License. As used in this Clause 12.6, the term "Event of Bankruptcy" relating to either Newco or TGEN shall mean: 12.6.1 the appointment of a liquidator, receiver, administrator, examiner, trustee or similar officer for either Party or over all or a substantial part of its assets under the law of any applicable jurisdiction, including without limitation, Bermuda, the United States of America or Ireland; or 12.6.2 An application or petition for bankruptcy, corporate re- organization, composition, administration, examination, arrangement or any other procedure similar to any of the foregoing under the law of any applicable jurisdiction, including without limit, Bermuda, the United States of America or Ireland (other than as part of a bona fide restructuring or reorganization), is filed, and is not discharged within forty-five (45) days, or if either Party applies for or consents to the appointment of a receiver, administrator, examiner or similar officer for it or all or a material part of its assets, rights or revenues or the assets and/or the business of either Party are for any reason seized, confiscated or condemned. 12.7 Upon exercise of those rights of termination as specified in Clause 12.1 to Clause 12.6 inclusive or elsewhere within this Agreement, this Agreement shall, subject to the other provisions of this Agreement, and specifically subject to Section 12.8, automatically terminate forthwith and be of no further legal force or effect. 12.8 Upon expiration or termination of this Agreement: -32- 12.8.1 any sums that were due from Newco to TGEN with respect to license granted hereunder, including without limitation on Net Sales or on Net Proceeds, in the Territory or in such particular country or countries in the Territory (as the case may be) prior to the expiration or termination of this Agreement as set forth herein shall be paid in full within sixty (60) days after the expiration or termination of this Agreement for the Territory or for such particular country or countries in the Territory (as the case may be); 12.8.2 any provisions clearly meant to survive termination or expiration of this Agreement, including without limitation Section 7, shall remain in full force and effect; 12.8.3 all representations, warranties and indemnities stated herein shall insofar as are appropriate remain in full force and effect; 12.8.4 the rights of inspection and audit set out in Section 6 shall continue in force for a period of one year; 12.8.5 termination or expiration of this Agreement for any reason shall not release any Party hereto from any liability which, at the time of such termination or expiration, has already accrued to the other Party or to any third party beneficiary or which is attributable to a period prior to such termination or expiration, including without limitation claims for indemnification under Sections 8.3 - 8.5 or 9.7 arising from events, actions, omissions or liabilities that existed at or prior to such termination or expiration, nor preclude either Party or any third party beneficiary from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement; 12.8.6 all rights, licenses and sublicenses granted by TGEN in the TGEN Intellectual Property pursuant to this Agreement shall cease for the Territory or for such particular country or countries in the Territory (as the case may be) and shall immediately revert to TGEN and all TGEN Program Technology shall be deemed immediately transferred and assigned to TGEN. Following such expiration or termination, Newco may not thereafter use in the Territory or in such particular country or countries in the Territory (as the case may be) (a) any valid and unexpired TGEN Patents, (b) any TGEN Intellectual Property that remains confidential or otherwise proprietary to TGEN, and/or (c) Trademarks. All rights to Newco Technology (other than Elan Program -33- Technology and TGEN Program Technology) shall be transferred to and jointly owned by Elan and TGEN. Rights of permitted Independent Third Party sublicensees in and to the TGEN Intellectual Property shall survive the termination or expiration of the license and sublicense agreements granting said intellectual property rights to Newco; and Newco, Elan and TGEN shall in good faith agree upon the form most advantageous to Elan and TGEN in which the rights of the sublicensor under any such sublicenses are to be held (which form may include continuation of Newco solely as the holder of such licenses or assignment of such rights to a third party or parties, including an assignment to both Elan and TGEN). Any sublicense agreement between Newco and such permitted sublicensee shall permit an assignment of rights by Newco to Elan or TGEN, as the case may be, and shall contain additional reasonable confidentiality protections which an assignee shall reasonably require. Upon any such assignment, TGEN shall enter into good faith negotiations with TGEN with respect to additional reasonable confidentiality protections which either party shall reasonably require. 13. IMPOSSIBILITY OF PERFORMANCE - FORCE MAJEURE 13.1 Neither Party to this Agreement shall be liable for delay in the performance of any of its obligations hereunder if such delay results from causes beyond its reasonable control, including, without limitation, acts of God, fires, strikes, acts of war, or intervention of a government authority, non availability of raw materials, but any such delay or failure shall be remedied by such Party as soon as practicable. 14. SETTLEMENT OF DISPUTES; GOVERNING LAW 14.1 Any dispute between the Parties arising out of or relating to this Agreement will be subject to resolution in accordance with Clause 19 of the Development Agreement, which is incorporated by reference and shall for such purposes survive expiration or termination of the Development Agreement. 14.2 This Agreement is construed under and ruled by the laws of the State of New York, without regard to conflicts of law principles. -34- 15. ASSIGNMENT 15.1 This Agreement may not be assigned by either Party without the prior written consent of the other, which consent shall not be unreasonably withheld, conditioned or delayed, save that (i) either Party may assign this Agreement to its Affiliate without such consent, provided that such assignment does not have any adverse tax consequences on the other Party, and (ii) TGEN may assign its rights and obligations hereunder in connection with a sale of all or substantially all of the business of TGEN to which the Definitive Documents relate, whether by merger, sale of stock, sale of assets or otherwise (provided that, in the event of such transaction, no intellectual property rights of any third party that is the acquiring corporation in such transaction shall be included in the TGEN Intellectual Property licensed hereunder). TGEN and Newco will discuss any assignment by either Party to an Affiliate prior to its implementation in order to avoid or reduce any additional tax liability to the other Party resulting solely from different tax law provisions applying after such assignment to an Affiliate. For the purpose hereof, an additional tax liability shall be deemed to have occurred if either Party would be subject to a higher net tax on payments made hereunder after taking into account any applicable tax treaty and available tax credits than such Party was subject to before the proposed assignment. Notwithstanding any assignment hereof to an Affiliate, each Party will remain fully liable hereunder. 16. NOTICES 16.1 Any notice to be given under this Agreement shall be sent in writing in English by registered airmail or telefaxed to the following addresses: If to Newco at: Targeted Genetics Newco, Ltd. c/o Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, Washington 98101 Attention: Chief Executive Officer Telefax: (206) 623-7064 If to TGEN to: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, Washington 98101 Attention: Chief Executive Officer Telefax: (206) 623-7064 -35- with a copy to: Perkins Coie LLP 411-108/th/ Avenue N.E., Suite 1800 Bellevue, Washington 98004-5584 Attention: Roger M. Tolbert, Esq. Telefax: (425) 453-7350 If to Elan at: Elan Corporation plc Lincoln House, Lincoln Place, Dublin 2, Ireland Attention: Vice President, General Counsel, Elan Pharmaceutical Technologies, a division of Elan Corporation, plc Telefax: + 353 1 709 4124 with a copy to: Cohen & Tauber LLP 1350 Avenue of the Americas 26/th/ Floor New York, New York 10019 Attention: Laurence S. Tauber Telefax: (212) 262-1766 or to such other address(es) and telefax numbers as may from time to time be notified by either Party or TGEN to the other hereunder. 16.2 Any notice sent by mail shall be deemed to have been delivered within seven (7) working days after dispatch and any notice sent by telex or telefax shall be deemed to have been delivered within twenty four (24) hours of the time of the dispatch. Notice of change of address shall be effective upon receipt. 17. MISCELLANEOUS CLAUSES 17.1 No waiver of any right under this Agreement shall be deemed effective unless contained in a written document signed by the Party or third party beneficiary charged with such waiver, and no waiver of any breach or failure to perform shall be deemed to be a waiver of any other breach or failure to perform or of any other right arising under this Agreement. 17.2 If any provision in this Agreement is agreed by the Parties to be, or is deemed to be, or becomes invalid, illegal, void or unenforceable under any law that is applicable hereto, (i) such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the Parties, it will be deleted, with -36- effect from the date of such agreement or such earlier date as the Parties may agree, and (ii) the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way. 17.3 The Parties shall use their respective reasonable endeavors to ensure that the Parties and any necessary third party shall execute and perform all such further deeds, documents, assurances, acts and things as any of the Parties hereto may reasonably require by notice in writing to the other Party or such third party to carry into effect the provisions of this Agreement. 17.4 This Agreement shall be binding upon and inure to the benefit of the Parties hereto, their successors and permitted assigns and sub-licenses. Elan shall be a third party beneficiary to this Agreement and shall have the right (subject to the dispute resolution provisions of the Development Agreement) to cause Newco to enforce Newco's rights against TGEN. 17.5 No provision of this Agreement shall be construed so as to negate, modify or affect in any way the provisions of any other agreement between the Parties unless specifically referred to, and solely to the extent provided, in any such other agreement. In the event of a conflict between the provisions of this Agreement and the provisions of the Development Agreement, the terms of the Development Agreement shall prevail unless this Agreement or the Development Agreement specifically provides otherwise. 17.6 No amendment, modification or addition hereto shall be effective or binding on either Party unless set forth in writing and executed by a duly authorized representative of each Party. Amendments hereto shall be subject to the prior approval of TGEN, which approval, except as otherwise provided herein, shall not be unreasonably withheld, conditioned or delayed. 17.7 This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 17.8 Each of the Parties undertakes to do all things reasonably within its power which are necessary or desirable to give effect to the spirit and intent of this Agreement. 17.9 Each of the Parties hereby acknowledges that in entering into this Agreement it has not relied on any representation or warranty save as expressly set out herein or in any document referred to herein. -37- 17.10 Nothing contained in this Agreement is intended or is to be construed to constitute Elan, TGEN and Newco as partners, or to constitute any of Elan, TGEN or Newco as an employee of any of the others. Neither Party hereto nor Elan shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party hereto or Elan or to bind the other Party hereto or Elan to any contract, agreement or undertaking with any third party. -38- IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first set forth above. TARGETED GENETICS CORPORATION By: /s/ Stewart Parker --------------------------------- Name: H. Stewart Parker ------------------------------- Title: President & CEO ------------------------------ TARGETED GENETICS NEWCO, LTD. By: /s/ Stewart Parker --------------------------------- Name: H. Stewart Parker ------------------------------- Title: President ------------------------------ AGREED TO: ELAN PHARMACEUTICAL TECHNOLOGIES, a division of Elan Corporation, plc By: /s/ Kevin Insley --------------------------------- Name: Kevin Insley ------------------------------- Title: Authorized Signatory ------------------------------ [TGEN LICENSE AGREEMENT EXECUTION PAGE] -39- SCHEDULE 1 ---------- TGEN Intellectual Property [*] * Confidential Treatment Requested -40- SCHEDULE 2 ---------- TGEN Exceptions and Disclosures [*] * Confidential Treatment Requested -41- EX-1.7 8 LICENSE AGREEMENT DATE JULY 21, 1999 Exhibit 1.7 EXECUTION COPY LICENSE AGREEMENT BY AND BETWEEN TARGETED GENETICS NEWCO, LTD. A Bermuda Limited Company AND ELAN PHARMACEUTICAL TECHNOLOGIES, a division of Elan Corporation, plc An Irish Company July 21, 1999 TABLE OF CONTENTS
Section Page - ------- ---- 1. DEFINITIONS................................................. 1 2. GRANT OF RIGHTS............................................. 10 3. IMPROVEMENTS AND AFTER ACQUIRED TECHNOLOGY.................. 14 4. DEVELOPMENT OF PRODUCTS..................................... 15 5. REGULATORY APPROVALS........................................ 15 6. FINANCIAL PROVISIONS........................................ 16 7. CONFIDENTIAL INFORMATION.................................... 20 8. WARRANTIES/INDEMNITIES...................................... 22 9. INTELLECTUAL PROPERTY OWNERSHIP RIGHTS...................... 26 10. RIGHTS EXPLOITATION OUTSIDE THE FIELD....................... 28 11. NON-COMPETITION............................................. 28 12. TERM AND TERMINATION OF AGREEMENT........................... 29 13. IMPOSSIBILITY OF PERFORMANCE - FORCE MAJEURE................ 32 14. SETTLEMENT OF DISPUTES; GOVERNING LAW....................... 32 15. ASSIGNMENT.................................................. 32 16. NOTICES..................................................... 33 17. MISCELLANEOUS CLAUSES....................................... 34
