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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 1998
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period From _________ to __________.
Commission File Number: 0-27188
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PHARMACOPEIA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0557266
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
CN 5350, PRINCETON, NEW JERSEY 08543-5350
(Address of principal executive offices and zip code)
(609) 452-3600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock $.0001
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Par Value
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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 periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of voting stock held by
nonaffiliates of the Registrant was $172,672,671 based on the last sale price of
Common Stock reported on The Nasdaq National Market on January 31, 1999.
3,472,804 shares of Common Stock held by officers, directors, and holders of 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of January 31, 1999, the number of outstanding shares of the
Registrant's Common Stock was 19,259,298.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of Form 10-K is incorporated by
reference from the Registrant's Proxy Statement for the Annual Stockholders
Meeting to be held May 4, 1999 (the "Proxy Statement), which will be filed with
the Securities and Exchange Commission within 120 days after the close of the
Registrant's fiscal year ended December 31, 1998.
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PHARMACOPEIA, INC. AND SUBSIDIARIES
1998 FORM 10-K
TABLE OF CONTENTS
Page
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PART I........................................................................ 2
ITEM 1. BUSINESS....................................................... 2
ITEM 2. PROPERTIES.....................................................28
ITEM 3. LEGAL PROCEEDINGS..............................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............28
PART II.......................................................................30
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS............................................30
ITEM 6. SELECTED FINANCIAL DATA........................................31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...........................................................35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................35
PART III......................................................................35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............35
ITEM 11. EXECUTIVE COMPENSATION.........................................36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................36
PART IV.......................................................................36
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................36
SIGNATURES....................................................................41
REPORT OF INDEPENDENT AUDITORS...............................................F-1
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PART I
ITEM 1. BUSINESS
Pharmacopeia, Inc. ("Pharmacopeia" or the "Company") offers products and
services to accelerate drug discovery and chemicals development integrating
three platform technologies: small molecule combinatorial chemistry,
high-throughput screening, and simulations software. The Company's small
molecule combinatorial chemistry and high-throughput screening operations are
focused primarily on drug discovery and are conducted by its Laboratory Services
segment ("Pharmacopeia Labs"). Through its wholly-owned subsidiary, Molecular
Simulations Incorporated ("MSI"), which the Company acquired in 1998,
Pharmacopeia's software segment develops and commercializes molecular modeling,
simulation, and informatics software and services for both life science and
materials science customers.
When used in this Report, the words "expects", "believes", "anticipates",
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties, including
those set forth under the caption "Business --Important Factors Regarding
Forward Looking Statements" and elsewhere in this Report, that could cause
actual results to differ materially from those projected. These forward-looking
statements speak only as of the date of this Report and the Company disclaims
any undertaking to publicly update or revise any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
OVERVIEW OF PHARMACOPEIA LABS
Since its inception in March 1993, the Company has focused its research
efforts in developing novel, proprietary technologies for accelerating the pace
of drug discovery for its pharmaceutical and biotechnology customers.
Pharmacopeia Labs' Encoded Combinatorial Library on Polymeric Support
("ECLiPS"TM) technology addresses a key challenge in the drug discovery process:
generating and evaluating large numbers of diverse and readily identifiable
small molecule compounds to find new, orally active drugs. ECLiPS enables
Pharmacopeia Labs to generate hundreds of thousands of small molecule compounds
at a fraction of the cost of traditional chemical synthesis methods.
Pharmacopeia Labs focuses on drug discovery, and seeks customers to develop,
manufacture, market and sell resulting drugs. To date, Pharmacopeia Labs has
signed contracts with several pharmaceutical customers for collaborations using
ECLiPS, including Schering Corporation and Schering-Plough Ltd. (collectively
"Schering-Plough"), Berlex Laboratories, Inc. ("Berlex"), Novartis Corporation
("Novartis"), Bayer Corporation ("Bayer"), Daiichi Pharmaceutical Co., Ltd.
("Daiichi"), N.V. Organon ("Organon"), Bristol-Myers Squibb Company ("BMS"),
Pharmacia & Upjohn Inc. ("Pharmacia Upjohn") and Zeneca Limited ("Zeneca") and
with a number of biotechnology customers.
Pharmacopeia Labs' technology supports its pharmaceutical and
biotechnology customers in improving their drug discovery productivity.
Pharmacopeia Labs uses "Direct Divide" combinatorial chemistry to build
collections, or libraries, of 10,000 to 500,000 or more small molecule compounds
by performing only 50 to 200 individual chemical reactions. Pharmacopeia Labs'
ECLiPS technology offers substantial productivity improvements as compared to
the 10,000 to 500,000 or more reactions that would be required to prepare
similarly sized chemical libraries by synthesizing each compound individually.
The ECLiPS productivity advantage results from the synthesis of compounds on
tiny plastic beads in large mixtures. After each solid phase synthesis step,
proprietary tag sets are attached to the beads to indicate the chemical building
block and reaction conditions used in that step. These stable, easily detectable
tag sets enable the rapid identification from the mixture of any compound that
is active
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in a biological screening assay. This tagging technology is licensed exclusively
from Columbia University ("Columbia") and Cold Spring Harbor Laboratory ("Cold
Spring").
Pharmacopeia Labs' objective is to be among the industry leaders in the
discovery and optimization of novel drug candidates. Pharmacopeia Labs'
commercialization strategy is to pursue collaborations with pharmaceutical and
biotechnology companies. Pursuant to collaborative agreements, Pharmacopeia Labs
licenses its libraries for screening by customers, forms drug discovery
collaborations with its customers and plans to license internally developed
compounds. Pharmacopeia Labs' technology strategy is to enhance productivity
through cost reductions and increased throughput, to increase the size and
quality of its library compound collection and its high throughput screening
capabilities, and to build its knowledge base of the relationships between
chemical structures and biological targets for use in future drug discovery
programs.
DRUG DISCOVERY TECHNOLOGIES USED AT PHARMACOPEIA LABS
A major bottleneck in the drug discovery process is the limited number and
diversity of available chemical compounds. Using traditional manual chemical
synthesis techniques, a chemist is usually able to synthesize only 25 to 50
compounds per year. The low productivity of manual synthesis severely constrains
the number of compounds available for screening in order to identify active
compounds and provide the basis for initial structure-activity relationships
("SAR") analysis. Manual synthesis also slows the optimization process by
limiting the number of analogs synthesized and tested.
Numerous technologies have been developed to accelerate the synthesis of
chemical compounds. Several early methods were based on either automated or
combinatorial chemical synthesis of oligonucleotides and peptides, which are not
generally useful as oral drugs. Combinatorial chemistry involves the synthesis
of large numbers of different chemical compounds by creating all possible
combinations of a set of chemical components, or building blocks. More recent
methods include robotic synthesis and various combinatorial chemistry approaches
to synthesizing libraries of small molecules, which are generally preferred by
pharmaceutical companies as drug development candidates.
Pharmacopeia Labs believes that its drug discovery technology offers a
unique solution to the bottleneck that constrains the drug discovery process.
Pharmacopeia Labs' combinatorial chemistry technology generates large, diverse
libraries of the small molecules favored by pharmaceutical companies for
development. Most importantly, Pharmacopeia Labs' technology uses solid phase
synthesis and an encoding system to permit rapid identification of compounds
synthesized in combinatorial mixtures.
The ECLiPS technology uses a patented "Direct Divide" approach to
combinatorial chemistry to build collections, or libraries, of 10,000 to 500,000
or more small molecule compounds by performing only 50 to 200 individual
chemical reactions. This "Direct Divide" approach yields a more controlled
distribution of final compounds than does the "pool and split" method currently
used by certain other companies in drug discovery and previously practiced by
Pharmacopeia Labs. Pharmacopeia Labs is able to synthesize a large number of
widely diverse libraries of small molecule compounds because its chemists can
combine a nearly unlimited set of chemical building blocks using a wide variety
of reactions. Although large libraries of peptides, oligonucleotides and other
oligomers can be generated, their diversity is constrained by the limited number
of building blocks and the fewer reactions available to combine them.
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Pharmacopeia Labs uses ECLiPS to build libraries of small, low molecular
weight (less than 700 Daltons) compounds, predominantly heterocycles. These low
molecular weight compounds are preferred by pharmaceutical companies because
they are more likely to be orally active (effective as drugs in tablet or
capsule form), tend to have longer duration of action and are less expensive to
manufacture. In contrast, natural peptide and oligonucleotide drugs are usually
degraded by human digestive system enzymes and generally must be administered by
injection. In addition, peptide and oligonucleotide drugs are often quickly
eliminated from the body, which limits their duration of action.
The ECLiPS technology allows Pharmacopoeia Labs to quickly identify the
chemical structure of individual small compounds synthesized in combinatorial
mixtures. This identification is made possible through the use of Pharmacopeia
Labs' encoded solid phase synthesis technology. Solid phase synthesis generally
refers to the synthesis of compounds on tiny plastic beads. Encoding refers to
the tag sets that Pharmacopeia Labs attaches to each bead as a compound is
synthesized. These tag sets allow Pharmacopeia Labs to rapidly identify the
chemical structure of each compound.
Pharmacopeia Labs' drug discovery approach encompasses its ECLiPS
technology, assay technology, production automation, information systems and
quality assurance programs, as more fully described below.
ECLiPS Technology
The ECLiPS technology is the central component of Pharmacopeia Labs' drug
discovery approach. ECLiPS includes solid phase synthesis, combinatorial
chemistry and sets of encoding molecules.
Solid Phase Synthesis. Pharmacopeia Labs has developed proprietary
methods and procedures for performing a variety of small molecule chemical
reactions on tiny plastic beads. In this approach to chemical synthesis, known
as solid phase synthesis, compounds are bound to these tiny plastic beads using
special linkers. This approach offers several advantages over solution phase
synthesis. Solid phase synthesis can often result in higher yields because the
beads can be repeatedly re-exposed to reactants until the desired reaction
product has reached a satisfactorily high yield. Solid phase synthesis also
facilitates the isolation of individual compounds. Beads can be washed with
solvents to remove byproducts, and an individual compound can then be isolated
from a mixture by removing a single bead and breaking the linkage to detach the
compound from the bead.
