<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 00-23473
COMBICHEM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-3061739
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9050 Camino Santa Fe, San Diego, CA 92121
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (619) 530-0484
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1)[X] [ ] No; (2)[ ] Yes [X] No
As of August 13, 1998 there were 13,408,391 shares of $.001 par value common
stock outstanding.
================================================================================
<PAGE> 2
COMBICHEM, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets At June 30, 1998 (unaudited)
and December 31, 1997 ................................ 2
Condensed Statements of Operations (unaudited) for the
Three and Six months ended June 30, 1998 and 1997 .... 3
Condensed Statements of Cash Flows (unaudited) for the
Six months ended June 30, 1998 and 1997 .............. 4
Notes To Condensed Financial Statements ........................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................. 6
PART II-OTHER INFORMATION ................................................ 17
Item 1. Legal Proceedings ......................................... 17
Item 2. Change in Securities and Use of Proceeds .................. 17
Item 3. Defaults Upon Senior Securities ........................... 17
Item 4. Submission of Matters to a Vote of Security Holders ....... 17
Item 5. Other Information ......................................... 17
Item 6. Exhibits and Reports on Form 8-K .......................... 17
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
COMBICHEM, INC.
CONDENSED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------ --------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 20,006 $ 5,867
Short-term investments 10,998 11,055
Accounts receivable 1,262 528
Prepaid expenses and other current assets 923 767
------------ --------
Total current assets 33,189 18,217
Property and equipment, net 7,421 5,961
Other assets 591 1,348
------------ --------
Total assets $ 41,201 $ 25,526
============ ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 666 $ 881
Accrued liabilities 1,336 1,394
Deferred revenue 2,229 1,476
Current portion of obligations under capital leases 1,856 1,569
------------ --------
Total current liabilities 6,087 5,320
Deferred rent 116 91
Obligations under capital leases, less current portion 3,526 3,284
Redeemable convertible preferred stock, $.001 par value: -- 23,130
Authorized shares - 63,196,296
Issued and outstanding shares - 31,019,635 shares and no shares
on December 31, 1997 and June 30, 1998, respectively
Stockholders' equity (deficit):
Preferred stock, $.001 par value
Authorized shares - 5,000,000
Issued and outstanding shares - no shares issued or outstanding
on December 31, 1997 or June 30, 1998
Common stock, $.001 par value:
Authorized shares - 80,000,000
Issued and outstanding shares - 10,981,938 on
December 31, 1997 and 13,408,391 on June 30, 1998 13 3
Additional paid-in capital 51,762 12,520
Notes receivable from employees (390) (419)
Deferred compensation (1,362) (1,582)
Accumulated deficit (18,551) (16,821)
------------ --------
Total shareholders' equity (deficit) 31,472 (6,299)
------------ --------
Total liabilities and shareholders' equity $ 41,201 $ 25,526
============ ========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See accompanying notes
2
<PAGE> 4
COMBICHEM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
1998 1997 1998 1997
-------------------- --------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Project initiation fees and
milestone payments $ 2,300 $ - $ 3,050 $ -
Research and development
funding 2,083 830 3,955 1,321
-------- ------- -------- -------
Total revenue 4,383 830 7,005 1,321
Expenses:
Research and development
Collaborative 2,327 1,102 4,250 1,239
Proprietary 1,400 1,065 2,715 2,302
-------- ------- -------- -------
3,727 2,167 6,965 3,541
General and administrative 1,117 413 2,009 1,285
-------- ------- -------- -------
Total operating expenses 4,844 2,580 8,974 4,826
-------- ------- -------- -------
Loss from operations (461) (1,750) (1,969) (3,505)
Interest income 290 121 525 310
Interest expense (136) (77) (257) (137)
Foreign tax expense -- -- (30) --
-------- ------- -------- -------
Net loss $ (307) $(1,706) $ (1,731) $(3,332)
======== ======= ======== =======
Net loss per share $ (0.03) $ (3.28) $(0.16) $(6.57)
======== ======= ======== =======
Shares used in calculating
net loss per share 11,464 520 10,799 507
======== ======= ======== =======
</TABLE>
See accompanying notes
3
<PAGE> 5
COMBICHEM, INC.
CONDENSED STATEMENTS OF CASH FLOW
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30
-----------------------
1998 1997
-------- --------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,731) $ (3,332)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 837 368
Deferred rent 25
Deferred revenue 753 (1,294)
Amortization of deferred compensation 220 --
Change in operating assets and liabilities:
Accounts receivable (734) 2
Prepaid expenses and other current assets (40) (11)
Accounts payable and accrued liabilities (273) (145)
-------- --------
Net cash used in operating activities (943) (4,412)
Cash flows from investing activities:
Purchases of short-term investments (7,677) --
Maturities of short-term investments 7,530 6,919
Purchases of property and equipment (2,205) (823)
Other assets 5 5
-------- --------
Net cash (used in) provided by investing activities (2,347) 6,101
Cash flows from financing activities:
Advances on capital lease obligations 1,355 618
Principal repayments on capital lease obligations (829) (552)
Receipt of payment on notes from employees 29 --
Deferred public offering costs (685) --
Issue of common stock, net of repurchased shares 17,559 29
Restricted cash given as collateral for letter of credit -- 325
-------- --------
Net cash provided by financing activities 17,429 420
Net increase in cash and cash equivalents 14,139 2,109
Cash and cash equivalents at beginning of period 5,867 367
-------- --------
Cash and cash equivalents at end of period $ 20,006 $ 2,476
======== ========
</TABLE>
See accompanying notes
4
<PAGE> 6
COMBICHEM INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Interim results
are not necessarily indicative of the results that may be expected for
the year. For further information refer to the financial statements and
footnotes thereto for the year then ended December 31, 1997 included in
the Company's prospectus (dated May 8, 1998) for its initial public
offering ("IPO").
2. Computation of Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," (SFAS 128) which requires the presentation
of basic and diluted earnings per share. Basic earnings per share
reflects the historical weighted average shares of common stock and
excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share includes the dilutive effect of
such securities. All earnings per share amounts for all periods conform
to SFAS 128 and the requirements of Staff Accounting Bulletin No. 98.
Recent interpretations by the Securities and Exchange Commission have
altered the treatment of preferred stock previously included in
computing certain loss per share data. The Company previously considered
redeemable convertible preferred stock, which converted in conjunction
with the Company's IPO, as outstanding in pre-IPO periods from the date
of original issuance ("as if converted method"). To conform with the
recent interpretations, the Company has revised its calculation of loss
per share for all pre-IPO periods to exclude the impact of redeemable
convertible preferred shares. For comparison purposes, if redeemable
convertible preferred stock were included as outstanding during the
three and six months ended June 30, 1997, using the as if converted
method, basic loss per share would have been ($.21) and ($.40),
respectively.
3. Offering of Common Stock
On May 8, 1998, the Company completed its IPO of 2,250,000 shares of
Common Stock at $8.00 per share. On June 5, 1998, the underwriter's
excercised their over-allotment option by acquiring an additional
109,500 shares of Common Stock on June 10, 1998. The combined gross
proceeds raised by the Company from the offering and over-allotment
option was approximately $18.9 million. Concurrent with the IPO,
31,019,635 shares of redeemable convertible preferred stock were
converted to 7,754,933 shares of common stock.
5
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties,
including, the execution of new collaborative agreements and other factors
relating to the Company's growth as well as those discussed below at "Risks and
Uncertainties." While this outlook represents management's current judgment on
the future direction of the business, such risks and uncertainties could cause
actual results to differ materially from any future performance suggested below.
The Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
OVERVIEW
CombiChem Inc., is a computational drug discovery company that is
applying its proprietary design technology and rapid synthesis capabilities to
accelerate the discovery process for new drugs. The Company believes its
approach offers pharmaceutical, biotechnology and agrochemical companies the
opportunity to conduct their drug discovery efforts in a more productive and
cost-effective manner. Using its proprietary Discovery Engine(TM) process, the
Company focuses on the generation, evolution and optimization of potential new
lead candidates for its collaborative partners, who will then develop,
manufacture, market and sell any resulting products. CombiChem believes that its
process is widely applicable to a variety of disease targets and therapeutic
indications. To date, the Company has established collaborative agreements with
Teijin Limited ("Teijin"), Roche Bioscience, a division of Syntex (U.S.A.) Inc.
("Roche Bioscience"), Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo"), ImClone
Systems Incorporated ("ImClone"), Athena Neurosciences, Inc., a wholly owned
subsidiary of Elan Corporation, plc ("Elan/Athena"), ICOS Corporation ("ICOS")
and Novartis Crop Protection AG, ("Novartis"). In addition, the Company intends
to use its approach on internal programs to discover new lead candidates and
then to outlicense them to third parties, while retaining a larger economic
interest.
The Company's revenue to date is primarily attributable to the receipt of
project initiation fees, research funding and milestone payments. Project
initiation fees are received from the Company's collaborators upon, or shortly
following, execution of the collaborative agreement. Research funding is
received by the Company in connection with the performance of research services
under the collaborative agreement. Such funding typically will be received only
during the life of the research program under the particular collaboration. In
addition, the Company has received advance payments under certain of its
collaborations and in connection with a feasibility study, which require the
Company to complete certain performance obligations. Such payments have been
recorded as deferred revenue and will be recognized as revenue when the
Company's performance obligations have been met, as evidenced by the
collaborator's written approval and acceptance. The collaborative activities
under these agreements for which the Company receives revenue typically occur
over a one- to three-year period, although the agreements provide for earlier
termination in certain circumstances. The Company expects that a significant
portion of its revenue for the foreseeable future will be comprised of such
payments, although the receipt of project initiation fees will be dependent on
the Company's ability to enter into additional collaborative agreements which
provide for such fees and the timing of such payments will be difficult to
predict. In addition, the timing of certain revenue in the future will depend
upon the completion of certain milestones as provided for in the Company's
collaborative agreements, which are contingent and uncertain. Milestone fees may
be earned for different events or achievements from agreement to agreement, and
for certain collaborations, such fees may not be earned until the collaborator
has advanced products into clinical testing. In any one fiscal quarter the
Company may earn multiple or no payments from its several collaborators.
Operating results may therefore vary substantially from period to period and
will not necessarily be indicative of results in subsequent periods. Completion
of the research phase of a single project collaboration or a single project
within a broad multiple project collaboration is not expected to have a material
adverse effect on the Company's financial condition and results of operations.
However, the termination or conclusion of any collaborative agreement could have
a material adverse effect on the Company's financial condition and results of
operations, and the failure of the Company to enter into additional
collaborative agreements on favorable terms would have a material adverse effect
on the Company's financial condition and results of operations.
6
<PAGE> 8
The Company has not been profitable since inception and has incurred a
cumulative net loss of $18.6 million through June 30, 1998. Losses have resulted
principally from costs incurred in research and development activities related
to the Company's efforts to develop its technologies and from the associated
administrative costs required to support these efforts. The Company's ability to
achieve profitability is dependent on its ability to market its technology to
pharmaceutical, biotechnology and agrochemical companies.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 and 1997
Revenue
The Company's revenue for the three months ended June 30, 1998 was $4.4
million, up from $0.8 million for the same period in 1997. Revenue was $7.0
million for the six months ended June 30, 1998 compared to $1.3 million for the
same period ended 1997. The increase in revenues, for both periods, reflects the
increased number of discovery collaborations, as well as the Company's success
in achieving milestones. In May 1998, the Company entered into a new
collaborative agreement with Novartis for which a project initiation fee was
earned.
Operating Expenses
Research and development expenses for the three months ended June 30,
1998 totaled $3.7 million compared to $2.2 million for the same period in 1997.