LICENSE AGREEMENT dated as of July 21, 1999 between Targeted Genetics Newco, Ltd., a Bermuda limited company, and Elan Pharmaceutical Technologies, a division of Elan Corporation, plc, an Irish limited company. RECITALS: A. Contemporaneously herewith, Elan and TGEN (capitalized terms used herein are defined below) are entering into the Development Agreement for the purpose of recording the terms and conditions of a joint venture and of regulating their relationship with each other and certain aspects of the affairs of and their dealings with Newco. B. Elan is beneficially entitled to the use of certain know-how and certain patents that have been granted or are pending in relation to the development and production of various Drug Delivery Technologies. C. Newco desires to enter into this Agreement with Elan so as to permit Newco to utilize the Elan Intellectual Property in the research, development, manufacture, distribution and sale of the Products in the Field and in the Territory. D. Elan, EIS and TGEN entered into a letter agreement dated June 30, 1999 (the "Letter Agreement") pursuant to which they agreed to enter into definitive documents, including this Agreement, and the TGEN License Agreement relating to Newco's use of the TGEN Intellectual Property. NOW THEREFORE IT IS HEREBY AGREED AS FOLLOWS: 1. DEFINITIONS A. In this Agreement, the following definitions shall apply: 1.1. "Affiliate" shall mean, with respect to Elan or TGEN, any corporation or entity other than Newco (and entities controlled by it) controlling, controlled by or under the common control of Elan or TGEN, as the case may be, and, with respect to Newco, any corporation or entity under control of Newco. A corporation or non-corporate entity shall be regarded as in control of another corporation if it owns or directly or indirectly controls more than fifty percent (50%) of the voting stock of the other corporation or (a) in the absence of the ownership of at least fifty percent (50%) of the voting stock of a corporation or (b) in the case of a non-corporate entity, the power to direct or cause the direction of the management and policies of such corporation or non-corporate entity, as applicable. [*] OMITTED, CONFIDENTIAL MATERIAL, WHICH MATERIAL HAS BEEN SEPERATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. 1.2. "Agreement" shall mean this agreement (which expression shall be deemed to include the Recitals and the Schedules hereto); 1.3. "Antisense" shall mean [*]; 1.4. "Base Technologies" shall mean technologies, techniques and formulations for the administration of an active agent to a mammal: (i) in formulations of the active agent with one or more substantially inert ingredients, including, without limitation, tonicity modifiers and bulking agents; or (ii) with or through devices or mechanical targeting systems or mechanical delivery systems (other than Elan's MEDIPAD(R) Drug Delivery System or devices utilizing autoinjector technology); 1.5. "cGCP", "cGLP" and "cGMP" shall mean current Good Clinical Practices, current Good Laboratory Practices and current Good Manufacturing Practices respectively; 1.6. "Change of Control Event" shall mean that a Technological Competitor of Elan acquires directly or indirectly voting stock or equivalent securities in TGEN or Newco representing [*] or more of the stock which carries entitlement to vote, or a Technological Competitor of Elan acquires by all or substantially all of the business of TGEN or Newco to which the Transaction Documents relate, whether by merger, sale of stock, sale of assets or otherwise; 1.7. "Commercialization" shall mean the manufacture, promotion, distribution, marketing and sale of the Products; 1.8. "Control" shall mean the ability to grant a license or sublicense as contemplated herein without violating the terms of any agreement with any Independent Third Party; 1.9. "Definitive Documents" shall have the same meaning as given to the term "Transaction Documents" in the Development Agreement; 1.10. "Development Agreement" shall mean the Subscription, Joint Development and Operating Agreement of even date entered into among TGEN, Elan, EIS and Newco; 1.11. "Development Candidate(s)" shall mean a TGEN Proprietary Gene, or a Gene obtained from an Independent Third Party, jointly selected by the Participants and Newco to be developed for incorporation in Products. For the avoidance of doubt, if it is subsequently determined by the Management Committee of * Confidential Treatment Requested -2- Newco that the TGEN Proprietary Gene initially offered for development as a Product is not suitable for use in a Product, TGEN shall offer an additional TGEN Proprietary Gene to the extent available, as described in Section 9.5 of the Development Agreement, and such additional TGEN Proprietary Gene shall in that instance become the Development Candidate. 1.12. "Drug Delivery Technologies" shall mean formulation and/or excipient systems and technologies for delivery of a therapeutic agent to a mammal, including but not limited to [*] allowing such agent, without limitation on other features that may be sought in addition to or instead of the following, to be administered on an optimized schedule, and/or to be administered with reduced side effects, and/or to be administered with enhanced efficacy, and/or to be administered with better patient compliance, and/or to be administered in reduced dosages. Drug Delivery Technologies shall also include Elan device delivery technologies including the MEDIPAD(R) Drug Delivery System and devices utilizing autoinjector technology. Notwithstanding the foregoing, Drug Delivery Technologies shall not include Base Technologies or Gene Delivery Technologies; 1.13. "Effective Date" shall mean the "Closing Date" as such term is defined in the Development Agreement; 1.14. "EIS" shall mean Elan International Services, Ltd., a Bermuda limited company; 1.15. "Elan" shall mean Elan Pharmaceutical Technologies, a division of Elan Corporation, plc, a public limited company incorporated under the laws of Ireland, its, successors and permitted assigns; and, shall also include, for purposes of the option contained in Section 2.2 below and the inclusion of the NanoCrystal(TM) technology covered by such option and referenced in the definition of "Elan Intellectual Property," Elan Pharma International Limited. 1.16. "Elan Improvements" shall mean any improvements to the Elan Patents and Elan Know-How developed by Elan independently or in collaboration with an Independent Third Party, which improvements Elan at any time during the Research and Development Term Controls within the Field (other than improvements developed pursuant to the Research and Development Program); 1.17. "Elan Intellectual Property" shall mean the Elan Know-How, the Elan Patents and/or the Elan Improvements. Schedule 1 hereto shall contain, by way of illustration but not limitation, examples of Elan Intellectual Property. For the avoidance of doubt, Elan Intellectual Property shall include, upon exercise of the * Confidential Treatment Requested -3- option contained in Section 2.2, below, technology Controlled by Elan Corporation, plc, doing business as Elan Pharma International Ltd. (but only to the extent such technology consists of NanoCrystal(TM) technology formerly held by NanoSystems, a subsidiary of the Eastman Kodak Company, as improved). Elan Intellectual Property shall exclude (a) the Excluded Elan Technology, (b) inventions, patents and know-how controlled by all other affiliates or subsidiaries of Elan Corporation, plc., including, but not limited to that not Controlled by Elan, but rather Controlled prior to or during the term of this Agreement by Axogen Limited, Neuralab Limited and the Elan Pharmaceuticals division of Elan Corporation, plc. which incorporates, inter alia, Athena ---------- Neurosciences, Inc., Elan Pharmaceuticals, Inc., Athena Diagnostics, Inc., Carnrick Laboratories Inc. and Elan Europe Limited and (c) inventions, patents and know-how that are subject to contractual obligations of Elan to third parties as of the Effective Date to the extent the licensing of such inventions, patents and know-how is restricted or limited; 1.18. "Elan Know-How" shall mean any and all rights (i) Controlled by Elan as of the Effective Date to any discovery, invention (whether or not patentable), know-how, substances, data, techniques, processes, systems, formulations and designs relating to drug delivery and commercial information relating to Base Technologies, Drug Delivery Technologies or Gene Delivery Technologies and useful for the conduct of the Project or Commercialization of Products and (ii) any discovery, invention (whether or not patentable), know- how, substances, data, techniques, processes, systems, formulations and designs relating to drug delivery and commercial information relating to Base Technologies, Drug Delivery Technologies or Gene Delivery Technologies and useful for the conduct of the Project or Commercialization of Products developed by Elan independently or in collaboration with an Independent Third Party after the Effective Date; 1.19. "Elan License" shall mean the license of the Elan Intellectual Property to Newco as provided herein; 1.20. "Elan Patents" shall mean any and all patents and patent applications relating to Base Technologies, Drug Delivery Technologies or Gene Delivery Technologies (i) Controlled by Elan on the Effective Date and (ii) Controlled by Elan and hereafter filed or obtained (to the extent covering inventions made by Elan independently or in collaboration with an Independent Third Party). Elan Patents shall also include all extensions, continuations, continuations-in-part, continuing prosecution applications, divisionals, patents-of-additions, re-examinations, re-issues, supplementary protection certificates and foreign counterparts of such patents and patent applications and any patents issuing thereon and extensions of any patents licensed hereunder; -4- 1.21. "Elan Program Technology" shall mean all Program Technology that relates solely to Drug Delivery Technologies or Antisense whether conceived or made by Elan and/or its agents or TGEN or Newco and/or its agents pursuant to the Research and Development Program; 1.22. "Elan Right of First Negotiation" shall have the meaning provided in Section 2.12 hereof; 1.23. "Excluded Elan Technology" shall mean transdermal or transcutaneous Drug Delivery Technology (i.e., pertaining to delivery, onto, into and through the skin); 1.24. "Excluded TGEN Technology" shall mean inventions, patents and know-how: (a) to the extent relating to transdermal or transcutaneous drug delivery technology (as above described); (b) to the extent relating to the treatment of cystic fibrosis or the delivery of Genes directed therefor; (c) to the extent relating to Antisense; or (d) that are subject to contractual obligations of TGEN to third parties as of the Effective Date to the extent the licensing of such inventions, patents and know-how is restricted or limited. 1.25. "FDA" shall mean the United States Food and Drug Administration or any successors or agency the approval of which is necessary to market a product in the United States of America; 1.26. "Field" shall mean the research, development and Commercialization of a Platform for delivery of Genes to mammals. For avoidance of doubt, the Field shall exclude (i) cell therapy, (ii) ex vivo gene therapy, (iii) Antisense delivery and (iv) transcutaneous and/or transdermal delivery (as above described); 1.27. "Gene" shall mean any nucleotide sequence that includes a region or regions (or gene cassette(s)) capable of coding, causing or modulating the expression of a protein or other genetic element (other than directly modulating expression where the nucleic acid sequence is an Antisense) and includes one or more elements that can control expression of said protein(s) or other genetic element(s); 1.28. "Gene Delivery Technologies" shall mean [*]; 1.29. "Independent Third Party" shall mean any person other than Newco, TGEN, Elan or any of their respective Affiliates; * Confidential Treatment Requested -5- 1.30. "In market" shall mean sales of Products whether by Newco or its Affiliates, or where applicable by a sublicensee, to an Independent Third Party being a wholesaler, distributor, managed care organization, hospital, pharmacy and/or the like; 1.31. "Licensed Technologies" shall mean the Elan Intellectual Property and the TGEN Intellectual Property; 1.32. "Licenses" shall mean the Elan License and the TGEN License; 1.33. "Lien" shall mean any and all liens, security interests, restrictions, claims, encumbrances or rights of third parties of every kind and nature; 1.34. "Management Committee" shall have the meaning given to such term in the Development Agreement; 1.35. "Marketing Authorization" shall mean the procurement of registrations and permits required by applicable government authorities in a country in the Territory for the marketing, sale, and distribution of a Product in such country; 1.36. "MEDIPAD(R) Drug Delivery System" shall mean the ambulatory continuous micro infusion device having a drug reservoir volume ranging from 3.3 to 5.0 ml. and associated technology; 1.37. "Net Proceeds" shall mean the net amount realized by Newco or its Affiliates in the form of upfront payments, milestones or royalty payments from Independent Third Parties with respect to Products or the grant of rights therein or to the Commercialization thereof, after deduction of all costs, commissions and fees payable by Newco or its Affiliates associated with or incurred with respect to such upfront payments, milestones or royalties, including without limitation royalties and other compensations paid or payable to any Independent Third Party (or to either of the Participants, where such Participant has separately licensed any rights or intellectual properties to Newco on a royalty-bearing basis). 1.38. "Net Sales" shall mean the amount billed or invoiced for sales of a Product by Newco or its Affiliates to an Independent Third Party, less, to the extent included in such invoice price the total of: (1) ordinary and customary trade, quantity or cash discounts and nonaffiliated brokers' or agents' commissions, including government managed care and other contract rebates, pharmacy incentive programs, including chargebacks of pharmacy or hospital performance incentive programs or similar programs; (2) credits, rebates and returns (including, but not limited to, wholesaler and retailer returns); (3) freight, postage and duties separately identified on the invoice or other documentation maintained in the ordinary course of business, and -6- (4) import, export and sales taxes, excise taxes, other consumption taxes, customs duties, tariffs and compulsory payments to governmental authorities separately identified on the invoice or other documentation maintained in the ordinary course of business and based on sales or turnover or delivery of the Products. Net Sales shall also include the amount or fair market value of all other consideration received by Newco or its Affiliates in respect of sales of Products by Newco or its Affiliates to an Independent Third Party, whether such consideration is payment in kind, exchange or another form., less applicable deductions as described above. If a Product is provided to an Independent Third Party by Newco or its Affiliates without charge or provision of invoice and used by such Independent Third Party, then Newco or its Affiliates shall be treated as having sold such Product to such Independent Third Party for an amount equal to the fair market value of such Product. Sales between or among Newco and its respective Affiliates or authorized licensees shall be excluded from the computation of Net Sales; 1.39. "Newco" shall mean Targeted Genetics Newco, Ltd., a Bermuda limited company; 1.40. "Newco Program Technology" shall mean all Program Technology other than Elan Program Technology and TGEN Program Technology; 1.41. "Newco Technology" shall mean all Program Technology and all technology licensed or acquired by Newco or developed by Newco whether or not pursuant to the Research and Development Program, excluding, however, TGEN Intellectual Property and Elan Intellectual Property; 1.42. "Participant" shall mean Elan or TGEN, as the case may be. "Participants" shall mean both Elan and TGEN; 1.43. "Parties" shall mean Elan and Newco; 1.44. "Person" shall mean an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, or other entity of whatever nature; 1.45. "Plan" shall mean that portion of the Business Plan defined in