Pharmacopeia Labs believes that its experience in solid phase synthesis of
diverse, heterocyclic, small compounds is a key competitive advantage. Large,
diverse libraries of these small molecules are more difficult to synthesize than
libraries of oligonucleotides or peptides. The great diversity of chemical
building blocks and the variety of chemical reactions that must be used in
synthesizing these small molecules require a wide range of reaction conditions,
including temperature, pH, solvents, catalysts and other variables. Each
chemical reaction must be optimized to achieve high yields of the desired
compound.
Combinatorial Chemistry. Pharmacopeia Labs' ECLiPS technology employs
"Direct Divide" combinatorial chemistry. For example, a chemist using a five
step reaction sequence and ten building blocks per step can synthesize a mixture
of 100,000 different chemicals by performing only 50 chemical reactions. Using
larger numbers of building blocks or steps can create larger libraries. This
technology offers substantial productivity improvement in comparison to parallel
synthesis and other techniques currently employed to generate chemical
libraries. Parallel synthesis is the performance of a series of
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individual chemical reactions, usually several dozen simultaneously, typically
using robotics. In parallel synthesis, 111,110 individual chemical reactions
would be required to synthesize the same 100,000 compounds that Pharmacopeia
Labs' technology can accomplish in 50 reactions. Parallel synthesis requires
extensive labor and time and a significant capital investment in robotics. The
labor and time disadvantage increases exponentially with library size.
Sets of encoding molecules. Pharmacopeia Labs overcomes the challenge of
identifying active compounds from combinatorial mixtures through its use of a
proprietary collection of chemically stable small molecules, or tag sets, to
encode each bead used in solid phase synthesis. This enables Pharmacopeia Labs
to quickly identify the structure of an active compound prepared using the
"Direct Divide" technique without resorting to deconvolution, a process in which
an active compound must be "reverse engineered" by resynthesizing and testing
various component combinations until the structure of the active compound is
deduced. During each step of Pharmacopeia Labs' solid phase synthesis process,
specific tag sets are attached to the beads to indicate the chemical reagent and
reaction conditions used in that step. By the end of the synthesis process, each
bead has collected tag sets that represent all of the building blocks used to
create the compound on that bead. When an active compound is found in an assay,
the bead from which the active compound was extracted is analyzed. The tag sets
are detached from the bead using specific chemical reactions that break the
linkage between the tag sets and the bead. The detached tag sets are read using
conventional gas chromatography techniques. The results, which resemble a bar
code, are captured in a database that identifies and stores data regarding the
active compound.
Pharmacopeia Labs' proprietary tag sets have the following important
characteristics:
Stability. Pharmacopeia Labs' proprietary tag sets are relatively
unreactive. For this reason the tag sets do not break or decompose as a result
of heat, vigorous shaking or other harsh reaction conditions. Thus, the tag sets
rarely interfere with or limit the solid phase chemical reactions used to create
potential new drug compounds. By contrast, the oligonucleotides and peptides
used as tags by some companies are more fragile because they are more reactive.
These large molecule tags may therefore interfere with chemical reactions or may
be decomposed or altered chemically during compound synthesis. These factors
constrain the range of chemicals that can be synthesized in solid phase when
oligonucleotide or peptide tags are used.
Size and Detectability. In contrast to the relatively large size of
oligonucleotide and peptide tags, Pharmacopeia Labs' tag sets are small and easy
to attach to and detach from the beads. The highly sensitive detection methods
available for these tag sets allow Pharmacopeia Labs to use them in extremely
small quantities. Pharmacopeia Labs' tag sets do not occupy a significant
portion of the beads' capacity and do not interfere with the extraction or
testing of detached compounds.
Thus, using its proprietary ECLiPS technology, Pharmacopeia Labs can
synthesize a large combinatorial mixture of compounds and rapidly identify the
specific structure of individual active compounds found in the library. As of
December 31, 1998, Pharmacopeia Labs has used its ECLiPS technology to
synthesize libraries containing an aggregate of more than 4.8 million unique
chemical compounds. Many of these libraries have initially been licensed to
customers for their exclusive use for varying periods of time.
ECLiPS also assists Pharmacopeia Labs in protecting its intellectual
property. When a customer licenses Pharmacopeia Labs' libraries, Pharmacopeia
Labs ships microtiter plates containing library compounds detached from the
beads for screening in the customer's laboratories. The beads containing
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the tag sets never leave Pharmacopeia Labs' facility. When the customer finds an
active compound in an assay, the customer asks Pharmacopeia Labs to decode the
compound. This process notifies Pharmacopeia Labs of active compounds identified
by its customers.
Assay Technology
The second component of Pharmacopeia Labs' drug discovery approach is its
proprietary assay technology. Pharmacopeia Labs employs 96-well and 384-well
microtiter plate solution phase assays, a standard format in the pharmaceutical
and biotechnology industry, to evaluate the biological activity of compounds in
Pharmacopeia Labs' libraries. The adoption of this format facilitates the use of
its libraries in assays performed by its customers.
Pharmacopeia Labs has improved the 96-well and 384-well microtiter plate
assays it performs for its collaborators and its internal drug discovery
programs. These improvements include increasing the sensitivity of detection,
increasing the number of assays that can be run daily, reducing labor and
materials required to execute assays and allowing simultaneous collection of
information on the activity of a single compound against multiple targets.
During 1998 Pharmacopeia Labs completed more than 30 million tests of its
library compounds for activity against biological targets such as receptors or
enzymes. For primary screening, Pharmacopeia Labs' often includes 10-20
compounds per well to perform a quick survey of a library's activity. If assay
results suggest that some compounds in that library are active, then compounds
from that library are tested individually.
Pharmacopeia Labs has also been developing an integrated set of
technologies to increase throughput and reduce compound and reagent consumption.
Pharmacopeia Labs' Ultra High Throughput Screen (UHTS) system is based on a
1,536-well plate. Each screening well in this plate accommodates a 1 microtiter
volume for conducting the assay. This compares with a 100 microtiter volume
required in each well of a 96-well plate. Thus, compound and reagent
consumption are reduced by 99%. In addition, each plate represents 1,536 tests
rather than 96.
Pharmacopeia Labs has been developing this 1,536-well system internally
and through contractors, vendors and collaborators since 1996. Pharmacopeia
Labs expects to begin screening of its library collection using this technology
in selected assays during 1999.
Production Automation
Production automation technology is the third component of Pharmacopeia
Labs' integrated drug discovery approach. Pharmacopeia Labs has developed
proprietary instruments and methods for quickly and cost effectively
manipulating large numbers of small plastic beads and the compounds that are
detached from these beads. Pharmacopeia Labs' proprietary technology includes
bead washing and synthesis vessels that support the synthesis process. The
production automation technology also includes proprietary engineering methods
and automated systems for placing individual compounds in 96 to 1,536-well
microtiter plates and processing these plates in preparation for screening.
Screening a single 50,000 compound library against 20 or more targets can
require the loading, processing and testing of thousands of 96-well microtiter
plates.
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Information Systems
Pharmacopeia Labs has developed proprietary software to support its drug
discovery activities. Pharmacopeia Labs' information systems assist Pharmacopeia
Labs' scientists in managing the extensive data generated during library
production and testing. First, the software tracks the chemical building blocks,
reaction steps and tag sets used to create each library. Pharmacopeia Labs'
systems then track the thousands of bar-coded microtiter plates filled and
processed as libraries are screened. As active compounds are identified and
decoded, Pharmacopeia Labs' software integrates the tag set decoding results
with the original library design database to quickly provide Pharmacopeia Labs'
scientists with the specific chemical structure and synthesis steps for the
active compound.
Pharmacopeia Labs' information systems also include analytical and
database tools. Databases of available chemical building blocks and reactions
are used as reference sources in the library design process. Molecular modeling,
structure analysis and statistical programs are available for designing
optimization libraries. In addition, analytical and database software is used to
collect and analyze the results of individual assays. In 1998, the Company
acquired MSI, thereby significantly enhancing its ability to use informatics in
the drug discovery process. See "Overview of MSI."
As Pharmacopeia Labs continues to build its chemical libraries and
accelerates its high-throughput screening activities an enormous amount of SAR
information is emerging from these activities, which is being stored in
Pharmacopeia Labs' information systems. Pharmacopeia Labs has the ability to
provide existing and new customers access to this data warehouse of SAR
information to assist in the search for candidate molecules that interact with
specific targets. No assurance can be given as to if or when such access will
be provided.
For information regarding year 2000 compliance see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Quality Assurance
Pharmacopeia Labs' drug discovery approach includes an extensive quality
assurance program. As libraries are synthesized, representative compounds are
analyzed at each reaction step to assure that yields are high and compounds are
sufficiently pure. During library production, samples are tested at each
reaction step to assure that the tag sets have been satisfactorily attached and
can be decoded. Representative compounds are also tested to identify optimal
solvents and detachment conditions for removing compounds from beads to perform
screening assays. Production plates containing compounds for screening include
control samples to further assure that plates to be screened in assays have been
prepared appropriately.
PHARMACOPEIA LABS' DRUG DISCOVERY PROGRAMS
Pharmacopeia Labs has several active drug discovery programs underway
using its drug discovery technology. Pharmacopeia Labs is presently conducting
ten programs pursuant to collaborative agreements with six of its customers.
Pharmacopeia Labs is also using its drug discovery technology for internal
programs. These targets include receptors and enzymes in therapeutic areas,
including inflammation, cancer, certain neurological disorders, and metabolic
and cardiovascular diseases. In an effort to identify lead compounds,
Pharmacopeia Labs has commenced the screening of its combinatorial libraries
against these targets and has identified several active compounds in these
assays. Activities are currently being extended to include the optimization of
lead compounds and the determination of
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bioavailability. Future activities may include preclinical animal efficacy and
toxicity studies. Pharmacopeia Labs will continue to seek financial support from
pharmaceutical companies for the optimization of lead compounds identified by
internal screening. In return for such support, Pharmacopeia Labs would offer
the funding pharmaceutical company an option to license the resulting drug
development candidate for commercialization. Pharmacopeia Labs may also invest
its own funds to optimize these lead compounds into development candidates for
outlicensing to pharmaceutical companies.
PHARMACOPEIA LABS' BUSINESS STRATEGY
Pharmacopeia Labs' objective is to be the industry leader in the discovery
and optimization of novel drug candidates on an out-sourced basis. Pharmacopeia
Labs seeks to minimize its financing requirements and shorten its time to
profitability by pursuing drug discovery collaborations with multiple
pharmaceutical and biotechnology companies. Pharmacopeia Labs does not currently
plan to develop, manufacture and sell its own pharmaceutical products.