Research and development expenses were $7.0 million and $3.5 million for the
six months ended June 30, 1998 and 1997, respectively. Both the $1.5 million
and $3.5 million increases for the three and six months ended, respectively,
are primarily attributable to research and development costs incurred on behalf
of its collaborators ("collaborative research and development"). Costs of
services under the Company's collaborative agreements approximated the research
funding earned under the agreements.
For the three months ended June 30, 1998, proprietary research and
development costs were $1.4 million compared to $1.1 million for the same period
ended 1997. For the six months ended June 30, 1998, proprietary research and
development costs were $2.7 million compared to $2.3 million for the same period
ended 1997. The increase for both the three and six month periods are
attributable to the Company's increased investment in its proprietary
technologies. The Company expects research and development spending to increase
over the next several years due to increased activities related to
collaborations, internal programs and technology development.
The Company's general and administrative expenses for the three months
ended June 30, 1998 totaled $1.1 million compared to $0.4 million for the same
period in 1997. General and administrative expenses increased $0.7 million to
$2.0 million from $1.3 million for the six months ended June 30, 1998 and 1997,
respectively. This increase, for both periods, reflects increased business
development activities and administrative support for the Company's continued
expansion. These expenses will likely continue to increase in future periods to
support the projected growth of the Company.
Net Loss
The Company's net loss for the three months ended June 30, 1998
decreased $1.4 million to $0.3 million from $1.7 million for the same period in
1997. The net loss for the six months ended June 30, 1998 decreased $1.6 million
to $1.7 million from $3.3 million for the same period in 1997. The decrease for
both the three and six month periods are primarily attributable to increased
revenue from project initiation fees and milestone achievements, partially
offset by increased collaborative research and development expenses.
Liquidity and Capital Resources
From inception through June 30, 1998, the Company financed its
operations through proceeds from the Company's initial public offering and
private placements of equity securities, payments from corporate collaborators,
and the utilization of capital equipment lease financing. In June 1998, the
Company completed its
7
<PAGE> 9
IPO of 2,359,500 shares of its Common Stock (including exercise of the
underwriters' over-allotment option), generating net proceeds of approximately
$16.2 million.
Net cash used in operating activities for the six months ended June 30,
1998 was $0.9 million compared to net cash used of $4.4 million for the
corresponding period in 1997. The decrease in net cash used in operating
activities was primarily attributable to the reduction of the Company's net loss
and the collection of project initiation fees.
At June 30, 1998, the Company held cash and cash equivalents and
short-term investments with a value of $31.0 million. The Company's working
capital at June 30, 1998 was $27.1 million. The Company has maintained capital
lease arrangements since 1994. Under these arrangements, the Company has funded
certain capital expenditures with lease terms ranging from 36 to 48 months in
duration. As of June 30, 1998, the Company had utilized $7.7 million of the
available $7.9 million financing facility.
The Company expects the net proceeds from the IPO completed in May 1998
and the interest income thereon, together with the existing cash and cash
equivalents, short term investments, operating revenues, and lease financing
arrangements, will be sufficient to finance its working capital and capital
requirements for the foreseeable future. The Company's capital requirements
depend on numerous factors, including the ability of the Company to enter into
additional collaborative arrangements, competing technological and market
developments, changes in the Company's existing collaborative relationships, the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, the purchase of additional capital equipment, the
progress of the Company's drug discovery programs and the progress of the
commercialization of milestone-and royalty-bearing compounds by the Company's
customers. The Company may be required to raise additional capital over a period
of several years in order to continue to conduct its operations. Such capital
may be raised through additional public or private financings, as well as
collaborative arrangements, borrowings and other available sources. In addition,
the Company may from time to time earn milestone fees under its collaborations.
However, there can be no assurance that any such fees will be earned, and, in
addition, milestone fees may be earned for different events or achievements from
agreement to agreement. Furthermore, for certain collaborations, such fees may
not be earned until the collaborator has advanced products into clinical
testing. Such milestones may not be earned for several years, if at all. During
such period, there can be no assurance that the Company's collaborative
arrangements will produce revenue adequate to fund the Company's operating
expenses. There can be no assurance that additional funding, if necessary; will
be available on favorable terms, if at all. If adequate funds are not available,
the Company may be required to curtail operations significantly or to obtain
funds through entering into arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets that the Company
would not otherwise relinquish. The failure to receive additional funding would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Year 2000
The Company has determined that Year 2000 issues do not affect its
proprietary drug discovery software. However, the Company has determined that it
will need to review, modify or replace portions of its or its vendors' standard
operating systems, such as payroll, cash management and other financial systems,
so they will function properly with respect to dates in the year 2000 and
beyond. The Company has initiated discussions with its financial institutions to
ensure that those parties have appropriate plans to remediate Year 2000 issues
where their systems interface with the Company's systems or otherwise impact its
operations. The Company is assessing the extent to which its operations are
vulnerable should those organizations fail to remediate properly their computer
systems. While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company. The cost
of the Year 2000 initiatives is not expected to be material to the Company's
results of operations or financial position.
8
<PAGE> 10
RISKS AND UNCERTAINTIES
Forward-Looking Statements
This Quarterly Report may contain predictions, estimates and other
forward-looking statements that involve risks and uncertainties. Such risks and
uncertainties could cause actual results to differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Quarterly Report. The Company undertakes no
obligation to release publicly revisions to the forward-looking statements to
reflect events or circumstances arising after the date hereof.
New and Uncertain Technology and Business
The Company's Discovery Engine process is novel and has not yet been
shown to be successful in the discovery of lead candidates that have been
subsequently developed into commercialized drugs. Furthermore, the Company's
drug discovery efforts are focused on some targets, the functions of which are
not yet known. Development of new pharmaceutical products is highly uncertain,
and no assurance can be given that the Company's drug discovery process will
result in lead candidates that will be safe or efficacious or commercially
successful as products. Failure to validate the Company's technology through the
successful discovery of lead candidates would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's strategy, which is unproven, is to use its proprietary
design technology for the purpose of rapidly identifying, optimizing and
obtaining proprietary rights to as many lead candidates and development
candidates as possible. The Company's ability to achieve profitability in the
near term depends entirely on its ability to enter into additional collaborative
agreements with third parties and to maintain the agreements it currently has in
place. The pricing and nature of the Company's collaborative relationships is
such that there may only be a limited number of pharmaceutical, biotechnology
and agrochemical companies that will be its potential customers. The Company's
ability to succeed is also dependent upon the acceptance by potential customers
of its Discovery Engine process as an effective tool in new drug discovery.
Historically, pharmaceutical, biotechnology and agrochemical companies have
conducted lead candidate identification and optimization within their own
research departments, due to the highly proprietary nature of the activities
being conducted, the central importance of these activities to their drug
discovery and development efforts and the desire to obtain maximum patent and
other proprietary protection on the results of their internal programs. In order
to achieve its business objectives, the Company must convince these companies
that its technology and capabilities justify the outsourcing of their programs
to the Company. There can be no assurance that the Company will be able to
attract any future customers on acceptable terms for its products and services
or develop a sustainable, profitable business. Failure to do so will have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's collaborative agreements are structured in a way that
provides the Company with payments for (i) initiating the collaboration, (ii)
providing research for a specified period, typically over a one- to two-year
period for each project undertaken under the collaboration, (iii) attaining
specifically negotiated milestones, and (iv) royalties from the sale of any drug
successfully developed under each collaborative agreement. Whereas a significant
portion of the Company's revenue to date has been related to the research phase
of each of its collaborative agreements which is for a specified period and is
generally offset by corresponding research costs, the Company expects any profit
to result primarily from project initiation fees, milestone payments and
royalties. Following the completion of the research phase of each collaborative
agreement, the Company may receive additional revenue under each respective
collaborative agreement only from milestones and royalties. Failure to do so
could have a material adverse effect on the Company's business, financial
condition and results of operation. See "Dependence of Company's Strategy on
Third Parties."
Uncertainty of Future Profitability
The Company's ability to achieve profitability in the near term depends
entirely on its ability to enter into additional collaborative agreements with
third parties and to maintain the agreements it currently has in place. The
Company has not yet received any revenue from royalties for the sale of a
commercial drug by a customer, and there can be no assurance when the Company
will receive such revenue, if at all. An element of the Company's
9
<PAGE> 11
commercialization strategy is the potential development and licensing to others
of lead compounds or drug development candidates identified by the Company
through its internal programs, at its own expense, for potential pharmaceutical
development. To date, no such license has been entered into, and there can be no
assurance that any such license will be entered into on acceptable terms in the
future, if at all. The Company is unable to predict when, or if, it will become
profitable. See "Management's Discussion And Analysis Of Financial Condition And
Results of Operations."
Dependence of Company's Strategy on Third Parties
The Company's strategy depends upon the formation of multiple
collaborative arrangements with third parties on a regular basis. To date, the
Company has entered into seven such arrangements, and substantially all of its
revenue has been from its collaborative arrangements. There can be no assurance
that the Company will be able to continue to establish additional collaborative
arrangements, that any such arrangements will be on terms favorable to the
Company, or that current or any future collaborative arrangements will
ultimately be successful. Failure to enter into additional collaborative
agreements on favorable terms would have a material adverse effect on the
Company's business, financial condition and results of operations. Whereas a
significant portion of the Company's revenue to date has been related to the
research phase of each of its collaborative agreements, which is for a specified
period and is generally offset by corresponding research costs, the Company
expects any profit to result primarily from project initiation fees, milestone
payments and royalties. Following the completion of the research phase of each
collaborative agreement, the Company may receive additional revenue under each
respective collaborative agreement only from milestones and royalties, which may
not be paid, if at all, until some time well into the future. Further,
CombiChem's receipt of revenue from collaborative arrangements is affected by
the timing of efforts expended by the Company and its collaborators and the
timing of lead compound identification by the Company. Milestone payments may be
earned for different events or achievements from agreement to agreement and, for
certain collaborations, such fees may not be earned until the collaborator has
advanced products into clinical testing, until some time well into the future.
The Company's products and services will only result in commercialized
pharmaceutical products generating milestone payments and royalties upon the
successful outcome of significant preclinical and clinical development, the
procurement of requisite regulatory approvals, the establishment of
manufacturing, sales and marketing capabilities and the achievement of
successful marketing. The Company does not currently intend to perform any of
these activities. Therefore, the Company will be dependent upon the expertise
and dedication of sufficient resources by third parties to develop and
commercialize products based on library compounds produced and lead compounds
discovered or optimized by the Company. In addition, there can be no assurance
that any such development or commercialization efforts by third parties would be
successful. Should a collaborative partner fail to develop or commercialize a
compound or product to which it has rights from the Company, the Company may not
receive any future milestone payments and will not receive any royalties
associated with such compound or product. In addition, the Company's
collaborative arrangements with its partners do not obligate the partners to
develop or commercialize lead compounds discovered or optimized by the Company.
Each collaborative partner may independently move forward with a competing lead
candidate developed either by such partner internally or in collaboration with
others, including the Company's competitors. The potential drugs developed by a
collaborative partner may be derivatives of the lead compounds provided to the
customer by the Company. While the Company's existing collaborative agreements
provide that the Company retain milestone and royalty payment rights with
respect to drugs developed from certain derivative compounds, there can be no
assurance that disputes will not arise over the application of payment
provisions to such drugs. There can be no assurance that current or future
collaborative partners, if any, will not pursue alternative technologies or
develop alternative products either on their own or in collaboration with
others, including the Company's competitors, as a means for developing
treatments for the diseases targeted by collaborative arrangements with the
Company. Furthermore, there can be no assurance that conflicts will not arise
between collaborative partners as to proprietary rights to particular compounds.