the Development Agreement that relates to the Project and Newco's program of development agreed to by Elan and TGEN within sixty (60) days of the date hereof, with respect to the research, development and Commercialization of the Products, which Plan shall be reviewed and mutually agreed to in writing by Elan and TGEN on an annual basis; -7- 1.46. "Platform" shall mean the combined utilization of Drug Delivery Technologies and Gene Delivery Technologies for delivery of Genes by any route of administration; 1.47. "Product" shall mean a Gene formulated for administration to mammals, including humans, by use of a Platform; 1.48. "Program Technology" shall mean all technology developed by or on behalf of Newco, whether by Elan, TGEN, a third party or jointly by any combination thereof, pursuant to the Research and Development Program; 1.49. "Project" shall mean all activity as undertaken by Elan, TGEN and Newco to develop the Platform and Products in accordance with the Plan; 1.50. "Regulatory Authority" shall mean any regulatory authority outside the United States of America, the approval of which is necessary to market a Product; 1.51. "Research and Development Program" shall have the same meaning given to such term in the Development Agreement; 1.52. "Research and Development Term" shall mean the period commencing on the Effective Date and continuing for a period of [*] thereafter, or as extended by agreement of the Participants, up to an aggregate of [*]; provided, however, that if a Participant shall be prevented by (i) events beyond the Participants' control, or (ii) by such Participant's delay or negligent act or omission, from performing its obligations under the Definitive Documents within said [*] period (or as extended), then the other Participant at its option, may extend the duration of the Research and Development Term by a term equal in length to the period during which the first Participant was unable to perform its obligations hereunder; 1.53. "Technological Competitor of Elan" shall mean any entity which has a significant program for the development of Drug Delivery Technology and which is active in promoting and contracting the use of such Drug Delivery Technology to third parties, a listing of which is contained on Schedule 3 to the Development Agreement, as such list may be supplemented by Elan from time to time with the consent of TGEN, which consent shall not be unreasonably withheld if the proposed additions are within the parties' contemplation as to the purpose of the original list; 1.54. "Term" shall have the meaning given to it in Clause 12 below; * Confidential Treatment Requested -8- 1.55. "Territory" shall mean all the countries of the world; 1.56. "TGEN" shall mean Targeted Genetics Corporation, a Washington corporation; 1.57. "TGEN Intellectual Property" shall have the meaning set forth in the TGEN License Agreement; 1.58. "TGEN License" shall have the meaning set forth in the TGEN License Agreement; 1.59. "TGEN License Agreement" shall mean that certain license agreement, of even date herewith, entered into between TGEN and Newco; 1.60. "TGEN Program Technology" shall mean all Program Technology which relates solely to Gene Delivery Technologies, whether conceived or made by TGEN and/or its agents or Elan or Newco pursuant to the Research and Development Program; 1.61. "TGEN Proprietary Gene" shall mean any Gene Controlled by TGEN; 1.62. "Trademark" shall mean the trademark(s) belonging to Elan as may be selected by Newco or its permitted sub-licensees, with Elan's consent, for use in connection with the Products; 1.63. "United States Dollar" and "US$" shall mean the lawful currency for the time being of the United States of America; B. Interpretation. In this Agreement the following shall apply: -------------- 1.1. The singular includes the plural and vice versa, the masculine includes the feminine and vice versa. 1.2. Any reference to a Clause, Section or Schedule shall, unless otherwise specifically provided, be to a Clause, Section or Schedule of this Agreement. 1.3. The headings of this Agreement are for ease of reference only and shall not affect its construction or interpretation. -9- 2. GRANT OF RIGHTS 2.1 Elan hereby grants to Newco a license in the Territory to Elan's rights in the Elan Intellectual Property for all research, development, and Commercialization purposes solely in the Field, subject to contractual obligations that Elan may have as of the Effective Date, and, unless prohibited by the Section 11 ("Non-Competition"), contractual obligations that Elan may -- enter into after the Effective Date (the "Elan License"). The Elan License shall be nonexclusive to Newco during the Research and Development Term, and thereafter during the License Term shall be exclusive to the extent applicable to the Commercialization (i) of a Product or Products which has (have) been successfully developed by Newco during the Research and Development Term, and (ii) of any Product containing the same Gene that would be competitive (i.e., directed at the same indication) with any Product being Commercialized by Newco. Otherwise, the Elan License shall be nonexclusive during the License Term after the Research and Development Term. 2.2 Elan hereby also grants an option, to be exercised, upon written notice to Elan by Newco and payment of an option price of [*], to obtain a license to the Elan Patents and Know-How related to Drug Delivery Technologies, Gene Delivery Technologies and Base Technologies held by Elan Pharma International Ltd. (but only to the extent such technology consists of NanoCrystal(TM) technology formerly held by NanoSystems, a subsidiary of the Eastman Kodak Company, as improved). The option shall be exercised at such time as the TGEN members of the Management Committee determine that such technology is relevant to the Project. Upon exercise of such option by Newco, such technology, shall, subject to any contractual obligations to Independent Third Parties that Elan may have as of the Effective Date, and, unless prohibited by Section 11, contractual obligations to Independent Third Parties that Elan may enter into after the exercise of such option, be deemed included within with the Elan License, the Elan Intellectual Property, the Elan Patents, and the Elan Know-How, as appropriate, and subject to the provisions hereof with respect thereto. If the inclusion of any Elan Know-How, Elan Patents or Elan Improvements in the license of Elan Intellectual Property is restricted or limited by a third party agreement, Elan shall use reasonable commercial efforts to exclude or where applicable minimize any such restriction or limitation. 2.3 To the extent royalty or other compensation obligations to Independent Third Parties that are payable with respect to Elan Intellectual Property would be triggered by a proposed use of such Elan Intellectual Property in connection with the Project, Elan will inform Newco and TGEN of such royalty or compensation obligation. If Newco and TGEN agree to utilize such Elan Intellectual Property in * Confidential Treatment Requested -10- connection with the Project, Newco will be responsible for the payment of such royalty or other compensation obligations relating thereto. 2.4 Except as expressly provided herein, all proprietary rights and rights of ownership with respect to the Elan Intellectual Property shall at all times remain solely with Elan. Elan shall disclose to Newco inventions made by or on behalf of Elan in connection with the performance of the Project, any patentable inventions and discoveries within the Elan Intellectual Property that relate to the Field and any patentable Elan Improvements developed by or on behalf of Elan. 2.5 Notwithstanding anything contained herein to the contrary, Elan shall have the right, outside the scope of the exclusivity under the Elan License, and subject to Section 11 below, to fully exploit and grant licenses and sublicenses with respect to the Elan Intellectual Property. 2.6 Notwithstanding the grant of the Elan License, Elan will not be required to disclose to TGEN or Newco proprietary manufacturing know-how, unless and until it is determined, as described in Sections 2.13 and 2.14 below, that a party other than Elan will perform relevant manufacturing services for Newco, and then such disclosures may be limited to those that are required to support such manufacturing services by such other party. 2.7 Newco shall not be permitted to (a) encumber any of its rights under the Licenses or the Newco Technology without the prior written consent of Elan; (b) assign or sublicense any of its rights under the licenses for the Licensed Technologies and the Newco Technology without the prior written consent of Elan, which consent may be withheld in Elan's sole discretion. Notwithstanding the foregoing, subject to the Elan Right of First Negotiation, Elan shall not unreasonably withhold, condition or delay its consent to the licensing of rights to Commercialize Products to Independent Third Parties who are not Technological Competitors of Elan. Any agreement between Newco and any permitted Independent Third Party for the development or exploitation of the Elan Intellectual Property shall require such Independent Third Party to maintain the confidentiality of all information concerning the Elan Intellectual Property and shall permit an assignment of rights by Newco to Elan in accordance with the terms of this Agreement. Rights of permitted third party sublicensees in and to the Elan Intellectual Property shall survive the termination of the license and sublicense agreements granting said intellectual property rights to Newco; and Newco and Elan shall in good faith agree upon the form most advantageous to Elan in which the rights of the sublicensor under any such sublicenses are to be held (which form may include continuation of Newco solely as -11- the holder of such licenses or assignment of such rights to a third party or parties, including an assignment to Elan). 2.8 Newco will use its reasonable commercial efforts to exploit the Elan Intellectual Property, the TGEN Intellectual Property and Newco Technology in accordance with this Agreement, the TGEN License Agreement and the Plan. Newco and/or its contractors or licensees/sublicensees shall employ reasonably diligent efforts to research, develop, register, and Commercialize the Products in appropriate regions in the Territory. Newco and/or its contractors or licensees/sublicensees shall employ or have employed on its or their behalf a level of advertising, sales, marketing, and promotion efforts in each country in the Territory where Marketing Authorization for Product has been obtained which is: (i) commensurate with that used by other pharmaceutical marketers for products of similar market potential in that country in the Territory, and (ii) consistent with the market potential for the Product as depicted in the Plan and as determined by the Management Committee in accordance with the Development Agreement. 2.9 Newco will be solely responsible for ensuring that it or its sublicensees manufacture and Commercialize the Products within each country of the Territory strictly in accordance with all the legal and regulatory requirements of each country of the Territory. 2.10 Upon the request of Newco and with the consent of Elan, Elan shall grant to Newco during the Term a non-exclusive royalty free license in the Territory, solely for use in connection with the sale of the Products, to use one or more Trademarks, on the following terms: 2.10.1 Newco shall as soon as it becomes aware of any infringement of a Trademark give to Elan in writing full particulars of any use or proposed use by any other person, firm or company of a service mark, trade name or trademark or promotional or advertising activity which may constitute infringement. 2.10.2 If Newco becomes aware that any other person, firm or company alleges that such Trademark is invalid or that the use of such Trademark infringes any rights or constitutes an unauthorized use of intellectual property of another party or that the Trademark is otherwise attacked or attackable, Newco shall immediately give to Elan full particulars thereof in writing and shall make no comment or admission to any third party in respect thereof. 2.10.3 Elan shall have the right to conduct all proceedings relating to such Trademark and shall in its sole discretion decide what action, if any, -12- to take in respect of any actual, threatened or alleged infringement of such Trademark or any other claim or counter-claim brought or threatened relating to the use or registration of such Trademark. Any such proceedings shall be conducted at Elan's expense and for its own benefit. 2.10.4 Nothing contained in this Agreement shall grant to Newco any right, title, or interest in or to such Trademark, whether or not specifically recognized or perfected under applicable laws, except for the non-exclusive license described herein. At no time during or after the term of this Agreement shall Newco challenge or assist others to challenge any such Trademark or the registration thereof or attempt to register any trademarks, service marks, or trade names confusingly similar to any such trademark. All displays of any such Trademark that Newco intends to adopt shall first be submitted to Elan for approval (which shall not be unreasonably withheld, conditioned or delayed) of design, color, and other details, or shall be exact copies of those used by Elan or previously approved by it for the same uses. In addition, Newco shall fully comply with all reasonable guidelines communicated by Elan concerning the use of any such Trademark as well as all rules and regulations of such use throughout the Territory. 2.10.5 The rights granted to Newco under this Section 2.10 shall automatically terminate with respect to a Product in a country in the Territory upon termination of Newco's right to market such Product in any such country. 2.11 When packaged, and to the extent permitted by law, a product label shall include an acknowledgement that the Product is made under license from Elan unless the incorporation of Elan Intellectual Property is so limited that such acknowledgment would be unreasonable. Any such acknowledgment shall take into consideration regulatory requirements and Newco's reasonable commercial requirements. In such event, Newco shall wherever possible give due acknowledgement and recognition to Elan in all printed promotional and other material regarding the Product such as stating that the Product is under license from Elan and that the applicable Elan Intellectual Property has been applied to the Products. Newco shall consult with and obtain the written approval of Elan as to the format and content of the promotional and other material insofar as it relates to a description of, or other reference to, the application of the Elan Intellectual Property, such approval not to be unreasonably withheld, conditioned or delayed. The further consent of Elan shall not be required where the format and content of such materials is substantively similar as the materials previously furnished to and approved in writing by Elan. 2.12 Notwithstanding anything contained in this Agreement to the contrary, at such time, during or within [*] following the end of the Research and Development * Confidential Treatment Requested -13- Term as Newco intends to develop and Commercialize Products [*] Elan shall have [*] relating to such Product [*], on the following terms and conditions: 2.12.1 If Newco intends to [*] then Newco immediately shall notify Elan in writing that Elan may elect to [*] referred to in this Section. Elan shall indicate its desire to [*] pursuant to this Section by delivering written notice to Newco within forty-five (45) days of Elan's receipt of the written notification from Newco to Elan. If Elan elects to [*], the Parties shall [*]. 