Pharmacopeia Labs' business strategy exploits the emerging trend in the
pharmaceutical industry to outsource certain products and services that can be
more efficiently provided by third parties. Pharmacopeia Labs' commercialization
and technology strategy has several components.
Commercialization Strategy
Pharmacopeia Labs' commercialization strategy is to provide collections of
compounds and drug development candidates to multiple pharmaceutical and
biotechnology customers. Under these arrangements, Pharmacopeia Labs' customers
are responsible for the clinical development and eventual manufacture and sale
of resulting drugs. Customers compensate Pharmacopeia Labs through (i) funding
or fees during or upon completion of its research and (ii) milestone payments
and royalties on drugs based on Pharmacopeia Labs' technology and developed by
Pharmacopeia Labs' customers. Each collaboration is tailored to the individual
customer's needs but is developed within three broad frameworks:
Form Drug Discovery Collaborations. Pharmacopeia Labs synthesizes
targeted and optimization libraries of compounds and, using its high throughput
screening technology, screens these libraries and Pharmacopeia Labs' internal
libraries to identify active compounds. In several collaborations, Pharmacopeia
Labs performs optimization services to identify drug development candidates.
License Libraries. Pharmacopeia Labs creates and licenses large libraries
of compounds to customers who screen these compounds using their own assays and
facilities. This increases the potential value of Pharmacopeia Labs' libraries
by having them screened in drug discovery assays against many biological
targets. These libraries are most often licensed on an exclusive basis and
become non-exclusive after the expiration of defined time frames.
Outlicense Compounds from Internal Discovery Programs. Pharmacopeia Labs
will seek to license to third parties drug development candidates identified by
Pharmacopeia Labs. Pharmacopeia Labs may also seek pharmaceutical sponsors for
various internal development programs, giving the sponsor an option to license
any resulting drug development candidates.
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Technology Strategy
Pharmacopeia Labs' technology strategy is to enhance productivity through
cost reductions and increased throughput and to build Pharmacopeia Labs' library
collection and its knowledge base of the relationships between chemical
structures and biological targets for use in future drug discovery programs.
Enhance Productivity. Pharmacopeia Labs seeks to leverage its existing
technology by increasing productivity through cost reductions and significant
increases in throughput. Pharmacopeia Labs' internal research and development
efforts focus on: (i) advances in Pharmacopeia Labs' automated systems; (ii) the
development of enhanced software; (iii) the development of new materials and
reactions for solid phase synthesis; (iv) new high throughput screening formats;
and (v) the discovery and optimization of lead compounds for Pharmacopeia Labs'
internal programs.
Develop Collection of Libraries and Knowledge Base. Pharmacopeia Labs is
building sets of libraries that will eventually aggregate millions of compounds
available for future screening programs. This collection of compounds will
increase as new libraries are created and as outlicensed libraries are returned
to Pharmacopeia Labs upon the expiration of customers' exclusivity periods.
Pharmacopeia Labs believes that this growing library collection will provide a
valuable source of leads for future drug discovery programs. Pharmacopeia Labs
also intends to build a knowledge base of the relationships between classes of
chemical structures and classes of biological targets. This knowledge base will
grow as Pharmacopeia Labs designs, synthesizes and screens large numbers of
compounds against a growing number of targets. Pharmacopeia Labs believes that
this knowledge base will provide a future competitive advantage by enabling
Pharmacopeia Labs to identify more quickly active compounds for newly identified
targets.
PHARMACOPEIA LABS' CUSTOMERS
Pharmacopeia Labs has signed collaborative agreements for services
provided by Pharmacopeia Labs with Schering-Plough, Berlex, Novartis, Bayer,
Daiichi, Organon, BMS, Pharmacia Upjohn and Zeneca. The loss of one or more of
such customers may have a material adverse affect on Pharmacopeia Labs.
PHARMACOPEIA LABS' COMPETITORS
Many organizations are actively attempting to identify and optimize
compounds for potential pharmaceutical development. Pharmacopeia Labs competes
with the research departments of pharmaceutical companies, biotechnology
companies, other combinatorial chemistry companies and research and academic
institutions.
Many of these competitors have greater financial and human resources, and
more experience in research and development, than Pharmacopeia Labs.
Historically, 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 the greatest
potential market for Pharmacopeia Labs' products and services, are developing
combinatorial chemistry and other methodologies to improve productivity,
including major investments in robotics 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
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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
Pharmacopeia Labs is working, either on their own or through collaborative
efforts.
Pharmacopeia Labs competes with several alternative technologies in the
design and synthesis of new chemical libraries for drug discovery programs.
Combinatorial chemistry libraries of oligonucleotides and peptides can be
synthesized in extremely large numbers. These molecules are also sequenceable,
making it easy to identify the structure of an individual oligonucleotide or
peptide found to be active in an assay. However, oligonucleotides and peptides
are not usually effective as oral drugs because they are usually not
bioavailable. These molecules are also usually quickly metabolized in the human
bloodstream. Other, unnatural oligomer libraries have also been prepared, but
these are less easily sequenceable than peptides and oligonucleotides. In
addition, unnatural oligomer libraries lack the diversity of structures of the
small molecule libraries prepared by Pharmacopeia Labs.
Libraries of small molecule compounds, which are preferred as drug
candidates due to their increased potential for oral bioavailability and long
duration of action, have recently been developed using competitive techniques.
Three such techniques are based on "pool and split" solid phase combinatorial
chemistry. The first uses oligonucleotide or peptide tags on each bead to
identify each synthesis step. These large molecule tags are relatively fragile,
which limits the nature of reaction conditions (temperature, pressure, etc.) and
reagents (acids, bases, etc.) that can be used to build compounds. In addition,
these large molecule tags complicate the synthesis of compounds or beads.
Pharmacopeia Labs' proprietary tag sets, in comparison, are durable, simple to
attach and detach, and allow Pharmacopeia Labs to make larger and more diverse
libraries of small compounds. The second "pool and split" combinatorial
chemistry technique uses deconvolution to identify the chemical structure of
compounds found active in assays. Deconvolution is a slow, labor-intensive
process, and may require several weeks of scientists' time to determine the
structure of a single active compound. Pharmacopeia Labs' tag sets permit
hundreds of structures to be determined each day. The third "pool and split"
combinatorial chemistry technique uses what are referred to as "hard tags" and
is proprietary to a specific large pharmaceutical company.
A fourth competitive approach is to perform a series of individual
chemical reactions, typically using a robotic system. The result of robotic
synthesis is compounds in individually labeled vessels. Robotic synthesis also
yields larger quantities of each compound than are usually achieved in
combinatorial mixtures such as Pharmacopeia Labs'. Using robotic synthesis,
however, requires extensive labor and time when compared with Direct Divide
combinatorial chemistry. This labor and time disadvantage increases
exponentially with library size.
EXCLUSIVE LICENSE WITH COLUMBIA UNIVERSITY AND COLD SPRING HARBOR LABORATORY
In 1993, the Company entered into an exclusive license agreement with
Columbia and Cold Spring (jointly, the "Licensors") covering technology related
to tagged combinatorial chemical libraries and methods of preparing and
utilizing such libraries. The licensed technology includes patents and patent
applications filed by Columbia and Cold Spring covering the use of encoding tag
sets to implement the drug discovery process using combinatorial chemistry
libraries. The Company is obligated to pay a minimum annual license fee of
$100,000. The term of the agreement is the later of (i) 20 years or (ii) the
expiration of the last patent relating to the technology, at which time the
Company has a fully paid license to the technology. The Company is also
obligated to pay royalties to the Licensors based on net sales of pharmaceutical
products developed by the Company as well as a percentage of all
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other payments and royalties received by the Company from customers where the
Company has utilized the technology licensed from the Licensors.
PATENTS AND PROPRIETARY INFORMATION
The Company and its licensors currently have nineteen issued U.S. patents
and a number of pending U.S. and foreign patent applications relating to various
aspects of the Company's technology, including its molecular tags, certain
screening technologies and its libraries or compounds contained therein. These
patents and patent applications are either owned by the Company or rights under
them are licensed to the Company. Of particular note, the Company is the
exclusive licensee of U.S. patents issued on October 15, 1996, February 24, 1998
and August 4, 1998 which provide broad protection to the Company's use of
encoded combinatorial libraries. The Company's success will depend in large
part on its ability, and the ability of its licensees and its licensors, to
obtain patents for its technologies and the compounds and other products, if
any, resulting from the application of such technologies, defend patents once
obtained, 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 questions are largely unresolved. Certain
patent applications, relating to encoded combinatorial libraries, have been
filed by others prior to the Company's patent applications. In February of 1997,
the European Patent Office granted to Affymax Technologies, N.V., a subsidiary
of Glaxo, certain patent claims which, if valid, would cover the synthesis of
encoded small molecule libraries of the type developed by the Company. On
November 12, 1997, the Company filed an Opposition to these patent claims
challenging their validity. If these claims are found valid and are enforceable,
the Company's ability to practice its ECLiPS technology in Europe would be
restricted unless the Company obtains appropriate licenses from the owner of
such patents. Although the Company has business relationships with a number of
European customers, the Company does not currently practice its technology in
Europe. On January 13, 1998, a U.S. patent was issued to Affymax that contains
certain claims covering a method of preparing an encoded library of chemical
compounds. In a press release issued by Affymax on January 13, 1998, Affymax
stated that these patent claims provide it with "a dominant proprietary position
in the area of tagged chemical libraries." The Company's scientific staff has
reviewed these patent claims and believes that such claims do not cover the
ECLiPS technology. If it is ultimately determined that these claims are valid
and enforceable and that the Company's ECLiPS technology infringes such claims,
then the Company's ability to use its ECLiPS technology in the United States may
be restricted unless the Company obtains appropriate licenses from the owner of
such patent and the Company may be subject to a claim for monetary damages.
However, if any such licenses were required from Affymax, there can be no
assurance that such licenses would be available to the Company or would be
available upon terms reasonably acceptable to the Company. The Company does not
know of any patent applications by others that would preclude the Company from
obtaining patent protection in the United States or elsewhere for its ECLiPS
technology. However, disputes may arise between the Company and other patent
holders as to claims of infringement, which could involve protracted periods of
litigation. Some of the Company's competitors have, or are affiliated with
companies having, substantially greater resources than the Company, and such
competitors may be able to sustain the costs of complex patent litigation to a
greater degree and for longer periods of time than the Company. Uncertainties
resulting from the initiation and continuation of any patent or related
litigation could have a material adverse effect on the Company's ability to
compete in the marketplace pending resolution of the disputed matters.