The amount and timing of resources that current and future collaborators, if
any, devote to collaborations with the Company are not within the control of the
Company. There can be no assurance that such collaborators will perform their
obligations as expected. Further, the Company's collaborations generally may be
terminated by its collaborators upon short notice and following an uncured
material breach, which terminations would result in a loss of anticipated
revenue. Termination of the Company's existing or future collaborative
agreements, if any, could have a material adverse effect on the Company's
business, financial condition and results of operations.
10
<PAGE> 12
The Company's strategy also involves conducting its own internally
funded discovery programs by choosing biological targets of current scientific
interest and working in collaboration with screening companies. There can be no
assurance that the Company will continue to have access to such targets, novel
or otherwise, on an ongoing basis. Furthermore, despite the Company's
installation of independent teams to conduct each collaborative project, there
can be no assurance that conflicts will not arise among collaborators as to the
rights to overlapping lead candidate compounds developed independently as a
result of being identified through the use of the Company's technologies.
Failure to manage multiple existing and future collaborator relationships
successfully, maintain confidentiality among such relationships or prevent the
occurrence of such conflicts could lead to disputes that result in, among other
things, a significant strain on management resources, legal claims involving
significant time and expense and loss of reputation, a loss of capital or a loss
of current or future collaborators, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Significant Fluctuations in Quarterly Results
To date, substantially all revenue received by the Company has been from
the receipt of project initiation fees, research funding and milestone fees paid
pursuant to collaborative agreements. The Company expects that a significant
portion of its revenue for the foreseeable future will be comprised of such
payments. The timing of certain revenue in the future will depend upon the
completion of certain milestones as provided for in the Company's collaborative
agreements. In any one fiscal quarter, the Company may receive multiple or no
payments from its several collaborators. Operating results may therefore vary
substantially from quarter to quarter and will not necessarily be indicative of
results in subsequent periods. There can be no assurance that such quarterly
fluctuations in revenue or financial results will not have a material impact on
the Company's stock price.
Company's Success Dependent on Intellectual Property Rights
The Company's success will depend in large part on its own, its
licensees' and its licensors' ability to obtain and defend patents for each
party's respective technologies and the compounds and other products, if any,
resulting from the application of such technologies, maintain trade secrets and
operate without infringing upon the proprietary rights of others, both in the
United States and in foreign countries. The patent positions of pharmaceutical
and biotechnology companies, including the Company, are uncertain and involve
complex legal and factual questions for which important legal principles are
largely unresolved. The Company has pending United States and foreign patent
applications relating to various aspects of its technology, certain systems,
materials and methods used in screening compounds and the libraries or compounds
contained therein. These patent applications are either owned or co-owned by the
Company or rights under them are licensed to the Company. To date, one foreign
patent and one United States patent owned by the Company have been issued and
notices of allowance for two United States patent applications owned by the
Company have been received. To the extent that any foreign patent application
filed in the European Patent Office or the Japanese Patent Office issues as a
patent, a challenge to the validity of such patent may be presented in an
opposition proceeding. There can be no assurance that patents will issue as a
result of any such pending applications or that, if issued, such patents will be
sufficiently broad to afford protection against competitors with similar
technologies. The Company is aware of five United States patents issued to third
parties that claim proprietary rights; two of these patents are entitled "System
and method for automatically generating chemical compounds with desired
properties", the third is entitled "System, method, and computer program for at
least partially automatically generating chemical compounds having desired
properties" and the fourth and fifth are entitled "Method of generating a
plurality of chemical companies in a spatially arranged array." Although the
Company believes that its current activities do not infringe these patents or
the patents of other third parties, the Company continually assesses its
position with respect to such patents and there can be no assurance that the
Company's belief would be affirmed in any litigation over patents or that the
Company's future technological developments would be outside the scope of these
patents or the patents of other third parties. Further, there can be no
assurance that any third party will not seek to assert such patent rights
against the Company, which would result in significant legal costs and require
substantial management resources, and there can be no assurance that the Company
would be able to obtain a license from any third party, if required, on
commercially reasonable terms, if at all. From time to time the Company receives
correspondence from third parties to license patents owned or controlled by
third parties and has recently received such correspondence. The Company's
inability to obtain or maintain patent protection or necessary licenses could
have a material adverse effect on the business, financial condition and results
of operations of the Company. The inability of the Company either to demonstrate
non-infringement of these and other current and future patents, whether issued
in the United States or overseas, or to
11
<PAGE> 13
obtain the appropriate licenses, would have a material adverse effect on the
Company's business, financial condition and operations. Moreover, there can be
no assurance that the Company or its customers will be able to obtain patent
protection for lead compounds or pharmaceutical products based upon the
Company's or such customers' technologies. There can be no assurance that any
patents issued to the Company or its collaborative partners, or for which the
Company has license rights, will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide competitive advantages to the
Company. To the extent that the Company or its consultants or collaborators use
intellectual property owned by others in their work for the Company, disputes
may also arise as to the rights in related or resulting know-how and inventions.
Litigation may be necessary to enforce the Company's patent and license rights
or to determine the scope and validity of others' proprietary rights. Any such
litigation whether or not the outcome thereof is favorable to the Company, could
result in substantial cost to and diversion of effort by the Company. Further,
United States patents do not provide any remedies for infringement that occurred
before the patent is issued. The commercial success of the Company will also
depend upon successfully avoiding the infringement of current and future patents
issued to competitors and upon maintaining the technology licenses upon which
certain of the Company's current products are, or any future products under
development might be, based. If competitors of the Company prepare and file
patent applications in the United States that claim inventions also claimed by
the Company or its collaborators, the Company or its collaborators may have to
participate in interference proceedings declared by the United States Patent and
Trademark Office ("PTO") to determine the priority of invention, which could
result in substantial cost to the Company, even if the outcome is favorable to
the Company. An adverse outcome could subject the Company to significant
liabilities to third parties and require the Company to license disputed rights
from third parties or cease using the technology.
A United States patent application is maintained under conditions of
confidentiality while the application is pending in the PTO, so that the Company
cannot determine the inventions being claimed in pending patent applications
filed by its competitors in the PTO. A number of pharmaceutical and
biotechnology and agrochemical companies and research and academic institutions
have developed technologies, filed patent applications or received patents on
various technologies that may be related to the Company's business. Some of
these technologies, applications or patents may conflict with the Company's
technologies or patent applications. Such conflict could limit the scope of the
patents, if any, that the Company may be able to obtain, or result in the denial
of the Company's patent applications. In addition, there can be no assurance
that the Company would be able to obtain licenses to patents held by third
parties that may cover the Company's activities at a reasonable cost, if at all,
or that the Company would be able to develop or obtain any alternative
technologies. The Company currently has certain licenses from third parties and
in the future may require additional licenses from other parties in order to
refine its Discovery Engine further and to allow its collaborators to develop,
manufacture and market commercially viable products effectively. There can be no
assurance that (i) such licenses will be obtainable on commercially reasonable
terms, if at all, (ii) any patents underlying such licenses will be valid and
enforceable or (iii) the proprietary nature of any patented technology
underlying such licenses will remain proprietary. The Company relies
substantially on certain technologies that are not patentable or proprietary and
are therefore available to the Company's competitors. The Company also relies on
certain proprietary trade secrets and know-how that are not patentable. Although
the Company has taken steps to protect its unpatented trade secrets and
know-how, in part through the use of confidentiality agreements with its
employees, consultants and certain of its contractors, there can be no assurance
that (i) these agreements will not be breached, (ii) the Company would have
adequate remedies for any breach or (iii) the Company's trade secrets will not
otherwise become known or be independently developed or discovered by
competitors. Failure by the Company to protect all or part of its patents, trade
secrets and know-how could have a material adverse effect on the Company's
business, financial condition and results of operations.
Competitive Nature of Company's Industry and Risks of Obsolescence of Technology
Many organizations are actively attempting to identify, optimize and
generate lead compounds for potential pharmaceutical development. The Company
competes with the research departments of pharmaceutical companies,
biotechnology companies, agrochemical companies, combinatorial chemistry
companies and research and academic institutions as well as other
computationally based drug discovery companies. Many of these competitors have
greater financial and human resources and more experience in research and
development than the Company. Historically, large pharmaceutical companies have
maintained close control over their research activities, including the
synthesis, screening and optimization of chemical compounds. Many of these
companies, which represent one of the largest potential markets for CombiChem's
products and services, are internally developing combinatorial and computational
approaches and other methodologies to improve productivity, including major
investments in robotics
12
<PAGE> 14
technology to permit the automated parallel synthesis of compounds. In addition,
these companies may already have large collections of compounds previously
synthesized or ordered from chemical supply catalogs or other sources against
which they may screen new targets. Other sources of compounds include compounds
extracted from natural products, such as plants and microorganisms, and
compounds created using rational drug design. Academic institutions,
governmental agencies and other research organizations are also conducting
research in areas in which the Company is working, either on their own or
through collaborative efforts. The Company anticipates that it will face
increased competition in the future as new companies enter the market and
advanced technologies become available. The Company's processes may be rendered
obsolete or uneconomical by technological advances or entirely different
approaches developed by one or more of the Company's competitors. The existing
approaches of the Company's competitors or new approaches or technology
developed by the Company's competitors may be more effective than those
developed by the Company.
Success of Company Dependent on Scale-Up and Management of Growth
The Company's success will depend on the expansion of its operations to
service additional collaborative arrangements and the management of these
expanded operations. To be cost-effective in its delivery of services and
products, the Company must enhance productivity through further automation of
its processes and improvements to its technology generally. In addition, the
Company must successfully structure and manage multiple additional collaborative
relationships, including maintaining the confidentiality of the research being
provided to multiple customers. There can be no assurance that the Company will
be successful in adding technical personnel as needed to meet the staffing
requirements of any additional collaborative relationship. In addition, there
can be no assurance that the Company will be successful in its engineering
efforts to automate its processes further or in its initiatives to improve its
technology. Failure to achieve any of these goals could have a material adverse
effect on the Company's business, financial condition or results of operations.
Dependence of Company on Key Employees
The Company is highly dependent on the principal members of its
scientific and management staff. The loss of one or more key members of the
Company's scientific or management staff could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company's future success will also depend in part on the continued service of
its key design engineering, scientific, software and management personnel and on
its ability to identify, hire and retain any additional personnel. There is
intense competition for such qualified personnel in the areas of the Company's
activities, and there can be no assurance that the Company will be able to
continue to attract and retain such personnel necessary for the development of
the Company's business. Failure to attract and retain key personnel could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Government Regulation
Regulation by governmental entities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products that may be developed by a customer or collaborator of
the Company or, in the event the Company decides to develop a drug beyond the
preclinical phase, by the Company. The nature and the extent to which such
regulation may apply to the Company's customers will vary depending on the
nature of any such pharmaceutical products. Virtually all pharmaceutical
products developed by the Company's customers will require regulatory approval
by governmental agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures established by the United States
Food and Drug Administration (the "FDA") and by foreign regulatory authorities.
Various federal and, in some cases, state statutes and regulations also govern
or influence, among other things, the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of such
products. Non-compliance with applicable requirements can result in fines,
warning letters, recall or seizure of products, clinical study holds or delays,
total or partial suspension of production, refusal of the government to grant
approvals, and civil and criminal penalties. The process of obtaining these
approvals and the subsequent compliance with appropriate federal and foreign
statutes and regulations are time-consuming and require the expenditure of
substantial resources. Generally, in order to gain FDA approval, a company first
must conduct preclinical studies in the laboratory and in animal models to gain
preliminary information on a compound's efficacy and to identify any safety
problems. Preclinical studies must be conducted by
13
<PAGE> 15
laboratories that comply with FDA regulations regarding Good Laboratory
Practices. The results of these studies are submitted as a part of an
Investigational New Drug application (an "IND") that the FDA must review before
human clinical trials of an investigational drug can begin. In order to
commercialize any products, the Company or its customer will be required to
sponsor and file an IND and will be responsible for initiating and overseeing
the clinical studies to demonstrate the safety and efficacy that are necessary
to obtain FDA and foreign regulatory authority approval of any such products.