2.12.2 If, [*] Elan and Newco do not [*] within [*] from the notification in writing by Newco to Elan, then Newco shall be free [*] 2.12.3 Following the [*] period described in Section 2.12.2, [*] 2.13 Elan and TGEN shall have preferential rights to negotiate agreements with Newco whereby Elan and/or TGEN will manufacture Products to meet Newco's requirements. Newco shall evaluate each such manufacturing agreement in light of which of Elan or TGEN (or neither, or both) has the capability and the committed resources to perform such manufacturing services in the best interests of Newco. If the parties cannot come to mutual agreement on who is best qualified to perform such manufacturing services, the matter will be resolved through the dispute resolution procedures of the Joint Development and Operating Agreement. To the extent Elan or TGEN performs any manufacturing services to Newco, it shall be paid a price equal to [*] and other terms and conditions customary in a supply agreements shall apply. 2.14 Subject to the rights of Newco as provided in Section 2.12 herein and the rights of Elan and TGEN as provided in Section 2.13 herein, Newco shall not be permitted to contract the development or Commercialization of any Product without the prior written consent of Elan, which consent will not be unreasonably withheld, conditioned or delayed; provided that such reasonableness standard, shall not be applicable in the case of a proposed sublicense to any Technological Competitor of Elan. 3. IMPROVEMENTS AND AFTER ACQUIRED TECHNOLOGY 3.1 Subject to contractual restrictions permissible under Section 11 ("Non-Competition"), Elan Improvements shall be deemed, immediately upon development, to be included in the license of the Elan Intellectual Property granted to Newco hereunder. 3.2 For the avoidance of doubt, and without limitation on the applicability of the same exclusion as to other Elan Intellectual Property, it is understood that the * Confidential Treatment Requested -14- Elan License specifically excludes any right to use Elan Improvements outside of the Field. 3.3 If the inclusion of an Elan Improvement in the license of Elan Intellectual Property granted to Newco hereunder is restricted or limited by a third party agreement, then Elan shall use reasonable commercial efforts to exclude, or where applicable, to minimize any such restriction or limitation. 3.4 All rights, title, and interest to any Elan Improvements shall be the property of Elan. Newco, TGEN and any such third party shall execute and deliver documents, and take such other actions as Elan may reasonably request, to effect or evidence such ownership. 3.5 If, after the Effective Date, Elan acquires know-how or patent rights relating to the Field, through acquisition of or merger with an Independent Third Party that has know-how or patent rights relating to the Field, then Elan shall offer, as soon as practicable, to license such know-how and patent rights to Newco (subject to existing contractual obligations binding on such Independent Third Party at the time of such acquisition or merger), on such terms as would be offered to an Independent Third Party negotiating in good faith on an arms-length basis, and if TGEN determines that Newco should not acquire such license, then Elan shall be free (subject to the provisions of Section 11, below) to fully exploit such know-how and patent rights (without the Elan Intellectual Property then licensed to Newco, other than outside the scope of the exclusivity of the Elan License), and to grant to third parties licenses and sublicenses with respect thereto. 4. DEVELOPMENT OF PRODUCTS 4.1 During the Research and Development Term, Newco will diligently pursue the research and development of the Elan Intellectual Property, TGEN Intellectual Property and Newco Technology in accordance with the Research and Development Program. The objectives of this research and development work will be (a) to develop the Platform, and (b) to develop one or more Products in the Field. 5. REGULATORY APPROVALS 5.1 Newco shall, or shall cause its sublicensees to, at its or their sole cost file and shall use its reasonable best efforts to prosecute to approval, the Marketing Authorizations for the Products in appropriate countries in the Territory in accordance with the Plan. During any Marketing Authorization registration procedure, Newco shall keep Elan promptly and fully advised of Newco's registration activities, progress -15- and procedures. Each Party shall inform the other Party and TGEN of any dealings such Party has with the FDA and any other Regulatory Authority. The Parties and TGEN shall collaborate in relation to obtaining any approval of the FDA or Regulatory Authority for final approved labeling. 5.2 Subject to agreement to the contrary, any and all Marketing Authorizations filed hereunder for Products shall, to the extent owned by Newco, remain the property of Newco, provided that Newco shall allow Elan access thereto solely to enable Elan to fulfill its obligations and exercise its rights under this Agreement and the Development Agreement. Newco shall maintain or cause its sublicensees to maintain such Marketing Authorizations at its or their own cost. 5.3 Newco shall indemnify and hold harmless Elan, its agents and employees from and against all claims, damages, losses, liabilities and expenses to which Elan, its agents, and employees may become subject related to or arising out of Newco's bad faith, negligence or intentional misconduct in connection with the filing or maintenance of the Marketing Authorizations. 6. FINANCIAL PROVISIONS 6.1 In consideration of the license to the Elan Patents, Newco shall pay to Elan the following amounts: 6.1.1 Up Front License Fee Payment. Fifteen million United States ---------------------------- Dollars (US$15,000,000), simultaneously with the execution and delivery of this Agreement by both Parties; and 6.1.2 Product based upon the Development Candidates. Newco shall --------------------------------------------- make the following payments with respect to Products based upon the Development Candidates: (a) Development Work - Initial research and development work ---------------- pursuant to the Research and Development Program regarding the development of the Platform and one or more Development Candidates contracted by Newco to TGEN and/or Elan shall be payable by Newco to each of TGEN and Elan based on [*] (or less, where the terms of a third party agreement do not support such fees, and are otherwise acceptable to the Management Committee). (b) Upfront or Milestone Payments - If any Independent Third ----------------------------- Party shall make upfront or milestone payments (e.g., for NDA filing, approvals, etc.) to Newco, then [*] of the Net Proceeds from such upfront or milestone payments shall be retained by Newco, and Newco shall pay to each of Elan * Confidential Treatment Requested -16- and TGEN, in proportion to their respective ownership interests in Newco, royalties in the amount of the remaining [*] of such Net Proceeds. (c) Royalties payable to Elan and TGEN Upon Sales of the ---------------------------------------------------- Products based upon the Development Candidates - If Newco makes any In market - ---------------------------------------------- sales of such Products, Newco shall pay Elan a royalty on Net Sales derived therefrom, at a rate to be determined by the Management Committee prior to the market launch thereof to be appropriate under the circumstances with respect to each such Product. Newco shall retain [*] of the Net Proceeds from all royalties derived from sales of Products based upon the Development Candidates, and shall pay to each of Elan and TGEN the remaining [*] of all such Net Proceeds in proportion to their respective ownership interests in Newco. (d) Special Provisions for TGEN Proprietary Genes. --------------------------------------------- Notwithstanding the foregoing, in the event a Product is based upon a Development Candidate which incorporates a TGEN Proprietary Gene, [*] of the aggregate Net Proceeds from all upfront, milestone and royalty payments made to Newco by an Independent Third Party with respect to such Product shall be paid as an additional royalty to TGEN, and the remaining [*] of such Net Proceeds shall be paid as an additional royalty to Elan. Thereafter, such amounts shall be allocated as provided above. 6.1.3 Products Based Upon TGEN Proprietary Genes. In the event ------------------------------------------ Newco shall desire to develop a Product incorporating a TGEN Proprietary Gene other than a Product based upon the Development Candidate, Newco, Elan and TGEN shall negotiate in good faith the terms for the licensing of such Gene and royalties to be paid to each of TGEN and Elan; provided, however, that with respect to Newco, the terms of such license shall be no less favorable than those that would have be obtained in an arm's length transaction between unrelated parties and, with respect to TGEN, the terms of such license shall be no less favorable than those granted to any other licensor to Newco 6.1.4 Products Based on Proprietary Genes of Independent Third -------------------------------------------------------- Parties. Newco shall make the following payments with respect to Products based - ------- on proprietary Genes of Independent Third Parties: (a) Development Work - Research and development work related to ---------------- Products based upon proprietary Genes of Independent Third Parties performed by Elan or TGEN for Newco, as the case may be, shall be payable to such Participant at [*] (or less, where the terms of a third party agreement do not support such fees, and are otherwise acceptable to the Management Committee). [*] of any * Confidential Treatment Requested -17- profit received by Newco for direct charges for such development following payment of Elan's or TGEN's charges shall be payable as an additional royalty by Newco to Elan and TGEN, in proportion to their respective ownership interests in Newco. (b) Upfront or Milestone Payments - If any Independent Third ----------------------------- Party shall make upfront or milestone payments (e.g., for NDA filing, approvals, etc.) to Newco with respect to Products based upon proprietary Genes of such third party, then [*] of the Net Proceeds from such upfront or milestone payments shall be retained by Newco, and Newco shall pay to each of Elan and TGEN the remaining [*] of such Net Proceeds in proportion to their respective ownership interests in Newco. (c) Royalty Payments to Participants - If Newco makes any In -------------------------------- market sales of such Products, Newco shall pay Elan a royalty on Net Sales derived therefrom, at a rate to be determined by the Management Committee prior to the market launch thereof to be appropriate under the circumstances with respect to each such Product. Newco shall retain [*] of Net Proceeds derived by it from all royalties paid to it by Independent Third Parties with respect to Products based upon proprietary Genes of such parties, and shall pay to each of Elan and TGEN the remaining [*] of all such Net Proceeds in proportion to their respective ownership interests in Newco. 6.2 Payment of those royalties that are payable to Elan pursuant to Clauses 6.1.2-6.1.4, if any, shall be made quarterly in arrears within forty- five (45) days after the expiry of the calendar quarter. The method of payment shall be by wire transfer to an account specified by Elan and shall be nonrefundable to Newco. Each payment made to Elan shall be accompanied by a true accounting of all Products sold by Newco, its Affiliates and its permitted sublicensees, if any, during such quarter. Such accounting shall show, on a country-by-country and Product-by-Product basis, Net Sales and Net Proceeds invoiced and received by Newco (and the calculation thereof) and each calculation of royalties with respect thereto, including the calculation of all adjustments and currency conversions. 6.3 Newco shall maintain and keep clear, detailed, complete, accurate and separate records for a period of three (3) years following the completion of such records so: (i) as to enable any royalties which shall have accrued hereunder to be determined; and (ii) that any deductions made in arriving at the Net Sales and Net Proceeds can be determined. 6.4 All payments due hereunder shall be made in United States Dollars. Payments due on Net Sales of any Product and Net Proceeds with respect to any Product invoiced and received by Newco for each calendar quarter made in a currency * Confidential Treatment Requested -18- other than United States Dollars shall first be calculated in the foreign currency and then converted to United States Dollars on the basis of the average exchange rate in effect for such quarter for the purchase of United States Dollars with such foreign currency quoted in the Wall Street Journal (or comparable publication if not quoted in the Wall Street Journal) with respect to the currency of the country of origin of such payment, determined by averaging the rates so quoted on each business day of such quarter. 6.5 If, at any time, legal restrictions in the Territory prevent the prompt payment when due of royalties payable hereunder to Elan or any portion thereof, the Parties shall meet to discuss suitable and reasonable alternative methods of reimbursing Elan the amount of such royalties. In the event that Newco is prevented from making any payment under this Agreement by virtue of the statutes, laws, codes or government regulations of the country from which the payment is to be made, then such payments may be paid by depositing them in the currency in which they accrue to Elan's account in a bank acceptable to Elan in the country the currency of which is involved or as otherwise agreed by the Parties. 6.6 Elan and Newco agree to co-operate in all respects necessary to take advantage of any double taxation agreements or similar agreements as may, from time to time, be available. 6.7 Any taxes payable by Elan on any payment made to Elan pursuant to this Agreement shall be for the account of Elan. If so required by applicable law, any payment made pursuant to this Agreement shall be made by Newco after deduction of the appropriate withholding tax, in which event the Parties shall co-operate to obtain the appropriate tax clearance as soon as is practicable. On receipt of such clearance, Newco shall forthwith procure that the amount so withheld is paid to Elan. 6.8 Newco shall, not more than once in each calendar year, nor more than once with respect to any accounting period, permit representatives of an internationally-recognized firm of independent certified accountants selected by Elan upon reasonable notice and at any reasonable time during normal business hours to have access to inspect and audit the accounts and records of Newco and any other book, record, voucher, receipt or invoice relating to the calculation of the royalty payments on Net Sales and Net Proceeds submitted to Elan. Any such inspection of Newco's records shall be at the expense of Elan, except that if any such inspection reveals a deficiency in the amount of the royalty actually paid to Elan hereunder in any calendar quarter of five percent (5%) or more of the amount of any royalty actually due to Elan hereunder, then the expense of such inspection shall be borne solely by Newco. Any amount of deficiency shall be paid promptly to Elan by -19- Newco. If such inspection reveals a surplus in the amount of royalties actually paid to Elan by Newco, Elan shall reimburse Newco the surplus within fifteen (15) days after determination. 