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There can be no assurance that patents will issue as a result of any
pending applications or that, if issued, such patents will be sufficiently broad
to afford protection against competitors with similar technology. 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 technology. 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.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce the Company's patent and license rights or to determine the
scope and validity of others' proprietary rights. Further, U.S. patents do not
provide any remedies for infringement that occurred before the patent is
granted.
The commercial success of the Company will also depend upon avoiding the
infringement of 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
technology also claimed by the Company, the Company may have to participate in
interference proceedings declared by the U.S. 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 U.S. 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.
The Company currently has certain licenses from third parties and in the
future may require additional licenses from other parties to develop,
manufacture and market commercially viable products effectively. There can be no
assurance that such licenses will be obtainable on commercially reasonable
terms, if at all, that the patents underlying such licenses will be valid and
enforceable or that the proprietary nature of the patented technology underlying
such licenses will remain proprietary.
The Company relies substantially on certain technologies which 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, which 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 these agreements will not be
breached, that the Company would have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
developed or discovered by competitors.
GOVERNMENT REGULATION OF PHARMACOPEIA LABS
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 of Pharmacopeia Labs
or, in the event Pharmacopeia Labs decides to develop a drug beyond the
preclinical phase, by Pharmacopeia Labs. The nature and the extent to which such
regulation may apply to Pharmacopeia Labs' customers will vary depending on the
nature of any such pharmaceutical products. Virtually all pharmaceutical
products developed by Pharmacopeia Labs' 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
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approval procedures by the U.S. Food and Drug Administration ("FDA") and by
foreign regulatory authorities. Various federal and, in some cases, state
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of such pharmaceutical products.
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 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. The
results of these studies are submitted as a part of an Investigational New Drug
application ("IND") that the FDA must review before human clinical trials of an
investigational drug can start. In order to commercialize any products,
Pharmacopeia Labs 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 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, Pharmacopeia Labs or its customer will be required to file a New Drug
Application ("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 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. For marketing outside the United States, Pharmacopeia Labs 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. The research and development processes of
Pharmacopeia Labs involve the controlled use of hazardous materials.
Pharmacopeia Labs 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 Pharmacopeia Labs 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 eliminated. In the event of such an accident, Pharmacopeia Labs could
be held liable for any damages that result and any liability could exceed the
resources of Pharmacopeia Labs. In addition, there can be no assurance that
Pharmacopeia Labs will not be required to incur significant costs to comply with
environmental laws and regulations in the future.
PHARMACOPEIA LABS' SOURCES OF SUPPLY
Pharmacopeia Labs currently relies on one supplier to provide plastic
filter bottom microtiter plates that are used in the assay plate preparation
process. Should Pharmacopeia Labs be unable to obtain an adequate supply of
these or comparable filter bottom plates at commercially reasonable rates, its
ability to continue to prepare assay plates would be materially and adversely
affected.
PHARMACOPEIA LABS' PHARMACEUTICAL MANUFACTURING AND MARKETING
Pharmacopeia Labs does not expect to directly manufacture or market any
pharmaceutical products that may be developed under its collaborative
arrangements. However, Pharmacopeia Labs
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may, in the future, consider undertaking such activities if it believes they are
appropriate under the circumstances. Pharmacopeia Labs has no experience in
developing pharmaceutical products or in manufacturing or marketing products on
a commercial scale. Pharmacopeia Labs may not have the resources to develop or
to manufacture or market by itself on a commercial scale any products identified
by it. In the event Pharmacopeia Labs decides to establish a manufacturing
facility, Pharmacopeia Labs will require substantial additional funds, and will
be required to hire and train significant additional personnel and comply with
the extensive FDA "good manufacturing practice" regulations applicable to such a
facility.
OVERVIEW OF MSI
MSI is a leading provider of molecular modeling and simulation software.
MSI designs, develops, markets and supports software that facilitates the
discovery and development of new products and processes in the pharmaceutical,
biotechnology, chemical, petrochemical and materials industries. Using MSI's
software products, researchers are able to increase the speed and efficiency of
the research and development cycle, thereby reducing product development costs
and shortening the time to market for new product introductions and process
improvements. MSI's customers comprise leading commercial, governmental and
academic organizations, including many of the largest pharmaceutical,
biotechnology, chemical, petroleum and semiconductor companies worldwide.
MSI has a comprehensive product suite consisting of over 100 application
modules based on proprietary technologies that employ fundamental scientific
principles, advanced computer visualization, molecular modeling techniques and
computational chemistry. MSI's application products allow scientists to perform
molecular level computations of chemical, biological and physical properties, to
simulate, visualize and analyze chemical and biological systems, and to
communicate the results to other scientists. MSI's products are based upon
advanced software architectures that facilitate the development, integration and
deployment of new software products. MSI also offers open access to its core
software development environment, within which customers and third-party
licensees can develop, integrate and distribute their own software applications
for computational chemistry, biology and materials research. MSI markets its
products and services worldwide, principally through its direct sales force
based in the United States and Europe and through its distribution network in
the Asia/Pacific region.
MSI plans to continue enhancing its product and service offerings for
simulation specialists, who are the principal users of MSI's products. In
addition, MSI plans to broaden significantly its user base to include the much
larger population of experimentalists--laboratory scientists and engineers that
engage in experimental activities. MSI has packaged its core simulation
technologies into solutions-oriented applications known as computational
instruments. These products are easier to use than traditional simulation
products and perform specific functions analogous to typical laboratory
procedures. Recently, MSI has developed its WebLab family of products, which are
computational instruments accessible over corporate intranets. These instruments
create a "virtual laboratory" of computational instruments and other products
for use on desktop computers by a broad range of scientists to perform
computational chemistry, biology and materials experiments.
MSI INDUSTRY BACKGROUND
For companies in the pharmaceutical, chemical and materials industries,
innovation in the discovery and development of new products and the rapid, cost-
effective commercialization of these products is crucial to success. To keep
pace with scientific advancement, companies in these industries
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invest considerable resources in technologies designed to help discover, develop
and commercialize new products and processes. The pace of technical progress has
resulted in the increased use of computation to simulate processes, predict the
outcome of product designs and decrease the time to market.
Many factors that affect a product's performance, including activity,
bioavailability, toxicity, shelf life and environmental impact, are governed by
fundamental, atomic level properties such as molecular shape, structure and
reactivity. Molecular simulation was developed to predict these molecular
properties and help researchers discover new products, sharpen the focus of
experimental activities and improve ultimate product performance. Beginning in
the late 1970's, major pharmaceutical and chemical companies began to use
molecular simulation in their research and development activities.
Increased academic and commercial investment in the 1980's improved the
utility of these new simulation technologies. As researchers began to migrate
from mainframe and minicomputer-based systems to high performance UNIX
workstations, companies emerged to provide commercial quality molecular
visualization and computational chemistry software products.
THE MSI SOLUTION
MSI offers a broad suite of software products and services designed to
enable MSI customers to shorten product lead times, reduce research and
development costs, improve product and process performance, collect and compute
otherwise inaccessible information, and communicate more effectively both inside
and outside an organization. MSI's products and services incorporate the
following attributes:
o Validated Core Technology. MSI's core technology consists of a number of
fundamental, scientifically proven methods for conducting predictive
computer modeling of chemical, biological and materials phenomena at the
atomic and molecular scale. This core technology is validated by over a
decade of industrial use and by the publication of more than 400
presentations, papers and articles citing applications of this technology.
o Broad Applicability. MSI's validated core technology enables MSI to offer
a wide range of products and services to a variety of industries,
including the pharmaceutical, biotechnology, chemical, petrochemical,
electronics, food, paper, agrochemical, aerospace, plastics, paint and
natural gas industries. MSI's products simulate and analyze both small
molecules that may be candidates for new drugs and more complex molecular
structures such as DNA or the polymers found in plastics and rubber. These
products are used in research applications as diverse as drug discovery,
protein design and structure determination, crystallization and
formulation, polymer property prediction, catalysis and development of
electronic materials.
o Open Architecture. MSI's products are based upon an open architecture that
allows customers, collaborators and third parties to develop software
applications in the same development environment used internally by MSI.
MSI's core molecular modeling functions are included in this open
environment, which permits developers to focus on their particular
scientific interests and increase the power and utility of their programs
by integrating them with MSI's products.
o Ease of Use. MSI develops software products that are integrated, modular,
focused on specific research areas or techniques, and accessible by an
intuitive graphical user interface ("GUI"). MSI's GUI enables
experimentalists to use molecular simulation in a manner consistent with
established analytical and laboratory techniques, in a user-friendly
computational environment.
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o Increased Access. MSI is developing a Web-based product line that targets
a broader group of users, including experimentalists and engineers. Web
browsers and other software products are used increasingly by scientific
researchers on desktop computers to search for, analyze and communicate
scientific data, particularly within corporate intranets. MSI's Web-based
products use familiar Web browser technology and are built upon MSI's open
architecture and validated core technology.
MSI'S BUSINESS STRATEGY
MSI's objective is to strengthen its position as a leading provider of
molecular simulation products and services worldwide by providing a set of
productivity tools that are integral to the research and development activities
of its customers. The key elements of MSI's strategy to achieve this objective
include:
o Expand User Base. MSI plans to increase its number of sales personnel in
order to increase sales to its key accounts and pursue new customers
within existing markets. In addition, MSI's products have been designed to
expand use of its software to include not only a growing number of
simulation specialists, but also the much larger group of
experimentalists. MSI believes it can leverage its strong relationships
with simulation specialists to help promote use of MSI products by other
scientists working in the same organization as the specialists.
o Leverage Core Technology and Maintain Technology Leadership. MSI believes
its core technology has helped position MSI at the forefront of simulation
technology providers. MSI intends to continue to make significant
investments in research and development in order to improve the efficiency
and predictive accuracy of its core technology and to maintain its
technology leadership. Further, MSI's strategy for WebLab is to create a
"virtual laboratory" that allows access to MSI's validated core technology
from desktop computers operating within corporate intranets.
o Become the Industry Standard. MSI has created a development product, the
Cerius2 Software Developer's Kit ("Cerius2 SDK"), that allows customers
and third-party licensees to use MSI's open architecture to create their
own applications for internal use or for distribution. MSI is extending
this development product to include the WebLab SDK for applications
development within MSI's WebLab environment. The open architecture
facilitates communication within and between companies and institutions
that use MSI's products. MSI intends to continue to promote its
development environment as the industry standard for use and development
of molecular simulation and related applications.
o Promote Strategic Technology Relationships. MSI strengthens its internal
scientific and technical expertise through MSI's consortia and through
joint development projects with leading academic, governmental and
industrial researchers. MSI will continue to pursue strategic
relationships with third parties in order to provide it with early access
to new technologies, facilitate market acceptance of new products and
reduce internal research and development investment.