Clinical trials are normally done in three phases and generally take two to five
years but may take longer to complete. After completion of clinical trials of a
new product, FDA and foreign regulatory authority marketing approval must be
obtained. If the product is classified as a new drug, the Company or its
customer will be required to file a New Drug Application (an "NDA") and receive
approval before commercial marketing of the drug. The testing and approval
processes require substantial time and effort, and there can be no assurance
that any approval will be granted on a timely basis, if at all. NDAs submitted
to the FDA can take, on average, two to five years to obtain approval. If
questions arise during the FDA review process, approval can take more than five
years. Even if FDA regulatory clearances are obtained, a marketed product is
still subject to continual review, and later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on the marketing of a product or withdrawal of the
product from the market, as well as possible civil or criminal sanctions.
Domestic manufacturing facilities of the Company or its customers are subject to
biannual inspections by the FDA and must comply with the FDA's current Good
Manufacturing Practices regulations. To comply with such regulations, a
manufacturer must spend funds, time and effort in the areas of production and
quality control to ensure full technical compliance. The FDA stringently applies
regulatory standards for manufacturing. For marketing outside the United States,
the Company or its customer will also be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for
pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country.
Future Capital Needs; Uncertainty of Additional Funding
The Company expects the net proceeds from the IPO completed in May 1998
and the interest income thereon, together with the existing cash and cash
equivalents, short term investments, operating revenues, and lease financing
arrangements, will be sufficient to finance its working capital and capital
requirements for the foreseeable future. The Company may be required to raise
additional capital over a period of several years in order to continue to
conduct its operations. Such capital may be raised through additional public or
private financings, as well as collaborative arrangements, borrowings and other
available sources. There can be no assurance that the Company's collaborative
arrangements will produce revenue adequate to fund the Company's operating
expenses. The Company's capital requirements depend on numerous factors,
including the ability of the Company to enter into additional collaborative
arrangements, competing technological and market developments, changes in the
Company's existing collaborative relationships, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
the purchase of additional capital equipment, the progress of the Company's drug
discovery programs and the progress of the commercialization of milestone- and
royalty-bearing compounds by the Company's customers. The Company does not
currently plan independently to develop, manufacture or market any drugs it
discovers. To the extent that additional capital is needed, it may be raised
through the sale of equity or convertible debt securities, and the issuance of
such securities could result in dilution to the Company's existing stockholders.
There can be no assurance that additional funding, if necessary; will be
available on favorable terms, if at all. If adequate funds are not available,
the Company may be required to curtail operations significantly or to obtain
funds through entering into arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets that the Company
would not otherwise relinquish. The failure to receive additional funding would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion And Analysis Of
Financial Condition And Results of Operations."
Uncertainty of Pharmaceutical Pricing and Health Care Reform
The Company expects that a substantial portion of its revenue in the
foreseeable future will be derived from products and services provided to the
pharmaceutical, biotechnology and agrochemical industries. Accordingly, the
Company's success in the foreseeable future is directly dependent upon the
success of the companies within those
14
<PAGE> 16
industries and their continued demand for the Company's products and services.
The level of revenue and profitability of pharmaceutical companies may be
affected by the continuing efforts of governmental and third-party payors to
contain or reduce the costs of health care through various means and the
initiatives of third-party payors with respect to the availability of
reimbursement. For example, in certain foreign markets, pricing or profitability
of prescription pharmaceuticals is subject to governmental control. In the
United States, there have been, and the Company expects that there will continue
to be, a number of federal and state proposals to implement similar governmental
control. It is uncertain what legislative proposals may be adopted or what
actions federal, state or private payors for health care goods and services may
take in response to any health care reform proposals or legislation. To the
extent that such proposals or reforms have a material adverse effect on the
business, financial condition and profitability of pharmaceutical and
biotechnology companies that are actual or prospective collaborators for certain
of the Company's products and services, the Company's business, financial
condition and results of operations may be adversely affected.
Company's Use of Hazardous Materials
The research and development processes of the Company involve the
controlled use of hazardous materials. The Company is subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the Company
believes that its activities currently comply with the standards prescribed by
such laws and regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result, and any
such liability could exceed the resources of the Company. In addition, there can
be no assurance that the Company will not be required to incur significant costs
to comply with environmental laws and regulations in the future. The occurrence
of any such event could have a material adverse effect on the Company's
business, financial condition and results of operations.
Control By Management and Existing Shareholders
The Company's executive officers, directors and affiliated entities
together beneficially own approximately 30.8% of the outstanding shares of
Common Stock. As a result, these stockholders will be able to exercise control
over matters requiring stockholder approval, including the election of directors
and mergers, consolidations and sales of all or substantially all of the assets
of the Company. This may prevent or discourage tender offers for Common Stock
unless the terms are approved by such stockholders.
Possible Volatility of Stock Price
The market prices for securities of life sciences companies have been
highly volatile, and the market has experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Announcements of technological innovations or new commercial products
by the Company or its competitors, developments concerning proprietary rights,
including patents and litigation matters, publicity regarding actual or
potential results with respect to products or compounds under development by the
Company or its strategic partners, regulatory developments in both the United
States and foreign countries, public concern as to the efficacy of new
technologies, general market conditions, as well as quarterly fluctuations in
the Company's revenue and financial results among other factors, may have a
significant impact on the market price of the Common Stock. In particular, the
realization of any of the risks described in these "Risk and Uncertainties"
could have a dramatic and adverse impact on such market price.
Anti-Takeover Effect of Certain Charts and Bylaw Provisions and Delaware Law
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. Although the
Company has no current plans to issue any shares of Preferred Stock, the
issuance of Preferred Stock or of rights to purchase Preferred Stock could be
used to discourage an unsolicited acquisition proposal. In addition, the
possible issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors
15
<PAGE> 17
might be willing to pay in the future for shares of the Company's Common Stock.
The Company's Certificate of Incorporation provides for staggered terms for the
members of the Board of Directors. A staggered Board of Directors and certain
provisions of the Company's by-laws and of Delaware law applicable to the
Company could delay or make more difficult a merger, tender offer or proxy
contest involving the Company. Further, the Company's stock option plans
generally provide for the acceleration of vesting of options granted under such
plans in the event of certain transactions which result in a change of control
of the Company. In addition, the Company is subject to Section 203 of the
General Corporate Law of Delaware which, subject to certain exceptions,
restricts certain transactions and business combinations between a corporation
and a stockholder owning 15% or more of the corporation's outstanding voting
stock (an "interested stockholder") for a period of three years from the date
the stockholder becomes an interested stockholder. These provisions may have the
effect of delaying or preventing a change of control of the Company without
action by the stockholders and, therefore, could adversely affect the price of
the Company's Common Stock.
16
<PAGE> 18
PART II - OTHER INFORMATION
Item 1. None.
Item 2. Change in Securities and Use of Proceeds
A Registration Statement on Form S-1 (File No. 333-37981) registering
2,587,500 shares of the Company's Common Stock filed in connection with the
Company's Initial Public Offering (the "IPO") for an aggregate offering of $20.7
million was declared effective by the Securities and Exchange Commission on May
7, 1998. The sale of 2,250,000 shares was closed on May 13, 1998. Exercise of a
portion of the over-allotment option was initiated on June 5, 1998 and was
closed on June 10, 1998.
The managing underwriters of the IPO were BancAmerica Robertson
Stephens, Donaldson, Lufkin & Jenrette, and Salomon Smith Barney.
The Company sold a total of 2,359,500 shares registered in the IPO at an
offering price to the public of $8 per share and an aggregate price of
approximately $18.9 million. In connection with the IPO, the Company incurred
total expenses of approximately $2.7 million, including underwriting commissions
of approximately $1.3 million and other costs of approximately $1.4 million. The
amount of net offering proceeds from the IPO and over-allotment option was
approximately $16.2 million. As of June 30, 1998, the Company had used
approximately $0.3 million of the net offering proceeds to fund its operations.
In May 1998, the Company issued 62,500 shares of Common Stock in
connection with a previously executed collaborative agreement. The shares of
Common Stock were issued in reliance on Section 4(2) of the Securities Act of
1933, as amended.
Item 3. None
Item 4. None
Item 5. None
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
a. Exhibits
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
of the Company, previously filed as Exhibit 3.2 on
Form S-1, File No. 333-37981, and incorporated
herein by reference.
3.2 Restated Bylaws of the Company, previously filed as
Exhibit 3.4 on Form S-1, File No. 333-37981, and
incorporated herein by reference.
4.1 Form of Certificate for Common Stock, previously
filed as Exhibit 4.1 on Form S-1, File No.
333-37981, and incorporated herein by reference
10.1* Collaborative Research and License Agreement by and
between the Company and Novartis Crop Protection AG
dated as of May 26, 1998
10.2 Amendment No. 1 to the Promissory Note dated September 5, 1995
between the Company and Peter Myers dated June 15, 1998.
27.1 Financial Data Schedules
b. None.
</TABLE>
* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Company's Application Requesting Confidential Treatment under Rule 406
under the Securities Act.
17
<PAGE> 19
COMBICHEM, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CombiChem, Inc.
Date: August 13, 1998 By: /s/ KARIN EASTHAM
--------------- -------------------
Karin Eastham
Vice President, Finance and Administration
and Chief Financial Officer (Duly
Authorized Officer and Principal Financial
and Accounting Officer)
18
<PAGE> 1
EXHIBIT 10.1
EXECUTION COPY
COLLABORATIVE RESEARCH AND LICENSE AGREEMENT
BETWEEN
COMBICHEM, INC.
AND
NOVARTIS CROP PROTECTION AG
MAY 26th, 1998
<PAGE> 2
COLLABORATIVE RESEARCH AND LICENSE AGREEMENT
(Novartis Crop Protection)
THIS COLLABORATIVE RESEARCH AND LICENSE AGREEMENT (the
"Agreement") is entered into and made effective as of May 26th, 1998 (the
"Effective Date"), by and between COMBICHEM, INC., a California corporation
having its principal offices at 9050 Camino Santa Fe, San Diego, California
92121 ("CombiChem") and NOVARTIS CROP PROTECTION AG, a corporation organized
under the laws of the Country of Switzerland having its principal offices
located in Basel, at CH-4002 Basel, Switzerland ("Novartis").
WHEREAS, CombiChem has developed and owns certain intellectual
property rights, including chemical library design software, multi-parallel
synthesis and purification methods, chemical libraries suitable for screening
assays (collectively, "CombiChem Technology");
WHEREAS, as of the Effective Date, Novartis and its Affiliates
have developed and own certain intellectual property rights, including certain
assays, methods and know how regarding the Initial Hits, among other things
(collectively "Novartis Technology");
WHEREAS, Novartis desires to utilize CombiChem Technology in
its search for compounds for the crop protection and animal health markets under
Novartis know-how;
WHEREAS, the parties wish to collaborate in a Research Program
to optimize the biological activity of Collaboration Hit(s) ("Collaboration");
NOW, THEREFORE, the Parties agree as follows:
1. DEFINITIONS
1.1 "Abandoned Compound" shall have the meaning given in
Section 4.1.
1.2 "Abandoned Hits" shall have the meaning given in Section
4.1.
1.3 "Active Compound(s)" means a compound (or compounds) which
(a)(i) is selected by Novartis under the Research
Program from Collaboration Compounds subject
to Section 4.2, or
(ii) is a Derivatized Compound which is so selected
by Novartis; and
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-2-
<PAGE> 3
(b) shows In Vivo Activity.