6.10 In the event of any unresolved dispute regarding any alleged deficiency or overpayment of royalty payments hereunder, the matter will be subject to resolution in accordance with Clause 19 of the Development Agreement, which is incorporated by reference and shall for such purposes survive termination of the Development Agreement. 7. CONFIDENTIAL INFORMATION 7.1 The Parties acknowledge that it may be necessary, from time to time, to disclose to each other confidential and proprietary information, including without limitation, inventions, works of authorship, trade secrets, specifications, designs, data, know-how and other information relating to the Field, the Products, Elan Intellectual Property, TGEN Intellectual Property or the Newco Technology, as the case may be, or otherwise as to processes, services or business of the disclosing Party. The foregoing shall be referred to collectively as "Confidential Information". Any Confidential Information revealed by a Party to another Party shall be used by the receiving Party exclusively for the purposes of fulfilling the receiving Party's obligations under this Agreement and the Development Agreement and for no other purpose. 7.2 Each Party agrees to disclose Confidential Information of another Party only to another Participant and to those employees, representatives and agents of Newco or such participant requiring knowledge thereof in connection with their duties directly related to the fulfilling of the Party's obligations under this Agreement, the Development Agreement or the TGEN License Agreement. Each Party further agrees to inform all such Participants and employees, representatives and agents of the terms and provisions of this Agreement and their duties hereunder and to obtain their consent hereto as a condition of receiving Confidential Information. Each Party agrees that it will exercise the same degree of care, but in no event less than a reasonable degree of care, to protect and preserve the proprietary and confidential nature of the Confidential Information disclosed by a Party, as the receiving Party would exercise to preserve its own proprietary and confidential information. Each Party agrees that it will, upon request of a Party, return all documents and any copies thereof containing Confidential Information belonging to or disclosed by, such Party, and that it will obtain the same agreement from the other Participant. -20- 7.3 Notwithstanding the above, each Party may use or disclose Confidential Information disclosed to it by another party to the extent such use or disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with patent applications, complying with applicable governmental regulations, including without limitation those relating to securities regulations and disclosures, or otherwise submitting information to tax or other governmental authorities, conducting clinical trials, or making a permitted sub-license or otherwise exercising its rights hereunder. 7.4 Confidential Information shall not be deemed to include: (i) information that is generally available to the public; (ii) information which is made public by the disclosing Party; (iii) information which is independently developed by a Party as evidenced by such Party's written records, without the aid, application or use of the disclosing Party's Confidential Information; (iv) information that is published or otherwise becomes part of the public domain without any disclosure by a Party, or on the part of a Party's directors, officers, agents, representatives or employees; (v) information that becomes available to a Party on a non- confidential basis, whether directly or indirectly, from a source other than a Party, which source did not acquire this information on a confidential basis; (vi) information which the receiving Party is required to disclose pursuant to: (A) a valid order of a court or other governmental body or any political subdivision thereof or otherwise required by law; or (B) any other requirement of law; provided that if the receiving Party becomes legally required to disclose any Confidential Information, the receiving Party shall give the disclosing Party prompt notice of such fact so that the disclosing Party may obtain a protective order or other appropriate remedy concerning any such disclosure. The receiving Party shall fully cooperate with the disclosing Party in connection with the disclosing Party's efforts to obtain any such order or other remedy. If any such order or other remedy does not -21- fully preclude disclosure, the receiving Party shall make such disclosure only to the extent that such disclosure is legally required; (vii) information which was already in the possession of the receiving Party at the time of receiving such information, as evidenced by its written records, provided such information was not previously provided to the receiving Party from a source which was under an obligation to keep such information confidential; or (viii) information that is the subject of a written permission to disclose, without restriction or limitation, by the disclosing Party. 7.5 The provisions relating to confidentiality in this Clause 7 shall remain in effect during the term of this Agreement, and for a period of seven (7) years following the expiration or earlier termination of this Agreement. 7.6 The Parties agree that the obligations of this Clause 7 are necessary and reasonable in order to protect the Parties' respective businesses, and each Party expressly agrees that monetary damages would be inadequate to compensate a Party for any breach by the other Party of its covenants and agreements set forth herein. Accordingly, the Parties agree and acknowledge that any such violation or threatened violation will cause irreparable injury to a Party and that, in addition to any other remedies that may be available, in law and equity or otherwise, any Party shall be entitled to obtain injunctive relief against the threatened breach of the provisions of this Clause 7, or a continuation of any such breach by the other Party, specific performance and other equitable relief to redress such breach together with its damages and reasonable counsel fees and expenses to enforce its rights hereunder, without the necessity of proving actual or express damages. 8. WARRANTIES/INDEMNITIES 8.1 Elan represents and warrants to Newco and TGEN, as a third party beneficiary, that: (a) Elan is a corporation duly organized under the laws of its jurisdiction of organization and has all the requisite corporate power and authority to own and lease its respective properties, to carry on its respective business as presently conducted and as proposed to be conducted and to carry out the transactions contemplated hereby; (b) Elan has full corporate power and authority to enter into this Agreement and to perform its obligations hereunder, which have been duly authorized by all requisite corporate action of Elan. This Agreement is the valid and binding -22- obligation of Elan, enforceable against it in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the enforcement of creditors' rights generally, and by general equity principles and limitations on the availability of equitable relief, including specific performance; (c) The execution, delivery and performance by Elan of this Agreement will not: (i) violate any provision of applicable law, statute, rule or regulation known by and applicable to Elan or any ruling, writ, injunction, order, judgment or decree of any court, arbitrator, administrative agency or other governmental body applicable to Elan or any of its properties or assets; or (ii) conflict with or result in any breach of any of the terms, conditions or provisions of the charter or organizational documents of Elan; (d) To Elan's best knowledge, except as set forth on Schedule 2 hereto, as of the Effective Date: (i) Elan has the right to grant the Elan License and any other rights granted herein, (ii) Schedule 1 contains primary examples of the Elan Intellectual Property existing as of the Effective Date, which listing is not necessarily exhaustive, (iii) there are no agreements between Elan and any third parties that conflict with the Elan License which would have a material adverse effect on the ability of Newco to conduct the Project, and (iv) Elan is the owner or licensee of all rights, title and interest in the Elan Intellectual Property. 8.2 Newco represents and warrants to Elan that: (a) Newco is duly and validly existing in good standing in the jurisdiction of its incorporation and each other jurisdiction in which the conduct of its business requires such qualification (except where such failure to so qualify shall not have a material adverse affect on the business and assets of Newco), and Newco is in compliance with all applicable laws, rules, regulations or orders relating to its business and assets; (b) Newco has full corporate authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby; this Agreement has been duly executed and delivered and constitutes the legal and valid obligations of Newco and is enforceable against Newco in accordance with its terms; and the execution, delivery and performance of this Agreement and the transactions contemplated hereby will not violate or result in a default under or creation of lien or encumbrance under Newco's certificate of incorporation, by-laws or other organic documents, any material agreement or instrument binding upon or affecting Newco, or -23- its properties or assets or any applicable laws, rules, regulations or orders affecting Newco or its properties or assets; (c) Newco is not in default of its charter or by-laws, any applicable laws or regulations or any material contract or agreement binding upon or affecting it or its properties or assets and the execution, delivery and performance of this Agreement and the transactions contemplated hereby will not result in any such violation; (d) The execution of this Agreement by Newco and the full performance and enjoyment of the rights of Newco under this Agreement will not breach the terms and conditions of any license, contract, understanding or agreement, whether express, implied, written or oral between Newco and any third party; (e) Newco has the sole, exclusive and unencumbered right to grant the licenses and rights herein granted to Elan and that it has not granted and will not grant any option, license, right or interest in or to the Elan Intellectual Property, the Newco Technology, or other property to any third party which would conflict with the rights granted by this Agreement and the Definitive Documents; (f) The Products shall be developed, manufactured, transported, stored, handled, packaged, marketed, promoted, distributed, offered for sale and sold in accordance with all regulations and requirements of the FDA and foreign regulatory authorities including, without limitation, cGCP, cGLP, cGMP regulations. The Products shall not be adulterated or misbranded as defined by the Federal Food, Drug and Cosmetic Act (or applicable foreign law) and shall not be a product which would violate any section of such Act if introduced in interstate commerce; and (g) It is fully cognizant of all applicable statutes, ordinances and regulations of the United States of America and countries in the Territory with respect to the manufacture of the Products including, but not limited to, the U.S. Federal Food, Drug and Cosmetic Act and regulations thereunder and similar statutes in countries outside of the United States. Newco shall manufacture or procure the manufacture of the Products in conformity with the Marketing Authorizations and in a manner which fully complies with all United States of America and foreign statutes, ordinances, regulations and practices. 8.3 In addition to any other indemnifications provided for herein, Elan shall indemnify and hold harmless Newco, TGEN and their Affiliates and their respective employees, agents, partners, officers and directors from and against any claims, losses, liabilities or damages (including reasonable attorney's fees and expenses) incurred or -24- sustained by Newco arising out of or in connection with any (a) breach of any representation, covenant, warranty or obligation by Elan hereunder, or (b) any act or omission on the part of Elan or any of its agents or employees in the performance of this Agreement. 8.4 In addition to any other indemnifications provided for herein, Newco shall indemnify and hold harmless Elan and its Affiliates and their respective employees, agents, partners, officers and directors from and against any claims, losses, liabilities or damages (including reasonable attorney's fees and expenses) incurred or sustained by Elan arising out of or in connection with any (a) breach of any representation, covenant, warranty or obligation by Newco hereunder, or (b) any act or omission on the part of Newco or any of its agents or employees in the performance of this Agreement. 8.5 The Person seeking an indemnity shall: 8.5.1 fully and promptly notify the indemnifying Party of any claim or proceeding, or threatened claim or proceeding; 8.5.2 permit the indemnifying Party to take full care and control of such claim or proceeding; 8.5.3 cooperate in the investigation and defense of such claim or proceeding; 8.5.4 not compromise or otherwise settle any such claim or proceeding without the prior written consent of the indemnifying Party, which consent shall not be unreasonably withheld, conditioned or delayed; and 8.5.5 take all reasonable steps to mitigate any loss or liability in respect of any such claim or proceeding. 8.6 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER ELAN NOR NEWCO SHALL BE LIABLE TO THE OTHER PARTY, BY REASON OF ANY REPRESENTATION OR WARRANTY, CONDITION OR OTHER TERM OR ANY DUTY OF COMMON LAW, OR UNDER THE EXPRESS TERMS OF THIS AGREEMENT, FOR ANY CONSEQUENTIAL OR INCIDENTAL LOSS OR DAMAGE (WHETHER FOR LOSS OF PROFIT OR OTHERWISE) AND WHETHER OCCASIONED BY THE APPLICABLE PARTY'S NEGLIGENCE OR THAT OF ITS EMPLOYEES OR AGENTS OR OTHERWISE -25- 8.7 EXCEPT AS SET FORTH IN THIS SECTION 8, ELAN IS GRANTING THE ELAN LICENSE HEREUNDER ON AN "AS IS" BASIS WITHOUT RECOURSE, REPRESENTATION OR WARRANTY WHETHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR INFRINGEMENT OF THIRD PARTY RIGHTS, AND ALL SUCH WARRANTIES ARE EXPRESSLY DISCLAIMED. 9. INTELLECTUAL PROPERTY OWNERSHIP RIGHTS 9.1 Subject to the terms and conditions of this Agreement, Newco shall own the legal and equitable title to the Newco Technology. 9.2 Elan shall own the legal and equitable title to the Elan Intellectual Property, including without limitation, Elan Improvements. 9.3 Newco shall permanently mark or otherwise use reasonable efforts to cause any third party to permanently mark all Products and/or the packaging therefor with such license or patent notices to comply with the laws of the country of sale or otherwise to generally communicate the existence of any Elan Patents for the countries of the Territory and in such manner as Elan may reasonably request in writing prior to the sale or commercial use thereof. 