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MSI'S TECHNOLOGY
MSI's core technology delivers predictive models of chemical, biological
and materials phenomena within MSI's open environment. This technology simulates
interatomic and intermolecular interactions, and a wide range of corresponding
properties, including molecular structure, activity, diversity, stability,
morphology, solubility, adhesion, adsorption, diffusion, color, analytical
spectra, and optical, electrical and mechanical properties. The benefits of
MSI's technology have been validated by more than 400 published presentations,
papers and articles citing MSI's technology.
Methods
There are four primary classes of molecular simulation methods, all of
which are employed by MSI in its products:
Quantum Methods. Quantum methods, the most fundamental of MSI's methods,
compute interatomic interactions at the level of electrons and nuclei. These
methods make the least number of assumptions about the nature of relevant
interactions and require little or no parameterization. These methods are
capable of simulating which combinations of elements are stable, how chemical
reactions occur, and other electronic structural properties such as reactivity,
color and magnetism. These methods are the most computationally demanding and
are applied to small, carefully selected models.
Molecular Methods. Molecular methods probe molecular conformations and the
interactions between molecules based on simplified analytical expressions. These
methods include automated procedures for probing how a drug molecule binds to an
active site, what conformations a polymer chain may adopt, what similarities
exist between a new amino acid sequence and protein sequences for which tertiary
structures are known, and they also include tools used to determine structure
based on X-ray diffraction or NMR data.
Correlative Methods. Correlative methods identify interrelationships
between structure and properties that can be used predictively. In many cases,
macroscopic properties are known to be determined by molecular-level behavior,
but the analytical details of these relationships are not known. The
quantitative structure activity relationship methods ("QSAR") provide a
framework in which to correlate molecular attributes and macroscopic properties.
The framework can predict, to a reasonable degree of confidence, the properties
of molecules that are comparable with a control set for which properties have
been measured.
Statistical Methods. Statistical methods are needed when many different
configurations must be sampled or when macroscopic properties reflect an
averaging over many different states. These include methods for modeling complex
polymer structures, computing thermodynamic parameters and conducting
statistical analyses of real and virtual molecular libraries.
Open Architecture
MSI has pioneered an open molecular simulation software architecture,
Cerius2, which includes an efficient data model; libraries of mathematical,
chemical and graphical utilities; and a client/server data and communications
management layer. Cerius2, a modular, object-oriented system, is written
principally in C++ and uses industry-standard protocols such as MOTIF and
TCP/IP. This modular architecture is designed to provide streamlined access to
the various methods, allowing their use in discrete, combined and packaged ways.
The Cerius2 application programming interfaces ("APIs") are
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used by MSI's internal developers to create products. The same APIs are made
available through the Cerius2 SDK to customers and third-party licensees. Using
the Cerius2 open architecture and its validated methods, MSI has created its
computational instruments. In each of these computational instruments, a
particular application of one or more methods is precalibrated, parameters and
protocols are predefined and results are delivered in an easily interpretable
fashion. These computational instruments are designed for and used by
experimentalists, such as synthetic, analytical and formulation chemists.
WebLab is a Web-enabling extension of the Cerius2 open architecture, and
is the medium by which MSI can deliver desktop products for experimentalists.
Accessed from a Web browser operating as a client, these products make use of
both the Cerius2 architecture and MSI's methods running on a server machine. The
server is a UNIX workstation accessed through a corporate intranet. The client
browser application is created using industry-standard languages and protocols.
The WebLab Viewer, a helper application, provides improved performance in the
display and manipulation of molecular structures. Versions of the WebLab Viewer
have been released for PCs running under Windows 95 and Windows NT.
MSI's Cerius2 architecture, graphics and interface subsystems are
supported on Silicon Graphics and IBM UNIX workstations. Certain of the methods
are also supported on vector supercomputers and on shared and distributed memory
parallel architectures. Existing and planned WebLab products will run on major
platforms that support standard browser technology.
MSI'S PRODUCTS AND SERVICES
Based upon the technology described above, MSI provides an extensive suite
of software products used throughout the research and development cycle. MSI
believes that offering a "single-shop," integrated molecular simulation solution
is a significant benefit to its customers. MSI's product family consists of over
100 application modules.
MSI's methods products are powerful, full-featured simulation engines used
primarily by simulation specialists. MSI's application packages are targeted,
solutions-oriented modules usually built upon MSI's methods. These application
packages are also used by simulation specialists and, in the case of
computational instruments, by experimentalists. The Cerius2 Visualizer has a
flexible card-stack layout and is designed to be user-friendly for the
experimentalist as well as the simulations specialist. MSI's WebLab products are
simple-to-use, desktop products designed for specific research tasks of
experimental chemists, biologists and engineers. MSI's methods products,
applications packages, graphical modeling systems and WebLab Viewer are used
throughout the pharmaceutical, biotechnology, chemical and materials industries.
MSI's individual software modules are priced from $2,500 to $75,000 for an
industrial customer on a UNIX workstation with a single processor. A typical
commercial product installation for a new user in one application area costs
approximately $50,000. Larger installations might include software modules for
several different application areas and for multiple processors or workstations.
MSI's WebLab products have individual user prices of less than $5,000; the
WebLab ViewerLite is provided at no charge on a compact disc or may be
downloaded from MSI's Web site.
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MSI's Customer Applications
MSI's products are used in a variety of research areas within a number of
industries. The principal research and development areas in which MSI products
are used include the following:
Protein Design. The pharmaceutical, biotechnology, cosmetics and
agrochemical industries use MSI's software to understand the relationship
between protein structure and function and to analyze, modify and tailor
proteins and peptides. MSI's protein modeling products integrate capabilities in
structure generation, molecular simulation, protein database search and
analysis, molecular visualization and presentation. Products used in protein
design include Cerius2 and Insight II modules, QUANTA, Discover and CHARMm.
Macromolecular Structure Determination. Protein structure determination is
a prerequisite for a structure-based route to drug discovery in the
pharmaceutical and biotechnology industries. MSI provides complete software
systems that streamline the process of protein structure determination from X-
ray and NMR data. These systems include products for data processing and
reduction, rapid model building, structure refinement, model evaluation,
analysis and graphical display. Products used in protein structure determination
include X-PLOR, Insight II application modules, QUANTA, Discover, CHARMm and
Felix.
Rational Drug Design. MSI's rational drug design products are used in the
pharmaceutical and biotechnology industries. These products allow the design and
optimization of small, organic therapeutics, based on a protein active site
model or on activity data for a set of compounds. Related techniques are used to
design and assess combinatorial molecular libraries. Products used in drug
design include Catalyst, Cerius2 and Insight II application modules, QSAR and
Discover.
Polymer Modeling. Polymer modeling products are used by researchers in the
chemical, plastics, rubber, adhesives, petrochemical, aerospace and automotive
industrial sectors. Polymer researchers seek to analyze and predict polymer
properties and establish the link between these properties and the molecular-
level structure of the material. MSI's polymer software products allow these
researchers to construct and characterize models of polymers and predict key
properties, such as blend compatibility, mechanical behavior, cohesion and
adhesion to surfaces. MSI's polymer products include Cerius2 and Insight II
application modules, QSAR and Discover.
Crystallization. Crystallization phenomena are important to development and
formulation departments in companies in the pharmaceutical, paint and pigment,
petrochemical and chemical industrial sectors. MSI offers products to predict
crystal structure, polymorphism and crystal shapes, and to design additives to
control or inhibit crystal growth. MSI's crystallization products include
Cerius2 and Insight II application modules, Discover, DMol, CASTEP and QSAR.
Electronics Research. The trend toward microminiaturization of electronic
devices has created a need for improved processes and materials. MSI's software
products are used by semiconductor and electronics companies to understand
surface chemistry, defects, thin oxide layers, magnetic properties and the
performance of new packaging materials. These products include Cerius2 and
Insight II application modules, Discover, DMol and CASTEP.
Chemical Reactions. Understanding, controlling and improving chemical
conversions is a key research and development objective of petrochemical,
chemical and pharmaceutical companies. MSI
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offers a range of quantum methods products for simulating chemical reactivity,
conversions and thermochemical data, including Cerius2 and Insight II
application modules, DMol and CASTEP.
Catalysis and Sorption. MSI's catalysis and sorption products are used by
companies in the chemical, petrochemical, natural gas and plastics industries
and by catalyst manufacturers to characterize catalysts and sorbent materials
and to simulate thermodynamic and reactivity data. MSI's products are used to
characterize and design metallocene catalysts, zeolites and other molecular
sieves, and metal oxides. MSI's catalysis and sorption products include Cerius2
and Insight II application modules, Discover, DMol and CASTEP.
Analytical Simulation. MSI's analytical products are used by companies in
each of the markets served by MSI to display and interpret diffraction, electron
microscopy, infra-red and other analytical data. MSI's analytical products
include Cerius2 and Insight II application modules, and Felix.
MSI's Other Products and Services
Integration Products. The Cerius2 SDK offers customers and third-party
licensees a standard simulation environment in which to develop and integrate
their own applications. The Cerius2 SDK provides an external developer with
access to the full set of Cerius2 APIs used by MSI's own internal development
staff. With the Cerius2 SDK a developer can employ any of the functions,
subsystems or methods embodied in or accessible through Cerius2 to integrate an
external program or to create additional application functionality, with a
corresponding Cerius2 GUI. MSI is extending Cerius2 SDK to include the WebLab
SDK for applications development within MSI's WebLab environment.
Databases. Databases are a close adjunct to MSI's software products. MSI
resells a number of scientific databases for use with its product modules,
including Derwent's World Drug Index, MDL Information Systems' Available
Chemical Directory, and the Brookhaven Protein Databank.