1.4 "Affiliate" of a Party means any corporation or other
business entity controlled by, controlling or under common control with, such
Party. For this purpose "control" shall mean direct or indirect beneficial
ownership of more than fifty percent (50%) of the voting securities or income
interest in such corporation or other business, or if not meeting the preceding
requirements, any company owned or controlled by or owning or controlling such
Party at the maximum control or ownership right permitted in the country where
such company exists.
1.5 "Collaboration" has the meaning set forth in the preamble.
1.6 "Collaboration Compound(s)" means a compound (or
compounds) which (a) is synthesized following the Effective Date for screening
in an assay/assays related to a Collaboration Hit(s) under the Research Program,
or (b) is a pre-existing or hereafter acquired CombiChem Compound which
CombiChem desires to designate as a Collaboration Compound.
1.7 "Collaboration Library" means a library synthesized under
the direction of the RMC which (a) contains Collaboration Compounds and (b) is
designed to provide information regarding activity in an assay/assays related to
a Collaboration Hit(s).
1.8 "Collaboration Hit(s)" means the Initial Hit(s) or a
Substitute Hit(s) according to the decision of the RMC.
1.9 "CombiChem Compound" means a chemical compound that is
proprietary to CombiChem, or whose use or manufacture is proprietary to
CombiChem.
1.10 "CombiChem Technology" has the meaning set forth in the
preamble.
1.11 "Combination Product(s)" means any product containing a
Development Compound as one of the active ingredients (in combination with one
or more other compounds as active ingredients) and which is granted regulatory
approval by the governing regulatory authority of the applicable country for
marketing and sale.
1.12 "Confidential Information" includes, but is not limited
to,
(a) all information and materials received by either
Party from the other Party pursuant to this
Agreement which is confidential under Article
11;
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-3-
<PAGE> 4
(b) all information and materials by either Party
arising out of the Collaboration during the
Research Period; and
(c) the financial terms of this Agreement.
1.13 "Development Compound(s)" means a compound (or compounds)
which
(a) (i) is an Active Compound or (ii) is a
Derivatized Compound; and
(b) is *** of the Novartis Crop Protection Stage
Plan or its equivalent for Novartis' animal
health program.
1.14 "Derivatized Compound" shall mean a compound (or
compounds) which has resulted from subsequent chemical synthesis by Novartis to
generate an Active Compound or Development Compound in support of the Research
Program.
1.15 "Due Diligence" means the use of by a Party or its
Affiliates' resources in a manner which is consistent with the exercise of
reasonable and prudent scientific and business judgment as applied to other
programs of Novartis or CombiChem, as the case may be, targeting products aimed
at markets of similar sizes and of similar scientific and commercial potential.
With respect to any Development Compound, "Due Diligence" shall also require
Novartis or its Affiliates to use commercially reasonable efforts to conduct all
necessary studies and to file an application for product registration for such
Development Compound within *** from the date upon which Novartis has designated
such Development Compound from any Active Compound or its Derivatives.
1.16 "Exclusivity Period" means the Research Period plus *** .
1.17 "Field" shall mean the area of crop protection and animal
health.
1.18 "First Commercial Sale" of a Product shall mean the first
sale for use of such Product in a country after required marketing and pricing
approval has been granted by the governing health regulatory or environmental
safety authorities of such country. Sale to an Affiliate shall not constitute a
First Commercial Sale unless the Affiliate is the end user of the Product.
1.19 "FTE" shall mean a full-time equivalent employee of
CombiChem. For purposes of this Agreement, the FTEs shall include synthetic and
analytical chemists, compound control scientists and computational scientists.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-4-
<PAGE> 5
1.20 "Hit(s)" shall mean a single compound or a group of
compounds which are structurally related and/or share the same biochemical mode
of action that show(s) biological activity in at least *** high throughput
screening.
1.21 "Inactive Compound(s)" means a Collaboration Compound(s)
which (a) does not have the In Vivo Activity required for an Active Compound, or
(b) is defined in Section 4.2(b).
1.22 "Novartis Compound" means a chemical compound that is
proprietary to Novartis or whose use or manufacture is proprietary to Novartis
or its Affiliates.
1.23 "Novartis Technology" shall have the meaning set forth in
the preamble of this Agreement.
1.24 "In Vivo Activity" shall mean the observation of relevant
biological activity in at least *** high throughput screening.
1.25 "Initial Hit(s)" shall have the meaning set forth in
Section 3.1 hereof.
1.26 "Net Sales" means the gross sales invoiced by Novartis or
its Affiliates for Products to Third Parties less actual deductions or returns
(including withdrawals and recalls), rebates (including price reductions and
chargebacks), cash, trade or volume (quantity) discounts, discounts granted at
the time of invoicing, the cost of transport, insurance, delivery, sales taxes
and use, tariff, excise or other taxes (other than income taxes) directly linked
to and included in the gross sales amount as computed on a product-by-product
basis for the countries concerned, whereby the amount of such sales in foreign
currencies is converted into Swiss Francs.
1.27 "Patent" means (a) valid and enforceable Letters Patent
within the Territory including any extension (including Supplemental Protection
Certificates), registration, confirmation, reissue, continuation, divisionals,
continuation-in-part, reexamination or renewal thereof, or (b) pending
applications for any of the foregoing, whether filed or issued before or after
the Effective Date of this Agreement.
1.28 "Party" means CombiChem or Novartis, as the case may be,
including their permitted successors and assigns.
1.29 "Product(s)" means any product containing a Development
Compound with such compound as the active ingredient and which is granted
regulatory approval by the governing regulatory authority of the applicable
country for marketing and sale.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-5-
<PAGE> 6
1.30 "Project Team" shall have the meaning set forth in
Section 2.1(c).
1.31 "Research Management Committee" or "RMC" has the meaning
set forth in Article 6 below.
1.32 "Research Period" means the initial term of the
Collaboration commencing on September 1, 1998 and ending on August 31, 2000,
unless earlier terminated, which can be extended in accordance with Section 7.1
below.
1.33 "Research Plan" means the research plan to be agreed in
writing between the Parties, which describes the research activities to be
performed for each Collaboration Hit and as attached hereto as Appendix B.
1.34 "Research Program" means the research to be conducted for
the Collaboration including, without limitation, the activities described in the
Research Plan and set forth in Sections 2.1 and 2.2 of this Agreement.
1.35 "Returned Compound" shall have the meaning set forth in
Section 9.2.
1.36 "Royalty Term" means, in the case of any Product or
Combination Product, on a country-by-country basis, the period of time
commencing on the First Commercial Sale and ending upon either of (a) *** from
the date of First Commercial Sale in any country without patent protection; or
(b) the later of *** from the date of First Commercial Sale or the expiration of
the last to expire Patent containing one or more composition of matter, and/or
method of use claims filed during the Exclusivity Period covering the
Development Compound(s) in the Field.
1.37 "Territory" means the entire world.
1.38 "Third Party" means an entity other than CombiChem or
Novartis, and their respective Affiliates.
2. RESEARCH COLLABORATION
2.1 CombiChem Responsibilities. CombiChem shall with Due
Diligence provide the following resources to Novartis and conduct the following
activities under the Research Program and as more fully described in the
Research Plan:
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-6-
<PAGE> 7
(a) Between the Effective Date of this Agreement and the
start of the Research Period, CombiChem shall review
Hits proposed by Novartis and help select Initial
Hits for the Research Program.
(b) During the Research Period, CombiChem shall (i)
review data and information regarding the
Collaboration Hits provided by Novartis; (ii) based
on such data and information and using the CombiChem
Technology, design Collaboration Libraries; and (iii)
supply lead chemistries and synthesize Collaboration
Compounds as provided in Section 5.4 below.
(c) During the Research Period, CombiChem shall keep
Novartis informed of its activities performed in
connection with the Collaboration, including, without
limitation, providing Novartis with data and
information (and, upon Novartis's request, reasonable
quantities of samples pursuant to Section 5.4)
regarding the status of all Collaboration Compounds
prior to the meetings of the Research Management
Committee.
(d) Subject to Section 2.3, Article 3 and Section 8.2,
and at all times during the Research Period,
CombiChem shall dedicate, in separate laboratory
facilities as to its chemistry efforts, one project
team ("Project Team"), to conduct all of CombiChem's
activities in connection with the Collaboration at a
per annum rate of U.S. *** per FTE to be paid by
Novartis. The initial Project Team shall consist of a
minimum of *** CombiChem FTEs, unless the RMC
determines otherwise.
2.2 Novartis Responsibilities. Novartis shall with Due
Diligence provide the following resources to CombiChem and conduct the following
activities under the Research Program as more fully described in the Research
Plan:
(a) Novartis shall provide CombiChem with funding for the
Collaboration as set forth in Article 8, provide
structural and biological data on Hit(s) and
screening results for Collaboration Compounds to
CombiChem with respect to the Collaboration necessary
for CombiChem to perform its duties under this
Agreement, and will assume scientific, financial and
administrative responsibility for screening and
biological support activities, compound development
and regulatory filings in the Field under the terms
set forth below.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-7-
<PAGE> 8
(b) During the Research Period, Novartis shall provide
CombiChem as quickly as possible, usually within ***
days, test results for Collaboration Compounds from
the assays related to the respective Collaboration
Hit(s).
(c) During the Exclusivity Period, Novartis shall screen
all Collaboration Compounds for In Vivo Activity in
the Field, shall quarterly report these screening
results to CombiChem and shall further evaluate
Active Compounds and endeavor to determine
Development Compounds in the Field.
(d) At any time during the Collaboration, Novartis may
apply chemistry effort to any Collaboration Compound,
including synthesis.
(e) Following the *** of the Novartis Crop Protection
Stage Plan through First Commercial Sale, Novartis
shall provide CombiChem with an annual report
summarizing Novartis's activities in developing
Development Compounds.
(f) During the Research Period and in connection with
CombiChem providing the services in Section 2.1(c)
above, Novartis shall send one (1) research chemist
to conduct Novartis' activities at CombiChem's
facilities under the Research Program. Novartis shall
have sole responsibility for the expenses associated
with its visiting chemist, including, without
limitation, salary, travel, living and other
associated expenses. CombiChem shall not charge any
infrastructure costs for such chemist.
2.3 Conduct of Research Program. The Parties hereby agree that
the Research Programs shall be carried out in accordance with the Research Plan,
as amended from time to time. The Research Management Committee shall review the
Research Plan on an ongoing basis and may make changes to the Research Plan so
long as such changes are mutually agreed to by CombiChem and Novartis.
2.4 Third Party Licenses. Each Party shall be solely
responsible for any Third Party license and license fees required to perform its
obligations under this Agreement.
3. HITS
3.1 Initial Hits. Initial Hits shall consist of *** for each
of the herbicide, fungicide and insecticide field (for a total of *** Initial
Hits).
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-8-
<PAGE> 9
4. EXCLUSIVITY
4.1 Collaboration Hit Exclusivity. Prior to designating a
Collaboration Hit(s) for an active Research Program under Article 3, and
thereafter so long as Novartis or its Affiliates are proceeding with Due
Diligence for that Hit(s), CombiChem shall not knowingly work on or knowingly
provide information regarding a Collaboration Hit(s) with or to any Third
Parties, except (a) as provided for in Section 12.2 with regard to any Public
Statements, and (b) with respect to any Third Parties who are collaborators or
proposed collaborators of CombiChem, CombiChem shall have the right, consistent
with its corporate policy (but without identifying any Collaboration Hit(s)), to
notify any such Third Party of its decision and/or inability to work on such
Hit(s) with that Third Party. In the event that Novartis or its Affiliates have
not transferred or assigned control of its program for that Hit(s) to a Third
Party under due diligence obligations no less stringent than those set forth
herein and have failed to exercise Due Diligence with respect to, or notifies
CombiChem in writing that it has abandoned work on, any Collaboration Hit(s) (an
"Abandoned Hit") and any Collaboration Compound associated with such Abandoned
Hit (together with all Derivatives of such Collaboration Compound, an "Abandoned
Compound"), then such Abandoned Hit and/or Abandoned Compound shall be available
to CombiChem (excluding any Novartis Compounds and Novartis Technology) and to
Novartis for any purpose thereafter.