9.4 Elan, at its expense, shall make a good faith effort (i) to secure the grant of any material patent applications within the Elan Patents that relate to the Field; (ii) to defend all such applications against third party oppositions and interferences; and (iii) to maintain in force any material issued letters patent within the Elan Patents that relate to the Field (including any letters patent that may issue covering any such Elan Improvements that relate to the Field). Elan shall have the right in its discretion to control such filing, prosecution, defense and maintenance provided that Newco and TGEN at their request shall be provided with copies of all documents relating to such filing, prosecution, defense and maintenance in sufficient time to review such documents and comment thereon prior to filing. Notwithstanding the foregoing, it is understood that Elan retains the discretion, in its sole judgment, as to whether and where to file or to prosecute patent applications on any such technologies or rights relating to the Elan Intellectual Property. 9.5 Newco, TGEN and Elan shall promptly inform each other in writing of any alleged infringement of any patents within the Elan Patents, the TGEN Patents, or any Newco patents or any alleged misappropriation of trade secrets within the Elan Intellectual Property or the TGEN Intellectual Property by a third party of which it -26- becomes aware and provide the others with any available evidence of such infringement or misappropriation insofar as such infringements or misappropriation relate solely to the Field. 9.6 Newco shall have the right to prosecute at its own expense and for its own benefit any infringements of the Elan Patents or misappropriation of the Elan Intellectual Property, insofar as such infringements or misappropriation relate solely to the Field. In the event that Newco takes such action, Newco shall do so at its own cost and expense. At Newco's request, Elan shall cooperate with such action. Any recovery remaining after the deduction by Newco of the reasonable expenses (including attorney's fees and expenses) incurred in relation to such infringement proceeding shall belong to Newco. Should Newco decide not to pursue such infringers, within a reasonable period but in any event within twenty (20) days after receiving written notice of such alleged infringement or misappropriation Elan may in its discretion initiate such proceedings in its own name, at its expense and for its own benefit, and at Elan's request, Newco shall cooperate with such action. Alternatively, the Participants may agree to institute such proceedings in their joint names and shall reach agreement as to the proportion in which they shall share the proceeds of any such proceedings, and the expense of any costs not recovered, or the costs or damages payable to the third party. If the infringement of the Elan Patents affects both the Field as well as other products being developed or commercialized by Elan or its commercial partners outside the Field, Newco and Elan shall endeavor to agree as to the manner in which the proceedings should be instituted and as to the proportion in which they shall share the proceeds of any such proceedings, and the expense of any costs not recovered, or the costs or damages payable to the third party. 9.7 Newco shall indemnify, defend and hold harmless Elan and TGEN, against all actions, losses, claims, demands, damages, costs and liabilities (including reasonable attorneys fees) relating directly or indirectly to all such claims or proceedings referred to herein, provided that Elan, shall not acknowledge to the third party or to any other person the validity of any claims of such a third party, and shall not compromise or settle any claim or proceedings relating thereto without the prior written consent to Newco, not to be unreasonably withheld, conditioned or delayed. At its option, Elan or TGEN, as the case may be, may elect to take over the conduct of such proceedings from Newco provided that Newco's indemnification obligations shall continue; the costs of defending such claim shall be borne by Elan or TGEN, as the case may be and such Participant shall not compromise or settle any such claim or proceeding without the prior written consent of Newco, such consent not to be unreasonably withheld, conditioned or delayed. -27- 10. RIGHTS EXPLOITATION OUTSIDE THE FIELD 10.1 Licenses to Elan Program Technology. Newco hereby grants to Elan an ----------------------------------- exclusive, royalty free and sublicensable license to Elan Program Technology outside of the Field. Such license shall be effective and exclusive on a country-by-country basis for the life of any patents on such Elan Program Technology in such country, or, to the extent the Elan Program Technology is not patented or covered by pending patent applications in any country, for fifteen years from the date any products are first introduced on the market in such country by Elan under such license, or for such shorter period as shall be required under the applicable law of any country in the Territory. 10.2 Licenses for Newco Program Technology Outside the Field. Newco shall ------------------------------------------------------- negotiate in good faith with Elan and TGEN, respectively, for the grant of exclusive or non-exclusive licenses for the rights to Newco Program Technology (other than TGEN Program Technology or Elan Program Technology) outside the Field in the Territory. All such licenses shall contain such customary terms contained in similar licenses in the industry, as agreed to by the licensee and the unanimous decision of the Management Committee, acting in good faith. 11. NON-COMPETITION 11.1 During the Research and Development Term (and any extensions thereto), subject to the other provisions of this Agreement, Elan (subject, however, to Section 20.2 of the Development Agreement) shall not (i) market, sell, develop, or assist in the development for the use, manufacture, distribution or sale of Products in the Field, except (a) for or on behalf of Newco, or (b) with Newco's prior written consent (ii) develop, or assist in the development of, [*] in the Field or (iii) market, sell, develop, or assist in the development for the use, manufacture or distribution of products having the same [*] with such Product. Following termination of the Research and Development Term, Elan shall not during the License Term market, sell, develop, or assist in the development for the use, manufacture, distribution of products having the same Gene which is part of a Product being Commercialized by Newco [*] In no event, however, shall the foregoing restrictions on competing apply to Elan Pharmaceuticals or to Axogen Limited and Neuralab Limited; provided, however, that neither the Elan Intellectual Property nor any of the Program Technology may be utilized by such divisions in violation of the restrictions contained in this Section 11. * Confidential Treatment Requested -28- 12. TERM AND TERMINATION OF AGREEMENT 12.1. The term of this Agreement and the term of the Licenses granted hereunder with respect to a Product utilizing or based on the Licensed Technologies shall commence as of the Effective Date and continue, on a Product- by-Product basis and country by country basis, for the life of the patent rights upon which such Product is based or which such Product utilizes in such country (the "Term"); provided, however, that all royalty and fee obligations contained herein shall survive for the greater of (i) the Term or (ii) 15 years from the first commercial sale of such Product. 12.2. Except as otherwise provided in Section 11 hereof, nothing contained herein shall obligate or restrict any party from utilizing public, non- proprietary information which is not subject to the protection of applicable patent laws. 12.3. If either Party materially breaches any provision of this Agreement and if such breach is (i) not capable of being cured or (ii) is capable of being cured but is not cured within sixty (60) days after the non-breaching party gives written notice of the breach to the breaching party, the non-breaching party may terminate this Agreement immediately by giving notice of the termination, effective on the date of the notice, provided, however, that (x) if -------- ------- any such curable breach is not capable of being cured within such sixty (60) day period, so long as the breaching party commences to cure the breach promptly after receiving notice of the breach from the non-breaching party and thereafter diligently prosecutes the cure to completion as soon as is practicable, the non- breaching Party may not terminate this Agreement so long as the breaching party is acting in good faith to rectify such breach and (y) if there is a good faith dispute as to the existence of the breach or as to its materiality, or regarding the amount of any required payment, provided, in the case of disputes as to the amount due, that any undisputed amount is paid, the right of the non-breaching Party to terminate this Agreement shall be stayed for a reasonable period during which a good faith resolution of the dispute will be obtained, either by agreement or, failing that, through the dispute resolution provisions under Clause 19 of the Development Agreement. 12.4. In the event that a Change of Control Event shall occur, at the sole option of Elan and upon written notice to TGEN and Newco, the Elan License shall be terminated. Upon written notice from TGEN to Elan of a proposed Change of Control Event or the occurrence of a Change of Control Event, Elan shall have thirty (30) days from such notice or occurrence to provide written notice to TGEN as to whether it intends to terminate the Elan License immediately. In the event Elan does not provide written notice to TGEN during such thirty (30) day period of its intention to terminate -29- the Elan License, such termination right shall be deemed waived with respect to such proposed Change of Control Event or such occurrence of a Change of Control Event. 12.5. In the event that the TGEN License Agreement shall be terminated, at the sole option of Elan and upon written notice to TGEN and Newco, the Elan License shall be immediately terminated. 12.6. Upon the occurrence of an Event of Bankruptcy with respect to Newco or Elan, the other Party may, upon written notice to TGEN and the Party with respect to which such Event of Bankruptcy has occurred, immediately terminate the Elan License. As used in this Clause 12.6, the term "Event of Bankruptcy" relating to either Newco or Elan shall mean: 12.6.1. the appointment of a liquidator, receiver, administrator, examiner, trustee or similar officer for either Party or over all or a substantial part of its assets under the law of any applicable jurisdiction, including without limitation, Bermuda, the United States of America or Ireland; or 12.6.2 an application or petition for bankruptcy, corporate re- organization, composition, administration, examination, arrangement or any other procedure similar to any of the foregoing under the law of any applicable jurisdiction, including without limit, Bermuda, the United States of America or Ireland (other than as part of a bona fide restructuring or reorganization), is filed, and is not discharged within forty-five (45) days, or if either Party applies for or consents to the appointment of a receiver, administrator, examiner or similar officer for it or all or a material part of its assets, rights or revenues or the assets and/or the business of either Party are for any reason seized, confiscated or condemned. 12.7. Upon exercise of those rights of termination as specified in Clause 12.1 to Clause 12.6 inclusive or elsewhere within this Agreement, this Agreement shall, subject to the other provisions of this Agreement, and specifically subject to Section 12.8, automatically terminate forthwith and be of no further legal force or effect. 12.8. Upon expiration or termination of this Agreement: 12.8.1 any sums that were due from Newco to Elan with respect to license granted hereunder, including without limitation on Net Sales or on Net Proceeds, in the Territory or in such particular country or countries in the Territory (as the case may be) prior to the expiration or termination of this Agreement as set forth herein shall be paid in full within sixty (60) days after the expiration or termination of -30- this Agreement for the Territory or for such particular country or countries in the Territory (as the case may be); 12.8.2 any provisions clearly meant to survive termination or expiration of this Agreement, including without limitation Section 7, shall remain in full force and effect; 12.8.3 all representations, warranties and indemnities stated herein shall insofar as are appropriate remain in full force and effect; 12.8.4 the rights of inspection and audit set out in Section 6 shall continue in force for a period of one year; 12.8.5 termination or expiration of this Agreement for any reason shall not release any Party hereto from any liability which, at the time of such termination or expiration, has already accrued to the other Party or to any third party beneficiary or which is attributable to a period prior to such termination or expiration, including without limitation claims for indemnification under Sections 8.3 - 8.5 or 9.7 arising from events, actions, omissions or liabilities that existed at or prior to such termination or expiration, nor preclude either Party or any third party beneficiary from pursuing all rights and remedies it may have hereunder or at law or in equity with respect to any breach of this Agreement; 12.8.6 all rights, licenses and sublicenses granted by Elan in the Elan Intellectual Property pursuant to this Agreement shall cease for the Territory or for such particular country or countries in the Territory (as the case may be) and shall immediately revert to Elan and all Elan Program Technology shall be deemed immediately transferred and assigned to Elan. Following such expiration or termination, Newco may not thereafter use in the Territory or in such particular country or countries in the Territory (as the case may be) (a) any valid and unexpired Elan Patents, (b) any Elan Intellectual Property that remains confidential or otherwise proprietary to Elan, and/or (c) Trademarks. All rights to Newco Technology (other than Elan Program Technology and TGEN Program Technology) shall be transferred to and jointly owned by Elan and TGEN. Rights of permitted Independent Third Party sublicensees in and to the Elan Intellectual Property shall survive the termination or expiration of the license and sublicense agreements granting said intellectual property rights to Newco; and Newco, Elan and TGEN shall in good faith agree upon the form most advantageous to Elan and TGEN in which the rights of the sublicensor under any such sublicenses are to be held (which form may include continuation of Newco solely as the holder of such licenses or assignment of such rights to a third party or parties, including an assignment to both Elan and TGEN). -31- Any sublicense agreement between Newco and such permitted sublicensee shall permit an assignment of rights by Newco to Elan or TGEN, as the case may be, and shall contain additional reasonable confidentiality protections which an assignee shall reasonably require. Upon any such assignment, Elan shall enter into good faith negotiations with TGEN with respect to additional reasonable confidentiality protections which either party shall reasonably require. 13. IMPOSSIBILITY OF PERFORMANCE - FORCE MAJEURE 13.1. Neither Party to this Agreement shall be liable for delay in the performance of any of its obligations hereunder if such delay results from causes beyond its reasonable control, including, without limitation, acts of God, fires, strikes, acts of war, or intervention of a government authority, non availability of raw materials, but any such delay or failure shall be remedied by such Party as soon as practicable. 