Accelerated Research Services. MSI offers consulting, contract research,
custom development and systems integration services. MSI's accelerated research
services allow its customers to benefit from MSI's facilities and the expertise
of MSI's staff in outsourcing these types of specialist functions. In certain
contract research projects, MSI may receive some future compensation in the form
of a royalty payment on sales of products or processes that result from the
project. MSI intends to continue to apply its technology and the expertise of
its staff to design new products and processes, both internally and through
collaborative activity, and to benefit from such projects when possible through
future royalty payments.
Computer Hardware. As a convenience to its customers, MSI acts as a value-
added reseller of computer hardware in order to deliver a complete turn-key
molecular simulation system. MSI purchases substantially all of its hardware for
resale from Silicon Graphics, Inc. ("SGI"). MSI's agreement with SGI obligates
MSI to meet an annual minimum purchase volume. Under the agreement, SGI provides
installation, support and maintenance with respect to the computer hardware.
MSI'S CUSTOMERS
MSI's customer base consists of leading commercial, governmental and
academic organizations. No MSI customer accounted for more than 10% of the
Company's revenues during the fiscal year ended December 31, 1998.
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Industrial Customers. MSI industrial customers include many of the largest
pharmaceutical, biotechnology, chemical, petroleum and semiconductor companies
worldwide. In each of the past three fiscal years, a significant portion of
MSI's total revenue has been derived from pharmaceutical, biotechnology and
chemical companies.
Governmental Customers. Many major governmental institutions in the United
States, Canada, Europe and the Asia/Pacific region use MSI's products.
Academic Customers. Many of the world's leading universities in the United
States, Europe and the Asia/Pacific region use MSI's products. This use
historically has been for purposes of academic research, but MSI believes its
products increasingly may be used as a part of formal university teaching
curricula.
MSI'S STRATEGIC AND ACADEMIC ALLIANCES
MSI has entered into a number of strategic alliances relating to product
development, product distribution and joint marketing. MSI plans to continue to
cultivate relationships with academic, governmental and commercial research
organizations for purposes of identifying and licensing new technology for MSI
to use in product development. In addition, MSI plans to maintain and expand its
alliances focused on compatibility of MSI's products with databases and database
management systems, other computational chemistry and molecular simulation
products, and products in related markets such as laboratory instrumentation.
MSI also intends to continue to enter into porting and joint marketing
arrangements with hardware vendors on whose systems MSI's products operate.
MSI'S CONSORTIA
Since 1986, MSI has formed a number of consortia with outside parties,
commonly for purposes of market expansion. MSI believes the formation and
management of these consortia helps MSI focus on topical industrial needs and
establishes the consortia members as an initial customer base for its products.
MSI believes its consortia help MSI establish valuable working relationships
with leaders in its target markets.
These consortia bring together groups of industrial researchers, academic
experts and MSI scientists that focus on developing, validating and applying
simulation to the target industrial research area. Typically, MSI consortia
participants provide funds and a liaison to MSI. Each consortium generally has a
three-year term and has a defined set of objectives and milestones that are
updated and re-prioritized annually by the consortium's members. Some of the
consortia have been extended beyond their initial terms in order to continue the
benefits of the collaborative activities.
MSI has four active consortia in the following research areas: Polymers,
Catalysis and Sorption, Combinatorial Chemistry and Pharmaceutical Development.
Consortia agreements are generally one to three years in length and require the
consortium participant to pay MSI an annual fee. In return, consortium members
obtain rights to participate in meetings, vote on product development priorities
and non-exclusive licenses to use software products developed as a result of the
consortium activities.
MSI SALES AND MARKETING
MSI markets its products and services worldwide. In the United States and
Europe, MSI has direct sales forces, consisting of field sales and telesales
representatives. In Japan and other Asia/Pacific
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countries, MSI distributes its products and services through TMSI, which manages
a network of subdistributors in this region. MSI and Teijin each own 50% of
TMSI.
North and South America; Europe. MSI employs direct sales representatives
and telesales representatives to market and sell MSI's products and services.
Certain of the telesales representatives focus exclusively on sales to academic
researchers. The direct sales representatives and remaining telesales
representatives work in teams selling to commercial and governmental accounts in
assigned geographic territories and focus on either life science industries or
material sciences industries. The direct sales representatives typically focus
on larger accounts and account transactions greater than $50,000 and work
closely with MSI's pre-sales support scientists in order to demonstrate MSI's
products and their applicability to various research and development efforts.
Japan and the Asia/Pacific region. MSI has a distribution agreement with
TMSI under which TMSI serves as the exclusive distributor of MSI's products and
services in Japan, South Korea, Taiwan, Hong Kong, China, India, Singapore,
Malaysia, Australia and New Zealand. TMSI has been MSI's exclusive distributor
in Japan since April 1, 1992 and in the other Asia/Pacific countries since April
1, 1994. TMSI's Japanese office has sales, marketing and administrative
personnel who manage and support four subdistributors in Japan. TMSI also
maintains an office in Korea with sales, marketing and administrative personnel
who manage and support subdistributors and conduct direct sales activities in
the other Asian countries. TMSI's subdistributor agreements generally renew
automatically each year but may be terminated if either party gives notice 90
days prior to expiration of the then current term.
In support of its sales activities, MSI participates in industry trade
shows, publishes its own magazine, places advertisements in other industry
publications, publishes articles in industrial and scientific publications,
conducts direct mail campaigns, sponsors industry conferences and seminars, and
maintains a World Wide Web home page that contains information about MSI and its
product and service offerings.
MSI PRODUCT DEVELOPMENT
MSI's development efforts are focused on expanding its simulation software
product line, designing enhancements to MSI's core technology and integrating
existing and new products into MSI's principal software architectures. MSI
intends to offer regular updates to its products and to expand its existing
product suite. A key component of MSI's product development activities is the
extension of its core UNIX-based software architecture to accommodate access to
MSI's products from Web browser technology operating on desktop computers.
MSI licenses products or otherwise has acquired products from corporate,
governmental and academic institutions including BASF AG, Bayer AG, Bristol-
Myers Squibb, DuPont, California Institute of Technology, the University of
Cambridge and Harvard University. These arrangements sometimes involve joint
development efforts and frequently require the payment of royalties by MSI. The
development and royalty obligations, scope of distribution rights, duration and
other terms of these arrangements vary depending on the product, the market,
resource requirements, the other parties with whom MSI contracts and other
factors. MSI has also developed products with funding and direction from
customers through MSI's consortia activities. See "-- Consortia." MSI intends to
continue to license or otherwise acquire technology or products from third
parties in the future and to develop products as part of its consortia
arrangements with customers.
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<PAGE>
MSI CUSTOMER SERVICES AND SUPPORT
MSI is committed to providing customers with superior support including
telephone, electronic mail, fax and Internet-based technical support services;
training; user group conferences; and targeted contract and consulting services
involving application of MSI's technology and scientific expertise to particular
research needs of customers. MSI believes that a high level of customer service,
support and training is critical to the adoption and successful utilization of
its products.
Purchases of multi-year licenses to use MSI's software products include
one year of maintenance services, consisting of technical support and software
upgrades. Thereafter, MSI offers renewals of maintenance services on an annual
basis for an annual fee. Annual licenses to use MSI's software products
generally include all maintenance services. Most of MSI's customers contract for
maintenance and support services. These give customers access to new releases,
technical notes, documentation addenda and other support required to utilize
MSI's products effectively, including access to MSI's technical and scientific
support personnel during extended business hours. Through its distribution
channels, MSI offers training conducted by staff knowledgeable in both the
theory and application of molecular simulation. Technical newsletters and
bulletins and advance notification about future software releases are sent to
customers to keep them informed and to help them with resource allocation and
scheduling. To maintain an ongoing understanding of customer requirements, MSI
sponsors scientific symposia and user group meetings throughout the year.
MSI'S COMPETITORS
The market for MSI's products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. MSI's competitors offer a variety of
products and services to address this market. MSI believes that the principal
competitive factors in this market are product quality, flexibility, ease-of-
use, scientific validation and performance, functionality and features, open
architecture, quality of support and service, reputation and price. Competition
currently comes from the following principal sources: other molecular simulation
software packages and software for analysis of chemical and biological data;
desktop software applications, including chemical drawing, molecular modeling
and analytical data simulation applications; consulting and outsourcing
services; other types of simulation software provided to engineers; and firms
supplying databases, such as chemical or genomic information databases, database
management systems and information technology. In addition, certain of MSI's
licenses grant the right to sublicense MSI's software. As a result, MSI's
customers and third-party licensees could develop specific simulation
applications using the Cerius2 SDK and compete with MSI by distributing such
programs to potential customers of MSI. Customers or licensees could also
develop their own simulation technology and cease using MSI's products and
services. Further, they may choose to sublicense such technology, in which case
MSI may receive royalty payments.
Certain of MSI's competitors and potential competitors have longer
operating histories than MSI and have greater financial, technical, marketing
and other resources. Further, many of MSI's competitors offer products and
services directed at more specific markets than those targeted by MSI, enabling
these competitors to focus a greater proportion of their efforts on such
markets. Certain offerings that are competitive with MSI's products and services
are developed and made available by governmental organizations and academic
institutions, and these entities may be able to devote substantial resources to
product development and also offer their products to users for little or no
charge. There can be no assurance that MSI's current or potential competitors
will not develop products, services or technologies that are comparable to,
superior to, or render obsolete, the products, services and technologies offered
by
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MSI. There can be no assurance that MSI's competitors will not adapt more
quickly than MSI to technological advances and customer demands, thereby
increasing such competitors' market share relative to that of MSI. Any material
decrease in demand for MSI's technologies or services may have a material
adverse effect on the business, financial condition and results of operations of
MSI.
MSI'S SOURCES OF SUPPLY
MSI purchases substantially all hardware products that it resells to its
licensees from a single vendor. Management believes that other vendors could be
identified who could provide MSI and its licensees with similar hardware
products at comparable terms. However, any disruption of supply could cause a
temporary adverse effect in MSI's revenues during any period requiring porting
of MSI software products to alternative hardware platforms or negotiation of
alternative supply and distribution agreements.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
MSI relies primarily on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
its proprietary rights. MSI also has two United States patents. MSI believes
that factors such as the technological and creative skills of its personnel, new
product development, frequent product enhancements, name recognition and
reliable product maintenance are essential to establishing and maintaining a
technical leadership position. MSI seeks to protect its software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection. Further, there can be no assurance that MSI's patents
will offer any protection or that they will not be challenged, invalidated or
circumvented. Furthermore, there can be no assurance that others will not
develop technologies that are similar or superior to MSI's technology. Despite
MSI's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of MSI's products or to obtain and use information that
MSI regards as proprietary. In limited instances, MSI has licensed source codes
of certain products to customers or collaborators. For these reasons, policing
unauthorized use of MSI's products therefore may be difficult. In addition, the
laws of some foreign countries do not protect proprietary rights as fully as do
the laws of the United States.