4.2 Active Compounds. (a) Following the designation of any
Collaboration Compound as an Active Compound, such Active Compound shall be
exclusively available to Novartis for research and development in the Field, and
CombiChem shall not knowingly work on or knowingly provide information regarding
such Active Compound to any Third Party, except to reject and take any steps
necessary to protect Novartis's exclusivity hereunder. (b) Following the
expiration of the Exclusivity Period, Active Compounds upon which a Patent has
not been filed within ninety (90) days following the Exclusivity Period shall be
deemed to be "Inactive Compounds" for all purposes hereunder; provided, that any
Active Compound which is the subject of claim(s) under at least one pending
Patent in the Territory shall continue to be treated as Active Compounds until a
Patent is issued with respect to one or more of such claims; or until all of
such Patent claims have been denied, at which time the compounds which are the
subject of those claims shall be Inactive Compounds hereunder.
4.3 Inactive and Returned Compounds. Any Inactive Compounds,
Abandoned Compounds and Returned Compounds shall be available to CombiChem
(except for any pre-existing Novartis Compound) and Novartis for any purpose
following the designation of a Collaboration Compound as an Inactive Compound or
Returned Compound.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-9-
<PAGE> 10
4.4 Duration of Exclusivity for Collaboration Hits.
Notwithstanding any other provision of this Agreement, it is understood and
agreed that once a Research Program has been initiated, CombiChem's obligations
under Section 4.1 shall continue until Novartis has (a) released CombiChem from
the effect of this Section 4.4 by written notice from Novartis, or (b) failed to
exercise Due Diligence with respect to Active Compounds resulting from the
optimization of Collaboration Hit(s).
5. COLLABORATION COMPOUNDS
5.1 Pre-Existing Compounds. Neither Party shall have any
rights to any pre-existing compound of the other Party unless and until such
compound is designated as a Collaboration Compound by such Party. Additionally,
CombiChem may decline (after informing Novartis) to synthesize a particular
compound or library of compounds by reason of existing patents or contractual
obligations.
5.2 Intellectual Property Rights; License to Novartis. Subject
to Section 9.2, and except as set forth in this Section 5.2, Novartis shall own
and have exclusive rights in all Patents and intellectual property (whether or
not patentable) relating to Active Compounds and the subject matter contained
therein and resulting from the Research Program during the Exclusivity Period
and thereafter. Notwithstanding the foregoing, Novartis acknowledges and agrees
that CombiChem reserves the right to assign or grant exclusive rights to any
compound to a Third Party who completes an act of invention with regard to such
compound to the extent CombiChem is obligated to do so under CombiChem's
existing contractual obligations and further provided that CombiChem has timely
(but in any event within thirty (30) days after notification from Novartis that
such compound shows In Vivo Activity) notified Novartis in writing of such
assignment or grant and its designation as an unavailable compound. Novartis
shall be responsible for filing, maintaining and prosecuting all Patents
relating to Active Compounds at its sole expense. CombiChem shall assign to
Novartis or its designee all intellectual property rights it may have in the
Active Compounds and the subject matter claimed therein which are necessary for
the development and commercialization by Novartis or its designee. CombiChem
shall use reasonable efforts to supply Novartis with the information necessary
for the filing, prosecution, defense and enforcement of Patents. If Novartis
fails to so file, maintain or prosecute such Patent, CombiChem shall have the
right to request Novartis to do so. If Novartis elects not to file, maintain, or
prosecute such Patent, on a country-by-country basis, CombiChem shall have the
right to take over such filing, maintenance or prosecution of Patent for which
it has previously assigned rights to Novartis, at its sole expense. Novartis
shall have the right to control any actions taken to enforce Patents which it
has elected to file, maintain and prosecute including such patents owned by
CombiChem (that is, patents that CombiChem has taken over from Novartis on a
country-by-country basis) under this clause 5.2. Litigation
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-10-
<PAGE> 11
costs for such patents shall be borne by Novartis. CombiChem shall use
reasonable efforts to support such actions as necessary. Novartis shall
reimburse CombiChem's out-of-pocket expenses for its support in such litigation.
After final judgement of such proceedings, Novartis shall have the right to
first recover its out-of-pocket costs. Any additional awards shall be with
Novartis for Patents owned by Novartis and with CombiChem for Patents owned by
CombiChem. In cases where Novartis prosecutes Patents and such Patents lapse
without first being offered to CombiChem according to this clause, or where
Novartis prosecutes Patents assigned to CombiChem lapse due to Novartis' fault,
Novartis shall only be liable for the maximum sum of past patent costs billed to
CombiChem. In such case, Novartis' royalty obligations under clause 8.4 shall
continue until the maximum expiration date of the Patent in question.
5.3 Structural Information. Neither Party shall disclose the
structure of any Active Compound to any Third Party without the other Party's
written permission, unless required to do so by law, in which case such Party
shall promptly notify the other Party of such required disclosure. If a subpoena
or other legal process concerning the same is served upon either Party, the
other Party shall cooperate with the Party served in any effort to contest the
validity of such subpoena or other legal process.
5.4 Supply of Collaboration Compounds. Aliquots of *** of any
Collaboration Compound that has been synthesized will be prepared and given to
Novartis together with the structural formula. CombiChem shall maintain aliquots
of any Collaboration Compound that has been synthesized by CombiChem. CombiChem
shall also provide Novartis with additional requirements of samples of up to ***
at CombiChem's expense, It will be Novartis' responsibility to synthesize
quantities greater than *** . Under such circumstances, CombiChem will provide
Novartis with synthesis procedures for such compounds. In the event that
frequency of additional requirements up to *** becomes burdensome to the
Research Program, the RMC shall meet and confer as to the appropriate research
allocation by Novartis and CombiChem.
6. RESEARCH MANAGEMENT COMMITTEE
The design, review and conduct of the Research Program will be
coordinated by the Research Management Committee, which will meet regularly on a
mutually-agreeable schedule. Each Party shall bear its own expenses related to
such meetings. The Research Management Committee may establish and amend or
revise the Research Plan as reasonable and necessary to reflect the scientific
progress and work performed under the Research Program, such amendments to be
mutually agreed to in writing by Novartis and CombiChem. The Research Management
Committee will consist of an equal number of members from Novartis
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-11-
<PAGE> 12
and CombiChem and will include appropriate representatives from Novartis and
CombiChem as mutually agreed. The co-chairs of the Research Management Committee
will initially be the Vice President, Chemistry of CombiChem and the Head of
Discovery Technologies and Natural Products of Novartis and subsequently may
change as each Party determines for its co-chair. Decisions of the Research
Management Committee shall be by consensus. If a decision is not reached by the
RMC with respect to management of the Research Program, the dispute will be
referred to the co-chairs of the RMC. If the co-chairs of the RMC are unable to
resolve the dispute, the dispute will be referred to the Chief Executive Officer
of CombiChem and the Head of R&D Crop Protection of Novartis for resolution. If
those officers are unable to resolve the dispute, after good faith discussions,
the dispute shall be resolved as determined per Section 15.2.
7. RESEARCH PERIOD; TERMINATION OF RESEARCH PROGRAM
7.1 Research Period: Option to Extend the Research Period. The
initial term of the Collaboration shall be the Research Period, subject to
extension upon mutual agreement. To extend the Research Period, Novartis must
notify CombiChem no later than ninety (90) days prior to the then-current
expiration date and the Parties shall negotiate in good faith the terms and
conditions of any such extension.
7.2 Termination of Research Program Upon Breach. The Research
Program and/or this Agreement may be terminated by a Party for the material
breach by the other Party as provided by Section 10.2.
8. CONSIDERATION
8.1 Project Initiation Fee. As of the Effective Date, Novartis
agrees to pay CombiChem a non-refundable, noncontingent project initiation fee
of U.S. *** in cash to initiate the Research Program for the Initial Targets,
which shall be payable within thirty (30) calendar days following the Effective
Date.
8.2 Program Funding.
(a) Research Support for Project Team. At all times
during the Research Period, Novartis shall make payments to CombiChem for direct
research support for its Project Team, which shall consist of a minimum of ***
FTEs of CombiChem, unless the RMC determines otherwise. The total amount payable
per FTE shall be U.S. *** per CombiChem FTE per annum. All payments for research
support shall be paid by Novartis to CombiChem, quarterly in advance, and
adjusted as necessary in subsequent quarters, of such amounts as are equal to
the product of (i) the number of CombiChem FTEs (a minimum of *** FTEs at all
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-12-
<PAGE> 13
times unless the RMC determines otherwise) allocated to the Research Program by
the RMC for the calendar quarter to which each such payment applies, multiplied
by (ii) U.S. *** (i.e., the quarterly amount per Combichem FTE on the basis of
U.S. *** per annum).
(b) Expansion of Project Team. Novartis may request
that CombiChem expand its Project Team during the Research Period in order to
accelerate work on Collaboration Targets. In such event, the RMC shall promptly
confer as to the appropriate number of FTEs to be added to the Project Team, at
a cost to Novartis of U.S. *** per CombiChem FTE.
8.3 Milestone Payments. Within thirty (30) days of the
occurrence of a development milestone triggered by the activities of Novartis or
its Affiliates as shown on Appendix A, Novartis shall pay CombiChem the related
milestone payment in U.S. dollars as set forth on Appendix A. Such payments
shall apply to any milestone reached by a Development Compound resulting from
this Collaboration.
8.4 Royalties. Subject to Sections 8.5, 8.6 and 8.7 hereof and
during the Royalty Term:
(a) Novartis will pay CombiChem a running royalty
of (i) *** of Net Sales of Products containing Collaboration Compounds as its
sole active ingredient sold in any country of the world by Novartis or its
Affiliates and (ii) *** on any Net Sales of Products containing Derivatized
Compounds as its sole active ingredient sold in any country of the world by
Novartis or its Affiliates.
(b) Royalties shall be paid to CombiChem in U.S.
Dollars. Each royalty payment by Novartis shall be accompanied by a report
stating total Net Sales (stated on a per Development Compound basis) in Swiss
Francs.
(c) For each Combination Product(s), CombiChem and
Novartis shall agree in writing on the payment to CombiChem of a running royalty
on Net Sales of each such Combination Product based upon a formula which (i)
provides for a proportionate fraction of a *** royalty for each Combination
Product containing Collaboration Compound(s) as an active ingredient in
combination with other compounds as active ingredient(s) which do not result
from the Research Program, and (ii) provides for a proportionate fraction of a
*** royalty for each Combination Product containing Derivatized Compound(s) as
an active ingredient in combination with other compounds as active ingredient(s)
which do not result from the Research Program. Such formulas shall take into
account the relative commercial value and functional contribution of the
respective Collaboration Compounds and/or Derivatized Compounds vis a vis other
compounds which are active ingredients in each such Combination Product.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-13-
<PAGE> 14
8.5 Manner and Place of Payment. The Royalty payments and
reports described in Section 8.4 hereof shall be calculated in Swiss Francs and
reported to CombiChem twice each year. The royalty payments shall be converted
in U.S. Dollars on the last day for the respective period of reporting based on
the applicable exchange rate of the stock exchange in Zurich, Switzerland. All
royalty payments due under this Agreement shall be made by wire transfer to the
bank account to be designated by CombiChem within sixty (60) days following the
end of each such biannual calendar period.