14. SETTLEMENT OF DISPUTES; GOVERNING LAW 14.1. Any dispute between the Parties arising out of or relating to this Agreement will be subject to resolution in accordance with Clause 19 of the Development Agreement, which is incorporated by reference and shall for such purposes survive expiration or termination of the Development Agreement. 14.2. This Agreement is construed under and ruled by the laws of the State of New York, without regard to conflicts of law principles. 15. ASSIGNMENT 15.1. This Agreement may not be assigned by either Party without the prior written consent of the other, which consent shall not be unreasonably withheld, conditioned or delayed, save that (i) either Party may assign this Agreement to its Affiliate without such consent, provided that such assignment does not have any adverse tax consequences on the other Party, and (ii) Elan may assign its rights and obligations hereunder in connection with a sale of all or substantially all of the business of Elan to which the Definitive Documents relate, whether by merger, sale of stock, sale of assets or otherwise (provided that, in the event of such transaction, no intellectual property rights of any third party that is the acquiring corporation in such transaction shall be included in the Elan Intellectual Property licensed hereunder). Elan and Newco will discuss any assignment by either Party to an Affiliate prior to its implementation in order to avoid or reduce any additional tax liability to the other Party resulting solely from different tax law provisions applying after such assignment -32- to an Affiliate. For the purpose hereof, an additional tax liability shall be deemed to have occurred if either Party would be subject to a higher net tax on payments made hereunder after taking into account any applicable tax treaty and available tax credits than such Party was subject to before the proposed assignment. Notwithstanding any assignment hereof to an Affiliate, each Party will remain fully liable hereunder. 16. NOTICES 16.1. Any notice to be given under this Agreement shall be sent in writing in English by registered airmail or telefaxed to the following addresses: If to Newco at: Targeted Genetics Newco, Ltd. c/o Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, Washington 98101 Attention: Chief Executive Officer Telefax: (206) 623-7064 If to TGEN to: Targeted Genetics Corporation 1100 Olive Way, Suite 100 Seattle, Washington 98101 Attention: Chief Executive Officer Telefax: (206) 623-7064 with a copy to: Perkins Coie LLP 411-108/th/ Avenue N.E., Suite 1800 Bellevue, Washington 98004-5584 Attention: Roger M. Tolbert, Esq. Telefax: (425) 453-7350 If to Elan at: Elan Corporation plc Lincoln House, Lincoln Place, Dublin 2, Ireland Attention: Vice President, General Counsel, Elan Pharmaceutical Technologies, a division of Elan Corporation, plc Telefax: + 353 1 709 4124 with a copy to: Cohen & Tauber LLP 1350 Avenue of the Americas 26/th/ Floor New York, New York 10019 -33- Attention: Laurence S. Tauber Telefax: (212) 262-1766 or to such other address(es) and telefax numbers as may from time to time be notified by either Party or TGEN to the other hereunder. 16.2. Any notice sent by mail shall be deemed to have been delivered within seven (7) working days after dispatch and any notice sent by telex or telefax shall be deemed to have been delivered within twenty four (24) hours of the time of the dispatch. Notice of change of address shall be effective upon receipt. 17. MISCELLANEOUS CLAUSES 17.1. No waiver of any right under this Agreement shall be deemed effective unless contained in a written document signed by the Party or third party beneficiary charged with such waiver, and no waiver of any breach or failure to perform shall be deemed to be a waiver of any other breach or failure to perform or of any other right arising under this Agreement. 17.2. If any provision in this Agreement is agreed by the Parties to be, or is deemed to be, or becomes invalid, illegal, void or unenforceable under any law that is applicable hereto, (i) such provision will be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the Parties, it will be deleted, with effect from the date of such agreement or such earlier date as the Parties may agree, and (ii) the validity, legality and enforceability of the remaining provisions of this Agreement shall not be impaired or affected in any way. 17.3. The Parties shall use their respective reasonable endeavors to ensure that the Parties and any necessary third party shall execute and perform all such further deeds, documents, assurances, acts and things as any of the Parties hereto may reasonably require by notice in writing to the other Party or such third party to carry into effect the provisions of this Agreement. 17.4. This Agreement shall be binding upon and inure to the benefit of the Parties hereto, their successors and permitted assigns and sub-licenses. TGEN shall be a third party beneficiary to this Agreement and shall have the right (subject to the dispute resolution provisions of the Development Agreement) to cause Newco to enforce Newco's rights against Elan. 17.5. No provision of this Agreement shall be construed so as to negate, modify or affect in any way the provisions of any other agreement between the Parties -34- unless specifically referred to, and solely to the extent provided, in any such other agreement. In the event of a conflict between the provisions of this Agreement and the provisions of the Development Agreement, the terms of the Development Agreement shall prevail unless this Agreement or the Development Agreement specifically provides otherwise. 17.6. No amendment, modification or addition hereto shall be effective or binding on either Party unless set forth in writing and executed by a duly authorized representative of each Party. Amendments hereto shall be subject to the prior approval of TGEN, which approval, except as otherwise provided herein, shall not be unreasonably withheld, conditioned or delayed. 17.7. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute this Agreement. 17.8. Each of the Parties undertakes to do all things reasonably within its power which are necessary or desirable to give effect to the spirit and intent of this Agreement. 17.9. Each of the Parties hereby acknowledges that in entering into this Agreement it has not relied on any representation or warranty save as expressly set out herein or in any document referred to herein. 17.10. Nothing contained in this Agreement is intended or is to be construed to constitute Elan, TGEN and Newco as partners, or to constitute any of Elan, TGEN or Newco as an employee of any of the others. Neither Party hereto nor TGEN shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other Party hereto or TGEN or to bind the other Party hereto or TGEN to any contract, agreement or undertaking with any third party. -35- IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first set forth above. ELAN PHARMACEUTICAL TECHNOLOGIES, a division of Elan Corporation, plc By: /s/ Kevin Insley -------------------------------- Name: Kevin Insley ------------------------------ Title: Authorized Signatory ----------------------------- TARGETED GENETICS NEWCO, LTD. By: /s/ Stewart Parker -------------------------------- Name: H. Stewart Parker ------------------------------ Title: President ----------------------------- AGREED TO: TARGETED GENETICS CORPORATION By: /s/ Stewart Parker -------------------------------- Name: H. Stewart Parker ------------------------------ Title: President & CEO ----------------------------- [ELAN LICENSE AGREEMENT EXECUTION PAGE] -36- SCHEDULE 1 Elan Intellectual Property [*] * Confidential Treatment Requested -37- SCHEDULE 2 Elan Exceptions and Disclosures [*] * Confidential Treatment Requested -38- EX-1.8 9 ARTICLES OF AMENDMENT, FILED WITH THE STATE OF WA. EXHIBIT 1.8 ARTICLES OF AMENDMENT OF TARGETED GENETICS CORPORATION The following Articles of Amendment are executed by the undersigned, a Washington corporation: 1. The name of the corporation is Targeted Genetics Corporation. 2. Pursuant to RCW 23B.06.020, the corporation states that the Designation of Rights and Preferences of Series B Convertible Exchangeable Preferred Stock attached hereto as Exhibit A was duly adopted by the Board of Directors of the corporation on June 29, 1999 and shareholder approval was not required. 3. The amendment does not provide for the exchange, reclassification or cancellation of issued shares. These Articles of Amendment are executed by said corporation by its duly authorized officer. DATED: July 21, 1999 TARGETED GENETICS CORPORATION By /s/ James A. Johnson ------------------------------------------ James A. Johnson Senior Vice President, Finance and Administration and Chief Financial Officer SERIES B CONVERTIBLE EXCHANGEABLE PREFERRED STOCK DESIGNATION OF RIGHTS AND PREFERENCES There is hereby designated a series of Preferred Stock to be known as Series B Convertible Exchangeable Preferred Stock (the "Series B Stock"), consisting of ____________________12,015 shares, ____________________$0.01 par value per share, having the following rights and preferences: 1. Dividend Rights (a) When and if this corporation's Board of Directors shall declare a dividend or distribution payable with respect to the then-outstanding shares of Common Stock of this corporation, other than any such dividend or distribution payable in shares of Common Stock or other securities of this corporation (which is provided for in Sections 3.3 and 3.4), the holders of the Series B Stock shall be entitled to the amount of dividends per share that would be payable on the largest number of whole shares of Common Stock into which a holder's aggregate shares of Series B Stock could then be converted pursuant to Section 3.1(a) without regard to the provisions of Section 4 (such number to be determined as of the record date for the determination of holders of Common Stock entitled to receive such dividend). (b) In addition to Section 1(a), subject to the rights of holders, if any, of shares of Preferred Stock then outstanding having a right to dividends ranking equal or superior to the rights of holders of Series B Stock, the holders of the then outstanding Series B Stock shall be entitled to receive, out of any assets of this corporation legally available therefor, a cumulative dividend equal to 7.0% per year of $1,000.00 per share (the "Series B Original Issue Price") (as adjusted for any combinations, consolidations, stock distributions, stock dividends or other recapitalizations with respect to such shares) plus accrued dividends thereon, compounded on a semi-annual basis for a period of six years from the date of issuance. Such dividend shall be payable solely by the issuance of additional shares of Common Stock upon conversion of the Series B Stock into Common Stock pursuant to Section 3 hereof; provided, however, that if the Company exercises the Redemption Right (as defined in Section 4), such dividend shall be payable in cash upon such redemption in accordance with Section 4. The dividend to be paid to a holder under this Section 1 upon a conversion of the Series B Stock shall be equal to that number of shares of Common Stock determined by dividing the total dividend accrued with respect such holder's Series B Stock by the Series B Conversion Price, determined in accordance with Section 3 hereof, then in effect. No dividends shall be payable under this Section 1 in the event the Exchange Right is exercised pursuant to Section 5. (c) In the event of any liquidation, dissolution or winding-up of the affairs of the Corporation, whether voluntary or involuntary (collectively, a "Liquidation"), before any payment of cash or distribution of other property shall be made to the holders of the Common Stock or any other class or series of stock subordinate in liquidation preference to the Series B Stock, the holders of the Series B Stock shall be entitled to receive out of the assets of the Corporation legally available for distribution to its shareholders, the Series B Original Issue Price (as defined below) per share (as appropriately adjusted for any combinations or divisions or similar recapitalizations affecting the Series B Stock after issuance) (the "Series B Liquidation Preference"), out of funds legally available therefor. (d) If, upon any Liquidation, the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of the B Preferred Stock the full amounts to which they shall be entitled, the holders of the Series B Stock shall share ratably in any distribution of assets in proportion to the respective amounts which would be payable to them in respect of the shares held by them if all amounts payable to them in respect of such were paid in full pursuant to Section 1(c). (e) After the distribution described in Section 1(c) above have been paid, subject to the rights of other series of preferred stock that may from time to time come into existence, the remaining assets of the Corporation available for distribution to shareholders shall be distributed among the holders of Common Stock pro rata based on the number of shares of Common Stock held by each. 2. Voting Rights Holders of Series B Stock shall not be entitled to vote together with holders of Common Stock, including with respect to the election of directors of this corporation, or as a separate class, except as otherwise provided by the Washington Business Corporation Act (the "WBCA"). To the extent that, under the WBCA, the vote of the holders of the Series B Stock, voting separately as a class or series as applicable, is required to authorize a given action of this corporation, the affirmative vote or consent of the holders of at least a majority of the shares of the Series B Stock represented at a duly held meeting at which a quorum is present or by written consent of a majority of the shares of Series B Stock (except as otherwise may be required under the WBCA) shall constitute the approval of such action by the class or series. Holders of the Series B Stock shall be entitled to notice of all shareholder meetings or written consents (and copies of proxy materials and other information sent to shareholders) -2- with respect to which they would be entitled as of right under the WBCA which notice would be provided pursuant to the Company's Bylaws and the WBCA. 3. Conversion 3.1 Right to Convert; Automatic Conversion (a) Subject to Sections 3.3, 3.4, 3.5 and 3.6, each share of Series B Stock shall be convertible, without payment of any additional consideration by the holder thereof and at the option of such holder, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Series B Original Issue Price, plus any accrued and unpaid dividends, by the Series B Conversion Price (as defined below) in effect at the time of conversion, at any time from the date hereof, at the office of this corporation or any transfer agent for such stock. The Series B Conversion Price shall initially be $ 3.32 per share, subject to adjustment as provided below. (b) In the event that a Significant Transaction (as defined below) occurs, then, in such event, the Series B Stock shall automatically be converted into such number of fully paid and nonassessable shares of Common Stock determined by dividing the Series B Original Issue Price, plus accrued and unpaid dividends, by the Series B Conversion Price then in effect, provided that the Corporation shall have given the holders of the Series B Stock notice that such significant transaction shall occur. For purposes of this Certificate of Designation, "Significant Transaction" shall mean (A) a reorganization, merger or consolidation in which immediately after (by virtue of securities issued as consideration for such transaction) the former shareholders of this corporation do not hold at least 50% of the voting power of the surviving or acquiring entity in approximately the same relative percentage after such acquisition or sale as before such acquisition or sale, (B) an acquisition of all outstanding capital stock of this corporation or (C) a sale or other transfer of all or substantially all of this corporation's assets, but shall not include (1) a commencement of any bankruptcy or insolvency proceedings, whether voluntary or involuntary, (2) a filing for reorganization or relief under bankruptcy law, (3) a consent to the appointment of a receiver, liquidator or trustee for this corporation or its assets, (4) a making of a general assignment by this corporation for the benefit of its creditors or (5) any other similar corporate action. 