There can be no assurance that MSI's means of protecting its proprietary
rights in the United States or abroad will be adequate.
There can be no assurance that third parties will not claim infringement
by MSI of their intellectual property rights. From time to time MSI receives
letters from third parties claiming or suggesting that its products may infringe
patents or other intellectual property rights. In particular, MSI has received
letters from Tripos, Inc. and Immunex Corporation stating that MSI's products
may be relevant to patents held by them. MSI has investigated these matters and
believes that they are immaterial to the operations of MSI. There can be no
assurance, however, that MSI's products do not infringe upon the patent or other
intellectual property rights of these or other third parties, that MSI will not
be required to seek licenses for or otherwise acquire rights to technology as a
result of claims of infringement or that these or other companies will not bring
infringement suits against MSI. MSI expects in general that simulation software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in MSI's industry segments grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
shipment delays or require MSI to enter into royalty or licensing agreements.
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Such royalty or licensing agreements, if required, may not be available on terms
acceptable to MSI, if at all. In the event of a successful claim of product
infringement against MSI, the failure or inability of MSI to license or design
around the infringed technology would have a material adverse effect on MSI's
business, financial condition and results of operations.
INTEGRATED BUSINESS ACTIVITIES
Although the Company currently operates Pharmacopeia Labs and MSI
primarily as two separate businesses as described in the previous sections of
this document, the Company is exploring ways in which the businesses might be
further improved through the integration of certain business functions. For
example, the Company has formed the Center for Informatics and Drug Discovery
(CIDD) wherein a dedicated staff of research employees are investigating ways in
which the Pharmacopeia Labs technology and the MSI software technology might be
integrated. Initially, the CIDD will use Pharmacopeia Labs' database of
chemical and biological interactions to test and validate computational
approaches to drug discovery, with the goal of enhancing the quality and
predictive utility of MSI's software. The CIDD will also seek to "mine" the
millions of data points of information generated by Pharmacopeia Labs through
its drug discovery efforts for use in future drug discovery programs. The
Company believes that the integration of the laboratory knowledge accumulated at
Pharmacopeia Labs with the simulation knowledge accumulated at MSI could create
combined informatics product offerings as well as improved laboratory services
and simulations software. The Company is also exploring ways in which the MSI
direct sales force could assist Pharmacopeia Labs in its sales and marketing
endeavors.
RISKS ASSOCIATED WITH CONSOLIDATED INTERNATIONAL OPERATIONS
In 1998, approximately 57% of the Company's consolidated revenue was
derived from customers outside the United States both through international
subsidiaries and on an export basis. Approximately 38% of the Company's revenue
was derived from customers in Europe and approximately 19% was derived from
customers in the Asia/Pacific region. The Company anticipates that
international revenue will continue to account for a significant percentage of
revenue in the future. The Company's international operations are subject to
risks inherent in the conduct of international business, including unexpected
changes in regulatory requirements, longer payment cycles, exchange rate
fluctuations, export license requirements, tariffs and other barriers, political
and economic instability, limited intellectual property protection, difficulties
in collecting trade receivables, difficulties in managing distributors or
representatives, difficulties in staffing and managing foreign subsidiary or
joint venture operations, and potentially adverse tax consequences. Certain
East Asian countries are currently experiencing severe economic turmoil,
represented by depressed business conditions and volatility in local currencies.
Such conditions may adversely impact the Company's financial results as a result
of customers altering their spending plans and by subjecting the Company to
greater foreign exchange exposure. There can be no assurance that the Company
will be able to sustain or increase international revenue and there can be no
assurance that any of the foregoing factors will not have a material adverse
effect on the Company's international operations and therefore its business,
financial condition and results of operations. The Company's direct
international sales generally are denominated in local currencies.
Fluctuations in the value of currencies in which the Company conducts business
relative to the United States dollar result in currency transaction gains and
losses, and the impact of future exchange rate fluctuations cannot be accurately
predicted. There can be no assurance that future fluctuations in currency
exchange rates will not have a material adverse impact on revenue from
international sales, and thus the Company's business, financial condition and
results of operations. When deemed appropriate, the Company engages in currency
exchange rate hedging transactions in an
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attempt to mitigate the impact of adverse exchange rate fluctuations. There can
be no assurance that any currency hedging policies will be successful, or that
they will not increase the negative impact of exchange rate fluctuations.
CONSOLIDATED RESEARCH AND DEVELOPMENT
Pharmacopeia's consolidated expenses for research and development
activities were as follows:
<TABLE>
<CAPTION>
Year Ended December 31 (in thousands)
-----------------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
----------------- --------------- ---------------
Collaborative $13,129 $16,931 $20,307
Proprietary 20,945 25,251 28,656
</TABLE>
These increased amounts primarily reflect additional costs incurred with the
expansion of Pharmacopeia Labs' chemical library production and screening
efforts for collaborations and for its own use, and additional costs incurred at
MSI related primarily to Weblab.
CONSOLIDATED EMPLOYEES
As of December 31, 1998, the Company had 546 regular employees, 344 of whom
were in research and development, including 182 chemists, biologists and
engineers holding doctorate degrees. None of the Company's employees is covered
by collective bargaining agreements. Management considers its relations with its
employees to be good.
IMPORTANT RISK FACTORS REGARDING CONSOLIDATED
FORWARD LOOKING STATEMENTS
Certain discussions set forth above regarding the Company's strategy for the
development and commercialization of its products and services as well as its
ability to achieve profitability in the near term are forward-looking
statements. This strategy depends upon the acceptance by potential customers of
combinatorial chemistry and analysis of compounds provided by the Company as an
effective tool in new drug discovery and the Company's ability to maintain the
arrangements it currently has in place. Historically, pharmaceutical companies
have conducted lead compound 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 the Company's technology and expertise justify the outsourcing of these
programs to the Company. There can be no assurance that the Company will be able
to attract customers on acceptable terms for its products and services or
develop a sustainable profitable business. Moreover, the pricing and nature of
the Company's combinatorial libraries is such that there may only be a limited
number of pharmaceutical companies that are potential customers for such
libraries. There can be no assurance that the Company will be able to establish
additional collaborative or licensing arrangements, that any such arrangements
or licenses will be on terms favorable to the Company, or that current or future
collaborative or licensing arrangements will ultimately be successful.
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<PAGE>
Further, the Company's receipt of revenues from collaborative arrangements is
affected by the timing of efforts expended by the Company and the timing of lead
compound identification. The Company's products and services will only result
in commercialized pharmaceutical products generating milestone payments and
royalties upon significant preclinical and clinical development, requisite
regulatory approvals, the establishment of manufacturing capabilities and
successful marketing. The Company does not currently intend to perform any of
these activities, other than in some instances preclinical work. 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 by the Company. 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 or royalties associated with such compound or product. The
Company's contractual arrangements with its customers do not obligate the
customers to develop or commercialize lead compounds discovered by the Company.
In addition, there can be no assurance that any such development or
commercialization would be successful. The compound basis for drugs developed by
a customer may be a derivative or optimized version of the lead compound
provided to the customer by the Company. While the Company's existing
collaborative agreements provide that the Company will receive milestone
payments and royalties with respect to certain products developed from certain
derivative compounds, there can be no assurance that disputes will not arise
over the application of payment provisions to such products. There can be no
assurance that current or future collaborative partners 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 based on the targets which are the subject of the
collaborative arrangements with the Company.
The Company's success is also dependent on the results of operations of its
wholly-owned subsidiary, MSI. The ability of MSI to increase revenue from the
license of its products is dependent upon increased market acceptance of MSI's
software products and services. MSI's products are used primarily by simulation
specialists. MSI's strategy is to expand usage of its products and services by
marketing and distributing its software, in part through its Web-based products,
to experimentalists. If MSI cannot expand its customer base to include
experimentalists, or if MSI otherwise cannot successfully market and sell its
Web-based products and related services, MSI may not be able to increase its
revenue, or its revenue may decline. In general, increased market acceptance
and greater market penetration of MSI's products depend upon several factors,
including the overall product performance, ease of implementation and use,
accuracy of simulation, breadth and integration of product offerings and the
extent to which users achieve the intended research and development benefits
from their use of MSI's products and services. There can be no assurance that
MSI's products and services will achieve increased market acceptance or
penetration in MSI's target industries or other industries. Failure to increase
market acceptance or penetration would restrict substantially the future growth
of MSI and may have a material adverse effect on the Company.
The Company's success will also depend upon certain issues arising in
connection with the Company's patents and proprietary technology. See "Business
- -- Patents and Proprietary Information."
CONSOLIDATED SEGMENT INFORMATION
The information in Note 9 of the Notes to Financial Statements is incorporated
herein by reference.
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<PAGE>
ITEM 2. PROPERTIES
Pharmacopeia Labs currently leases and occupies approximately 144,000 square
feet in or near Princeton, New Jersey. These leases expire at various dates
through 2005. MSI's principal administrative, sales, support, marketing and
product development facilities and the MSI corporate headquarters are located in
San Diego, California, where MSI has leased 76,635 square feet through December
2006. MSI's European headquarters, along with administrative, sales, support,
marketing and product development functions, are located in Cambridge, England,
where MSI has leased 6,545 square feet through December 31, 2008 and has
subleased an additional 4,952 square feet in the same building through February
1, 2007. MSI leases additional offices in the United States, Europe and Asia.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Joseph A. Mollica, Ph.D. 58 Chairman of the Board, President and Chief Executive
Officer
John J. Baldwin, Ph.D. 64 Chief Science and Technology Officer
Lewis J. Shuster 43 President and Chief Operating Officer, Pharmacopeia
Laboratories
Saiid Zarrabian 46 President and Chief Operating Officer, MSI
Stephen A. Spearman, Ph.D. 49 Executive Vice President, Discovery Technology
Nolan H. Sigal, M.D., Ph.D. 49 Senior Vice President, Drug Discovery
Bruce C. Myers 43 Senior Vice President of Finance, Administration and
Strategic Planning, MSI
Richard J. Walsh 55 Senior Vice President, Marketing and Business Development
Kenneth P. McCarthy 42 Vice President, Human Resources
</TABLE>
Dr. Mollica has served as the Chairman of the Board and Chief Executive
Officer of Pharmacopeia since February 1994 and was appointed President in
August 1996. From 1987 to December 1993, Dr. Mollica was employed initially by
the DuPont Company and then by The DuPont Merck Pharmaceutical Company, most
recently as President and Chief Executive Officer. Dr. Mollica is
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a director of USP, Inc., ImPath, Inc. and Neurocrine BioSciences, Inc. Dr.