8.6 Records and Audit. During the term of this Agreement and
for a period of three (3) years thereafter, Novartis shall keep complete and
accurate records pertaining to the sale or other disposition of Products and
Combination Products in sufficient detail to permit CombiChem to confirm the
accuracy of all payments due hereunder. CombiChem shall have the right to cause
an independent certified public accounting firm reasonably acceptable to
Novartis to audit such records to confirm Net Sales of Products and Combination
Products for the preceding year. Any information obtained during such audit
shall be treated as Confidential Information. Such audits may be exercised after
reasonable notice during normal business hours of Novartis no more than once
each year. CombiChem shall bear the full cost of such audit unless such audit
discloses a deficiency of more than *** from the amount of the Net Sales
reported by Novartis for such audited period. In such case, Novartis shall bear
the reasonable cost of such audit.
8.7 Taxes. All income and other taxes levied on account of the
royalties and other payments accruing to CombiChem under this Agreement shall be
paid by CombiChem, including taxes levied thereon as income to CombiChem. If
provision is made in law or regulation for withholding, such tax shall be
deducted from the royalty or other payment made by Novartis to the proper taxing
authority and a receipt of payment of the tax secured and promptly delivered to
CombiChem. Each Party agrees to assist the other Party reasonably in claiming
exemption from such deductions or withholdings under any double taxation or
similar agreement or treaty from time to time in force.
9. LICENSE GRANTS; OUTLICENSE
9.1 CombiChem License Grant to Novartis. Subject to the terms
and conditions of this Agreement, CombiChem hereby grants to Novartis an
exclusive, royalty-free, worldwide license, with the right to sublicense to use
such CombiChem Technology as is necessary to make, have made, use, have used,
sell, have sold, import and export Collaboration Compounds or Products in the
Territory. Such license shall remain exclusive (including as to CombiChem) in
relation to the Active Compound, Development Compound and/or Product so
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-14-
<PAGE> 15
long as Novartis or its licensee continues to develop and commercialize such
Active Compound, Development Compound and/or Product against a Collaboration
Target with Due Diligence.
9.2 Novartis License Grant to CombiChem. Subject to Article 4
and following the failure of Novartis or its licensee to develop and
commercialize with Due Diligence an Active Compound, a Development Compound or
Product, as the case may be (collectively "Returned Compounds"), Novartis shall
grant to CombiChem a non-exclusive, royalty-free license, with the right to
sublicense, under those Novartis Patents and know-how which are resulting from
the Research Program and related exclusively to the Returned Compound, to make,
have made, use, have used, sell, have sold, import and export such Returned
Compound in the Territory.
9.3 Novartis Outlicense. Novartis shall have the right to
transfer, assign or outlicense to a Third Party the Products or Patents covering
the Products, subject to CombiChem's right to receive all royalties and
milestones as provided in Sections 8.4 and 8.5. All Payments shall be made to
CombiChem by wire transfer to such bank account designated by CombiChem within
five (5) business days after receipt by Novartis or its Affiliates of such
Payments from the Third Party. As an express condition of any such transfer,
assignment or outlicense, any such Third Party shall be required to agree in
writing (a) to be bound by due diligence, royalty reporting and recordkeeping
and inspection provisions no less stringent than those contained in this
Agreement and (b) to allow CombiChem to institute or join legal actions against
any Third Party who fails to satisfy any obligations provided pursuant to this
Section 9.3. Novartis shall remain responsible to CombiChem for all milestone
and royalty payments due CombiChem pursuant to this Agreement and actually
received by Novartis from a Third Party. In addition, CombiChem shall have the
right to receive all audit reports relating to sales of Products of a Third
Party, and to cause Novartis or a Third Party to have an independent certified
public accounting firm (reasonably acceptable to Novartis) audit such Third
Party's records on the same terms as those specified in Section 8.6.
9.4 Rights to Inactive Compounds. Except for any Novartis
Compounds (which remain proprietary to Novartis), each of Novartis and, subject
to Novartis's Patent rights, CombiChem shall have rights to make, have made,
use, have used, sell, have sold, import and export Inactive Compounds or
products containing Inactive Compounds. Specifically, each party shall be free
to screen Inactive Compounds against any target other than the Collaboration
Target. In the event that either Novartis or CombiChem shall develop, market
and/or sell, or enter into a binding agreement with a Third Party to develop,
market and/or sell, any product containing the Inactive Compound as an active
ingredient, then the other Party hereto shall not be entitled to any payments,
milestones, royalties, fees or compensation of any kind.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-15-
<PAGE> 16
10. TERM AND TERMINATION OF THE AGREEMENT
10.1 Term. The term of this Agreement shall commence upon the
Effective Date of this Agreement, and unless earlier terminated as provided in
this Agreement, shall expire on August 31, 2000.
10.2 Termination by Novartis or CombiChem. If either Party
materially breaches this Agreement and fails to remedy that breach within ninety
(90) days of receiving written notice thereof from the other Party, or enters
into any arrangement of composition with its creditors or goes into liquidation,
insolvency, bankruptcy, receivership or reorganization proceedings, whether
voluntarily or compulsorily which is not dismissed within ninety (90) days, then
the other Party may at any time, by notice in writing or by telefax, terminate
this Agreement. Within ninety (90) days following termination for any Research
Program and/or research related to any Collaboration Hit(s) under this
Agreement, the RMC shall prepare a detailed, final written report to each Party,
and CombiChem shall provide any remaining supply of compounds in synthesis to
date to Novartis, for each Collaboration Hit(s) or Research Program being
terminated.
10.3 After Termination. Any termination of this Agreement or
the Research Program shall be without prejudice to the accrued rights of either
party prior to the termination. In case of termination of this Agreement or the
Research Program pursuant to Section 10.2 above, all milestone and royalty
payments, license rights and confidentiality obligations set forth in Sections
8.3 and 8.4 and Articles 9, 11 and 12 shall survive any such termination.
10.4 Effect of Termination on Licensees. In the event of any
termination of this Agreement pursuant to this Article 10 where such termination
shall not have been caused by the action or inaction on the part of any
respective licensee of Novartis or CombiChem, or by any breach by such licensee
of its obligations under its license from Novartis or CombiChem, as appropriate,
such termination of this Agreement shall be without prejudice to the rights of
each non-breaching licensee and such licensee shall be deemed to be a direct
licensee hereunder.
11. CONFIDENTIAL INFORMATION
11.1 Nondisclosure. During the term of this Agreement and for
a period of five (5) years after termination thereof, each Party will maintain
all Confidential Information in trust and confidence and will not disclose any
Confidential Information to any third party or use any Confidential Information
for any purpose except (i) as expressly authorized by this Agreement, (ii) as
required by law or court order, after as much advance notice as is practical to
the other Party, (iii) to its consultants, subcontractors or agents who need to
know to accomplish the purposes of this Agreement and who are bound by
equivalent written confidentiality obligations.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-16-
<PAGE> 17
Each Party may use the other Party's Confidential Information only to the extent
required to accomplish the purposes of this Agreement. Each Party will use at
least the same standard of care as it uses to protect proprietary or
confidential information of its own to ensure that its Affiliates, employees,
agents, consultants and other representatives do not disclose or make any
unauthorized use of the Confidential Information. Each Party will promptly
notify the other upon discovery of any unauthorized use or disclosure of the
Confidential Information.
11.2 Exceptions. Confidential Information shall not include
any information which the receiving Party can prove by competent evidence: (a)
is now, or hereafter becomes, through no act or failure to act on the part of
the receiving Party, generally known or available; (b) is known by the receiving
Party at the time of receiving such information, as evidenced by its records;
(c) is hereafter disclosed to the receiving Party by a Third Party, as a matter
of right and without restriction on disclosure; (d) is independently developed
by the receiving Party without the aid, application or use of Confidential
Information; or (e) is the subject of a written permission to disclose provided
by the disclosing Party.
12. PUBLICATIONS AND PUBLIC STATEMENTS
12.1 Publications. Without affecting obligations under Article
11 above, neither Party shall publish any information with respect to
Collaboration Compounds during the Exclusivity Period without the prior written
permission of the other Party. Such permission shall be approved or disapproved
within thirty (30) days of written request for permission unless the other Party
requests additional time (not to exceed ninety (90) days) for the purpose of
protecting its intellectual property position. Such permission shall not be
unreasonably withheld. The Party proposing to publish such information shall
give the other Party ninety (90) days prior written notice and an opportunity to
review such manuscript in order to determine the patentability of the
information contained therein.
12.2 Public Statements, Press Releases. Neither Party shall
use the name of the other Party in any public statement, prospectus, annual
report or other public communication (collectively "Public Statements") without
the prior written approval of the other Party, which may not be unreasonably
withheld or delayed; provided, however, that both Parties shall endeavor in good
faith to give the other Party a minimum of twenty (20) business days to review
such Public Statements; provided, further, that, upon approval of any such
Public Statement, both Parties may disclose to Third Parties the information
contained in such Public Statement without the further approval of the other.
Neither Party shall use the name of the other Party in any press release without
the prior written approval of the other Party, which may not be unreasonably
withheld or delayed. With respect to any draft press release provided by
CombiChem to Novartis twenty (20) business days prior to the appropriate and
authoritative
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-17-
<PAGE> 18
management meeting of Novartis, Novartis shall endeavor in good faith to review
such press release within five (5) business days following such management
meeting. Notwithstanding the foregoing, if a Party does not approve any Public
Statement or press release, the other Party may still use the name of the
non-consenting Party in any Public Statement or press release without the prior
written approval of such non-consenting Party, if the Party issuing such Public
Statement or press release is advised by counsel that such disclosure is
required to comply with applicable securities laws.
13. INDEMNIFICATION
13.1 EACH PARTY HEREBY AGREES TO SAVE, DEFEND AND HOLD THE
OTHER PARTY AND ITS OFFICERS, DIRECTORS, EMPLOYEES, CONSULTANTS AND AGENTS
HARMLESS FROM AND AGAINST ANY AND ALL SUITS, CLAIMS, ACTIONS, DEMANDS,
LIABILITIES, EXPENSES AND LOSSES, INCLUDING REASONABLE LEGAL EXPENSES AND
ATTORNEYS' FEES ("LOSSES") RESULTING DIRECTLY OR INDIRECTLY FROM THE
INDEMNIFYING PARTY'S ACTS OR OMISSIONS IN CONNECTION WITH THE MANUFACTURE,
DEVELOPMENT, USE, HANDLING, STORAGE, SALE OR OTHER DISPOSITION OF CHEMICAL
AGENTS, COLLABORATION COMPOUNDS, ACTIVE COMPOUNDS, DEVELOPMENT COMPOUNDS OR
PRODUCTS BY SUCH PARTY, ITS AFFILIATES OR LICENSEES except to the extent such
Losses result from the negligence, breach of this Agreement or willful
misconduct of the Party claiming a right of indemnification under this Article
13.
13.2 Infringement
(a) Subject to Section 13.2(c) below, Novartis shall
hold CombiChem and its officers, directors, employees, consultants, and agents
harmless from and against any and all losses resulting from the infringement of
any Third Party's Patent issued as of the Effective Date due to the performance
by Novartis or its Affiliates of any activity contemplated hereunder, including,
but not necessarily limited to, Novartis's responsibilities under Section 2.2
above, developing Products, and selling Products.
(b) Subject to Section 13.2(c) below, CombiChem
shall hold Novartis and its officers, directors, employees, consultants, and
agents harmless from and against any and all losses resulting from the
infringement of any Third Party's Patent issued as of the Effective Date due to
the performance by CombiChem of any activity contemplated hereunder, including,
but not necessarily limited to, CombiChem's responsibilities under Section 2.1
above.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-18-
<PAGE> 19
(c) The indemnity provided in Sections 13.2(a) and
13.2(b) above shall not apply where the loss is due to the breach by the
indemnified Party of a warranty made in Article 19.