3.2 Mechanics of Conversion Before any holder of Series B Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of this corporation or of any transfer agent for -3- the Series B Stock, and shall give written notice by mail, postage prepaid, to this corporation at its principal corporate office, of the election to convert the same and shall state the name or names in which the certificate or certificates for shares of Common Stock are to be issued. This corporation shall, as soon as practicable, issue and deliver at such office to such holder of Series B Stock or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series B Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. 3.3 Conversion Price Adjustments for Stock Splits and Combinations If this corporation shall at any time or from time to time after the date that the first share of Series B Stock is issued (the "Original Issue Date") effect a subdivision of the outstanding Common Stock without a corresponding subdivision of the Series B Stock , the Series B Conversion Price in effect immediately before that subdivision shall be proportionately decreased. Conversely, if the Company shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock into a smaller number of shares without a corresponding combination of the Series B Stock , the Series B Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 3.3 shall become effective at the close of business on the date the subdivision or combination becomes effective. 3.4 Other Distributions In the event this corporation shall declare a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other persons, assets (excluding cash dividends) or options or rights not referred to in Section 3.3, then, in each such case for the purpose of this Section 3.4, the holders of the Series B Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of this corporation into which their shares of Series B Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of this corporation entitled to receive such distribution. -4- 3.5 Recapitalizations If the Common Stock issuable upon the conversion of Series B Stock shall be changed into the same or a different number of shares of any class or classes of stock of this corporation, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for elsewhere in this Section 3), then and in each such event each share of Series B Stock shall be convertible into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change by the number of shares of Common Stock into which such share of Series B Stock might have been converted immediately prior to such reorganization, reclassification or change, all subject to further adjustment as provided herein. 3.6 No Fractional Shares; Certificates as to Adjustment (a) No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon the conversion of shares of Series B Stock, but this corporation shall pay to the holder of such shares a cash adjustment in respect of such fractional shares in an amount equal to the same fraction of the market price per share of the Common Stock (as determined in a reasonable manner prescribed by this corporation's Board of Directors) at the close of business on the applicable conversion date. The determination as to whether or not any fractional shares are issuable shall be based upon the total number of shares of Series B Stock being converted at any one time by any holder, not upon each share of Series B Stock being converted. (b) In each case of an adjustment or readjustment of the Series B Conversion Price, this corporation at its expense will furnish each holder of Series B Stock with a certificate, signed by this corporation's Chief Financial Officer, showing such adjustment or readjustment and stating in detail the facts upon which such adjustment or readjustment is based. 3.7 Notices of Record Date In the event of any taking by this corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or other securities or property, or to receive any other right, this corporation shall mail to each holder of Series B Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. -5- 3.8 Reservation of Stock Issuable Upon Conversion This corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock such number of its shares of Common Stock as shall be sufficient to effect the conversion of all outstanding shares of the Series B Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Stock, in addition to such other remedies as shall be available to the holder of such Preferred Stock, this corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. 3.9 Notices Any notice required by the provisions of this Section 3 to be given to the holders of shares of Series B Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at such holder's address appearing on the books of this corporation. 4. Limitation on Issuance of Shares Upon Conversion; Redemption (a) The following definitions shall apply to this Section 4: (i) "Maximum Share Amount" shall mean the number of shares of this corporation's Common Stock equal to 19.99% of this corporation's Common Stock then outstanding; (ii) "Excess Shares" shall mean Common Stock of this corporation which, upon issuance, results in the beneficial ownership (as defined in Rule 13(d)-3 of the Securities Exchange Act of 1934) by a holder of shares of Common Stock in excess of the Maximum Share Amount; (iii) "Exchange Rules" shall mean the rules or regulations of Nasdaq or any other principal securities market upon which the Common Stock of this corporation is or becomes traded. (b) Except as provided in Section 4(c), this corporation shall not be obligated to issue upon conversion of the Series B Stock, in the aggregate, Excess Shares if such issuance in excess of the Maximum Shares Amount would constitute a breach a or violation of the Exchange Rules. -6- (c) To the extent this corporation will be required, or it appears likely to the Board of Directors of this corporation that this corporation will be required, to issue any Excess Shares, this corporation shall promptly use its best efforts to obtain shareholder approval in accordance with the WBCA, the applicable rules of the Securities and Exchange Commission and the Exchange Rules. In the event this corporation does not obtain shareholder approval, this corporation shall have the right, at its option (the "Redemption Right"), to redeem, out of funds legally available therefor, all or any part of the Excess Shares at a redemption price, payable in cash, equal to the Series B Original Issue Price per share together with accrued and unpaid dividends on any such shares that are redeemed (the "Redemption Price"). This corporation may exercise the Redemption Right by providing notice by mail, first class postage prepaid, to each holder of Series B Stock of record (at the close of business on the business day preceding the day on which notice is given) of the Series B Stock to be redeemed, at the address last shown on the records of this corporation for such holder, notifying such holder of the redemption to be effected, specifying the number of shares to be redeemed from such holder, the date that the redemption is to occur (the "Redemption Date"), the place at which payment may be obtained and calling upon such holder to surrender to this corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). On or after the Redemption Date, each holder of Series B Stock to be redeemed shall surrender to this corporation the certificate or certificates representing such shares in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In the event less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series B Stock designated for redemption in the Redemption Notice as holders of Series B Stock (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates and except as provided in Section 6(c)) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of this corporation or be deemed to be outstanding for any purpose whatsoever. 5. Exchange Right (a) At any time beginning on the date hereof and ending on the later of April 21, 2003 or six months after the end of the Research and Development Term (as defined by the Joint Development and Operating Agreement among this corporation, Elan Pharmaceuticals, plc, a public liability corporation incorporated under the -7- laws of Ireland, Elan International Services, Ltd., a Bermuda corporation ("EIS") and Targeted Genetics Newco, Ltd., a Bermuda corporation ("Newco")), provided that no shares of Series B Stock representing the shares initially issued and sold by this corporation to EIS and its affiliates, together with those issued or issuable in respect of dividends provided for in Section 1, have been converted as provided in Section 3.1(a) or 3.1(b), the holders of the Series B Stock (by act of the holders of a majority of the Series B Stock) shall have the right to exchange 100% of such shares of Series B Stock (the "Exchange Right") with this corporation for 100% of the outstanding preferred shares of [Newco], held by this corporation, representing 30.1% of the beneficial interest in the aggregate issued and outstanding capital stock of Newco on a fully diluted basis, so that, after giving effect to the exercise of the Exchange Right, such holders will own such issued and outstanding capital stock of Newco representing 50.0% of the beneficial interest in the aggregate issued and outstanding capital stock of Newco on a fully diluted basis. (b) In order to exercise the Exchange Right, the holders shall provide written notice thereof to this corporation, setting forth (i) the fact that such holders intend to exercise the Exchange Right and (ii) the proposed date for such exercise (the "Exercise Date"), which shall be between 10 and 30 days after the date of such notice. On the Exercise Date, (x) the holders shall tender their shares of Series B Stock to this corporation for cancellation and (y) this corporation shall cause to be delivered to EIS, acting on behalf of such holders, such shares of Newco. The holders and this corporation shall take all other necessary or appropriate actions in connection with or to effect such closing. (c) If any shares of Series B Stock are converted into shares of Common Stock pursuant to Section 3.1(a) or 3.1(b), the Exchange Right shall terminate and be of no further force or effect with respect to such shares or with respect to those shares of Series B Stock issued as dividends pursuant to Section 1. If all or any shares of the Series B Stock are converted to shares of Common Stock upon the occurrence of a Significant Transaction, the Exchange Right shall be preserved for its full term as provided in Section 5(a), except that, to exercise the Exchange Right, EIS shall be obligated to tender the consideration received by EIS upon the automatic conversion of the Series B Stock in connection with such Significant Transaction. If this corporation exercises the Redemption Right with respect to any shares of Series B Stock, the Exchange Right shall be preserved for its full term, except that, to exercise the Exchange Right, in addition to tendering any shares of Series B Stock then outstanding, EIS shall be obligated to tender the consideration received by EIS upon the redemption of any Excess Shares in connection with this corporation's exercise of its Redemption Right. -8- 6. Protective Provisions So long as any shares of Series B Stock are outstanding, this corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series B Stock, voting as a separate class or series, amend its Articles of Incorporation so as to adversely affect the rights, preferences or privileges of the Series B Stock or any holder thereof, including, without limitation, by creating any series of Preferred Stock (or issuing shares under any such series) that is senior in right of payment upon liquidation, in respect of dividends or otherwise to the Series B Stock, or adversely change the rights of the holders of the Series B Stock in any other respect; provided, however, that the creation of any series of Preferred Stock (or issuance of shares under any such series) that is pari passu in respect of dividends or otherwise with the Series B Stock shall not be deemed to adversely affect the rights, preferences or privileges of the Series B Stock or any holder thereof or change the rights of the holders of the Series B Stock in any other respect. 7. Status of Converted, Redeemed or Exchanged Stock In the event any shares of Series B Stock shall be converted pursuant to Section 3, redeemed pursuant to Section 4 or exchanged pursuant to Section 5, the shares so converted, redeemed or exchanged shall be cancelled and shall not be reissuable by this corporation. -9- EX-1.9 10 FIRST AMENDMENT OF RIGHTS AGREEMENT JULY 21, 1999 EXHIBIT 1.9 FIRST AMENDMENT OF RIGHTS AGREEMENT Subject to the terms hereof, pursuant to Section 26 of the Rights Agreement, dated as of October 17, 1996, by and between Targeted Genetics Corporation (the "Company") and ChaseMellon Shareholder Services (the "Rights Agreement"), the Company, by this First Amendment of Rights Agreement dated July 21, 1999, does hereby amend the Rights Agreement as follows: Section 1 is hereby amended to add the following sentence at the end of the definition of "Acquiring Person": Notwithstanding the foregoing, neither Elan International Services, Ltd. ("EIS") nor any Affiliate or Associate of EIS shall be included within the definition of "Acquiring Person" by virtue of the acquisition by EIS of shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock, pursuant to the transactions contemplated by the Securities Purchase Agreement, dated July 21, 1999, between the Company and EIS and the Convertible Promissory Note, dated July 21, 1999, issued by the Company to EIS (the "Transaction Securities"); provided, however, EIS shall be included within the definition of Acquiring Person to the extent EIS, either alone or together with all Affiliates and Associates of EIS, including the Transaction Securities, becomes the Beneficial Owner of 15% or more of the Common Stock then outstanding as the result of being or becoming the Beneficial Owner of Common Stock other than the Transaction Securities. IN WITNESS WHEREOF, the Company has executed this First Amendment to Rights Agreement as of the date first written above. TARGETED GENETICS CORPORATION By: /s/ James A. Johnson --------------------------------------- James A. Johnson Vice President & Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----