13.3 Procedures. If either Party (the "Indemnified Party")
seeks indemnification under this Article 13, it shall inform the other Party
(the "Indemnifying Party") of a claim as soon as reasonably practicable after it
receives notice of the claim, shall permit the Indemnifying Party to assume
direction and control of the defense of the claim (including the right to settle
any claim brought against the Indemnified Party upon prior written consent,
which shall not be unreasonably withheld), and shall give reasonable cooperation
(at the expense of the Indemnifying Party) in the defense of such claim.
14. ASSIGNABILITY
This Agreement may not be assigned by either Party without the
prior written consent of the other Party, not to be unreasonably withheld;
provided, however, that either Party may assign this Agreement, in whole or in
part, to an Affiliate or to a successor of a Party in connection with the
merger, consolidation or sale of all or substantially all of such Party's assets
or that portion of its business pertaining to the subject matter of this
Agreement (and upon doing so will promptly notify the other Party in writing).
15. DISPUTE RESOLUTION PROCEDURES
15.1 Senior Executives Discussions. If a decision on a matter
regarding the management of the Research Program as provided herein is not
reached by the RMC, the dispute will be resolved as set forth in Article 6
above. If a dispute arises between CombiChem and Novartis with respect to
matters other than the management of the Research Program, either during or
after the Research Period, such dispute will be referred to the appropriate
senior management in the area of the dispute. If such senior management are
unable to resolve such dispute, such dispute will be referred to the Head of R&D
Crop Protection of Novartis and the Chief Executive Officer of CombiChem. If
such officers are unable to reach an agreement within thirty (30) days following
the initiation of discussions between them, such dispute shall be settled by
arbitration as described in Section 15.2 below.
15.2 Binding Arbitration. If the parties have not been able to
resolve the dispute as provided in Section 15.1 above, the dispute shall be
finally settled by binding arbitration. Any arbitration hereunder shall be
conducted under the rules of the American Arbitration Association. If
arbitration is demanded by Novartis, such arbitration shall take place in the
City of Wilmington, Delaware, and if demanded by CombiChem, it shall take place
in the City of New York, New York. The arbitration shall be conducted before
three arbitrators chosen
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-19-
<PAGE> 20
according to the following procedure: each of the parties shall appoint one
arbitrator and the two so nominated shall choose the third. If the arbitrators
chosen by the parties cannot agree on the choice of the third arbitrator within
a period of thirty (30) days after their appointment, then the third arbitrator
shall be appointed by the Court of Arbitration of the American Arbitration
Association. The arbitrators shall have the authority to grant specific
performance, and to allocate between the parties the costs of arbitration in
such equitable manner as they determine. The arbitral award (i) shall be final
and binding upon the parties; and (ii) may be entered for enforcement of
decision in any court of competent jurisdiction.
15.3 Injunctive Relief. Nothing contained in this Article 15
or any other provisions of this Agreement shall be construed to limit or
preclude a Party from bringing any action in any court of competent jurisdiction
for injunctive or other provisional relief to compel the other Party to comply
with its obligations hereunder before or during the pendency of arbitration
proceedings.
16. NOTICES
Any notice required or permitted to be given hereunder shall
be deemed sufficient if sent by facsimile letter or overnight courier, or
delivered by hand to Novartis or CombiChem at the respective addresses and
facsimile numbers as set forth below or at such other address and facsimile
number as either Party hereto may designate. If sent by facsimile letter, notice
shall be deemed given only when an original has been received by either Party.
If a confirmed transmission report does not exist, then the notice will be
deemed given when the notice is actually received by the person to whom it is
sent. If delivered by overnight courier, notice shall be deemed given when it
has been signed for. If delivered by hand, notice shall be deemed given when
received.
if to CombiChem, to:
CombiChem, Inc.
9050 Camino Santa Fe
San Diego, California 92121
Attention: President
Fax number: (619) 530-9998
with a copy to:
Brobeck, Phleger & Harrison LLP
550 South Hope Street, 21st Floor
Los Angeles, California 90071
Attention: Laurie A. Allen, Esq.
Fax number: (213) 239-1324
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-20-
<PAGE> 21
if to Novartis to:
Novartis Crop Protection AG
CH-4002, Basel
Switzerland
Attention: Head of Research and
Development
Fax number: 011-41-61-6978457
with a copy to:
Legal Department Crop Protection
Novartis Crop Protection AG
CH-4002, Basel
Switzerland
Attention: Head of Legal Department
Fax number: 011-41-61-6972665
17. SURVIVAL
The provisions of Sections 2.4, 5.1, 5.2, 5.3, 10.3, 10.4 and
Articles 4, 8, 9, 11, 12, 13, 15, and this Article 17 shall survive termination
of this Agreement in addition to those provisions which by their terms survive.
18. ADDITIONAL TERMS
18.1 Entire Agreement. This Agreement constitutes the entire
understanding between the Parties with respect to the subject matter hereto and
supersedes and replaces all previous negotiations, understandings,
representations, writings and contract provisions and rights relating hereof.
18.2 Amendment; No Waiver. No provision of this Agreement may
be amended, revoked or waived except by a writing signed and delivered by an
authorized officer of each Party. Any waiver on the part of either Party of any
breach or any right or interest hereunder shall not imply the waiver of any
subsequent breach or waiver of any other right or interest.
18.3 Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, each of which shall remain in full force
and effect.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-21-
<PAGE> 22
18.4 Headings. The descriptive headings are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning of or interpretation of this Agreement.
18.5 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, and all of which
together shall be deemed to be one and the same instrument.
18.6 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of New York,
without regard to conflicts of laws principles.
18.7 Further Assurances. At any time and from time to time
after the Effective Date, the Parties shall each do, execute, acknowledge and
deliver, and cause to be done, executed, acknowledged or delivered, all such
further acts, transfers, conveyances, or assignments as may be reasonably
required to carry out the transactions contemplated by this Agreement
19. REPRESENTATIONS AND WARRANTIES
19.1 Authorization. All action on the part of each of
CombiChem, Novartis and their respective officers, and directors necessary for
the authorization, execution and delivery of this Agreement and the performance
of all obligations of CombiChem and Novartis, respectively, hereunder has been
taken.
19.2 Rights to Intellectual Property. Each Party warrants that
it has the power to grant all of the rights granted and make such required
assignments, and to assume all of the obligations required, under this
Agreement. Under no circumstances does CombiChem warrant to Novartis that its
rights in any Active Compound, Development Compound or Products are exclusive to
the extent such Active Compound, Development Compound or Products may be covered
under the patent claims of Third Parties wherein such claims are not the direct
result of a collaboration between the Third Party and CombiChem.
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-22-
<PAGE> 23
IN WITNESS WHEREOF, the parties have executed this Agreement to be
effective as of the Effective Date.
COMBICHEM, INC. NOVARTIS CROP PROTECTION AG
By: [SIG] By: [SIG] [SIG]
------------------------- -----------------------------------
Head R&D
Its: President & CEO Its: Crop Protection Legal Counsel
------------------------- -----------------------------------
<PAGE> 24
Appendix A
Milestones and Payments(1)
(in U.S. Dollars)
<TABLE>
<CAPTION>
MILESTONES: MILESTONE PAYMENT(2)
- ---------- -------------------
<S> <C>
*** ***
***
*** ***
*** ***
***
*** ***
*** ***
----
Total ***
</TABLE>
- -----------------
(1) Paid in U.S. Dollars
(2) ***
(3) ***
(4) ***
ROYALTIES:
Collaboration Compounds ***
Derivatized Compounds ***
*** Portions of this page have been omitted pursuant to a request for
Confidential Treatment and filed separately with the Commission.
-24-
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1 TO
PROMISSORY NOTE
This Amendment No. 1 ("Amendment") to the Promissory Note dated
September 5, 1995 in the principal amount of $150,000 made by Peter Myers in
favor of CombiChem, Inc., as amended (the "Note") is made as of this 15th day of
June 1998. Capitalized terms used herein which are not defined herein shall have
the definition ascribed to them in the Note.
RECITALS
WHEREAS, the Note is due and payable upon the expiration of the
180-day period following the date on which Payee completes a successful initial
public offering of shares of its common stock;
WHEREAS, Payee completed a successful initial public offering of
shares of its common stock on May 13, 1998 and the Note is therefore due on
November 9, 1998; and
WHEREAS, Payee has decided to extend the due date of the balance
due under the Note, and all accrued interest thereto, until April 31, 2000.
In consideration of the foregoing and the promises and covenants
contained herein and other good and valuable consideration the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. AMENDMENT TO THE NOTE.
a. The third paragraph of the Note shall be amended in its entirety to
read as follows:
"The outstanding principal balance of this Promissory Note and all
unpaid interest accrued hereunder shall be due and payable no later than the
"Maturity Date." The Maturity Date shall be the earlier to occur of: (a) April
31, 2000; (b) the expiration of the 30-day period following the date the Maker
ceases for any reason to remain in the employment on a regular and full-time
basis by CombiChem, Inc., a Delaware corporation ("Corporation"); (c) the date
on which Corporation completes the consummation of any corporate transaction in
which (i) more than fifty percent (50%) of the outstanding shares of the common
stock of Holder are acquired by a single purchaser or by a group of purchasers
acting in concert; (ii) all or substantially all of the assets of Holder are
acquired by a single purchaser or a group of purchasers acting in concert; (d)
that date on which Corporation merges with or into another organization; or (e)
the expiration of the 10-day period following the date on which Maker sells,
transfers, or suffers or permits the sale or transfer of Maker's real property
located at 3 Los Altos Road, Orinda, California (the "Real Property"). Maker
hereby covenants that Maker shall provide Holder with written notice of any sale
or transfer of the Real Property at least ten (10) days prior to the date Maker
transfers title to the Real Property. Upon payment in full of all principal and
accrued interest payable hereunder, this Promissory Note shall be surrendered to
Maker for cancellation."
-1-
<PAGE> 2
2. EFFECT OF AMENDMENT.
Except as amended and as set forth above, the Note shall continue in
full force and effect, as previously amended.
3. COUNTERPARTS.
This Amendment may be executed in any number of counterparts, each which
will be deemed an original, and all of which together shall constitute one
instrument.
4. SEVERABILITY.
If one or more provisions of this Amendment are held to be
unenforceable under applicable law, such provision shall be excluded from this
Amendment and the balance of the Amendment shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
5. ENTIRE AGREEMENT.
This Amendment, together with the Note, as amended, constitutes
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof.
6. GOVERNING LAW.
This Amendment shall be governed by and construed under the laws
of the State of California as applied to agreements among California residents
entered into and to be performed entirely within California.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-2-
<PAGE> 3
This Amendment is hereby executed as of the date first above written.
COMBICHEM, INC., a California corporation
By: /s/ KARIN EASTHAM
--------------------------------------
Karin Eastham, Chief Financial Officer
/s/ PETER MYERS
--------------------------------------
Peter Myers
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO
PROMISSORY NOTE]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 31,004
<SECURITIES> 0
<RECEIVABLES> 1,262
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 33,189
<PP&E> 9,438
<DEPRECIATION> 2,017
<TOTAL-ASSETS> 41,201
<CURRENT-LIABILITIES> 6,087
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 31,459
<TOTAL-LIABILITY-AND-EQUITY> 41,201
<SALES> 0
<TOTAL-REVENUES> 7,005
<CGS> 0
<TOTAL-COSTS> 8,974
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (257)
<INCOME-PRETAX> (1,731)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,731)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,731)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