Mollica received a Ph.D. from the University of Wisconsin, and a Doctor of
Science, h.c., from the University of Rhode Island.
Dr. Baldwin has served as Vice President of Chemistry since July 1993, was
appointed Senior Vice President of Chemistry in August 1996 and was appointed
Chief Science and Technology Officer in June 1998. For a period of thirty years,
prior to joining the Company, Dr. Baldwin held a variety of scientific and
management positions with Merck Sharp & Dohme Research Laboratories, most
recently as Distinguished Senior Scientist. Dr. Baldwin holds more than 140 U.S.
patents and is the inventor of Trusopt, a drug for preventing glaucoma. Dr.
Baldwin received a Ph.D. in Organic Chemistry from the University of Minnesota.
Mr. Shuster has served as Chief Financial Officer since November 1994, was
appointed Executive Vice President, Corporate Development and Chief Financial
Officer in August 1996 and was appointed President and Chief Operating Officer
of Pharmacopeia Laboratories in February 1999. Mr. Shuster served as Executive
Vice President, Operations and Finance for Human Genome Sciences, Inc., a
biotechnology company, from September 1992 to November 1994. From 1986 to June
1992, Mr. Shuster was with Microbiological Associates, Inc., a biological safety
testing services company, most recently as President and Chief Executive
Officer. Mr. Shuster received a M.B.A. from Stanford University Graduate School
of Business.
Mr. Zarrabian has served as Chief Operations Officer of MSI since October 1994
and was appointed President and Chief Operating Officer, MSI in February 1999.
From 1988 to October 1994, Mr. Zarrabian was Vice President and Director of
Symbolics Inc. which declared Chapter 11 bankruptcy in January 1993. From 1978
to 1988, Mr. Zarrabian was Director of Mechanical Applications Development at
Computervision Corporation.
Dr. Spearman has served as Executive Vice President, Operations since August
1996 and was appointed Executive Vice President, Discovery Technology in June
1998. From 1975 to August 1996, Dr. Spearman held several positions at CIBA-
GEIGY Corporation, most recently as Project Leader. Dr. Spearman received his
Ph.D. and M.S. from Emory University. Dr. Spearman also holds a M.B.A. in
Finance from Bryant College.
Dr. Sigal has served as Vice President of Biology since January 1994 and
was appointed Senior Vice President, Drug Discovery in August 1996. From 1983
to December 1993, Dr. Sigal held several positions at Merck Research
Laboratories, most recently as Executive Director of the Department of
Immunology Research. Dr. Sigal received a M.D. and Ph.D. from the University of
Pennsylvania.
Mr. Myers has served as Senior Vice President of Finance, Administration
and Strategic Planning, MSI since December 1998. Mr. Myers served as Chief
Financial Officer and Secretary to the Board for GTI Corporation from January
1997 to December 1998. From June 1989 to December 1996, Mr. Myers was with
Photomatrix, Inc. and served as Chief Financial Officer, Chief Operating Officer
and Secretary to the Board. Prior to joining Photomatrix, Mr. Myers spent eleven
years with Arthur Andersen & Company. Mr. Myers holds a B.S. in Commerce from
the University of Virginia and is a Certified Public Accountant.
Mr. Walsh has served as Senior Vice President, Marketing and Business
Development since February 1998. Mr. Walsh served as Vice President, Corporate
Development for Cytogen Corporation from 1994 to 1998. From 1992 to 1994 Mr.
Walsh served as Vice President, Biotechnology Acquisition for the Medical and
Agricultural groups at American Cyanamid Company. Prior to joining American
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Cyanamid Company, Mr. Walsh spent twenty-five years at Parke Davis and its
parent, the Warner Lambert Company. Mr. Walsh holds a B.S. degree in Pharmacy
from the University of Cincinnati.
Mr. McCarthy has served as Vice President, Human Resources since September
1996. Mr. McCarthy served as Vice President, Human Resources and Corporate
Services for Genelabs Technologies, Inc. from 1990 to 1996. From 1981 to 1990,
Mr. McCarthy was with Schlumberger, Inc. and held various personnel management
positions. Mr. McCarthy received his B.S. degree in Industrial and Labor
Relations from the New York State School of Industrial and Labor Relations of
Cornell University.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Company's Common Stock has traded on The Nasdaq Stock Market(R) under
the symbol PCOP since the Company's initial public offering on December 5, 1995.
The following table sets forth for the periods indicated the high and low sale
prices of the Common Stock.
<TABLE>
<CAPTION>
----------------------------- -----------------------------
1998 1997
----------------------------- -----------------------------
High Low High Low
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
First Quarter $22.13 $15.00 $22.63 $16.50
Second Quarter 20.38 11.63 17.38 12.88
Third Quarter 14.00 9.73 22.75 12.75
Fourth Quarter 10.63 8.00 23.13 16.00
</TABLE>
HOLDERS OF RECORD
As of January 31, 1999, there were approximately 461 holders of record.
The Company has never paid cash dividends on its capital stock. The
Company currently expects that it will retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended
December 31,
- ---------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ------------
Statements of Operations Data:
<S> <C> <C> <C> <C> <C>
Total revenue................ $ 15,372 $ 35,271 $ 62,060 $ 81,197 $ 92,211
Operating loss (2) (3)....... (11,171) (21,300) (8,358) (3,024) (13,456)
Net loss (2) (3)............ (11,277) (20,836) (7,386) (1,728) (10,163)
Basic and diluted net loss
per share.................. (2.61) (2.79) (.42) (.09) (.54)
Weighted average number of
common shares outstanding,
basic and diluted.......... 4,321 7,458 17,736 18,445 18,916
Cash dividends declared per
common share............... - - - - -
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents, and
marketable securities....... $ 19,345 $ 71,271 $ 95,991 $ 97,640 $ 81,098
Total assets................. 30,428 99,693 131,644 140,051 127,865
Notes payable, and deferred
revenue, long-term portion
and other long-term
liabilities................. 3,028 4,085 6,433 6,194 3,332
Accumulated deficit.......... (32,707) (53,543) (60,929) (62,657) (72,820)
Total stockholders'
equity...................... 17,792 59,450 75,501 80,596 72,217
</TABLE>
(1) The financial information set forth above excludes financial information
for Biosym Technologies, Inc. ("Biosym") prior to August 16, 1995, the
effective date of MSI's acquisition of Biosym.
(2) The 1995 amount includes a $6.5 million write-off of acquired in-process
research and development, $4.5 million in restructuring costs and a $1.1
million write-off of capitalized software, all in connection with the
acquisition of Biosym.
(3) The 1998 amount includes $8.0 million of merger related expenses.
(4) Selected financial data for all periods presented has been restated to
include the operations of MSI. The MSI merger was completed on June 12,
1998 and was accounted for as a pooling-of-interests.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Pharmacopeia should be read in conjunction with the consolidated
financial statements and the related notes thereto included elsewhere is this
document. The discussion in this document contains forward looking statements
that involve risks and uncertainties. Pharmacopeia's actual results may differ
materially from the results discussed in the forward looking statements. Factors
that could cause or contribute to such differences include those discussed in
this section as well as those discussed elsewhere in this document.
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The Company's consolidated financial statements for all periods presented
have been restated to include the operations of MSI. The MSI merger was
completed June 12, 1998 and was accounted for as a pooling-of-interests.
RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
Total revenues for the year ended December 31, 1998 rose 14% to $92.2
million compared to $81.2 million reported for the same period last year. In
1998 contract revenues increased to $29.7 million compared to $24.5 million a
year ago. The year to year increase of $5.2 million or 21%, primarily reflects
expanded efforts in the Schering-Plough, Bristol-Myers Squibb and Zeneca
collaborations. 1998 software license, service, hardware and other revenues
increased to $62.5 million compared to $56.7 million a year ago. The year to
year increase of $5.8 million or 10%, is primarily the result of consolidating,
in 1998, the operating results of TMSI as a result of MSI becoming the
controlling partner in this joint venture.
Research and development expenses increased $6.8 million to $49.0 million
during 1998; a 16% increase over 1997 levels. These increased amounts primarily
reflect increased personnel costs, facilities expenses, equipment depreciation,
leasehold amortization and laboratory supplies and reagents as the Company
expands its efforts to support its existing collaborations along with making
investments in software development, chemical library production, proprietary
drug discovery, and high throughput screening.
Sales, general and administrative expenses were $38.2 million and $31.8
million in the years ended December 31, 1998 and 1997, respectively. The
increase of $6.4 million or 20%, is primarily attributable to consolidating, in
1998, the operating results of TMSI along with increased payroll and personnel
expenses as the Company continued to hire additional sales, marketing and
administrative personnel.
Merger related costs of $8.0 million were recorded during 1998 in
connection with the MSI merger. Such charges consist of transaction costs,
principally investment banking and professional fees which were expensed under
the pooling-of-interests method of accounting.
The Company had net interest and other income of $4.2 million and $4.3
million for the twelve months ended December 31, 1998 and 1997, respectively.
The decrease of $0.1 million, resulted primarily from a decrease in the average
balance of cash, cash equivalents and marketable securities.
The Company recorded a provision for income taxes of $0.9 million for 1998
compared to a provision for income taxes of $3.0 million for 1997. The year to
year favorable tax variances are primarily the result of the combined companies'
ability to offset MSI's taxable income with Pharmacopeia's losses during the
period following the completion of the merger.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues increased to $81.2 million in 1997, compared to $62.1 million in
1996. The increase of $19.1 million or 31% primarily reflects contract revenue
increases from the new collaboration with BMS and the Company's expanded efforts
in the drug discovery collaborations with Bayer, Daiichi, and Organon along with
increased software license, service, hardware and other revenue resulting from
increased customer sites and additional sales to existing customers.
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Research and development expense increased to $42.2 million in 1997
compared to $34.1 million in 1996. These increased amounts primarily reflect
increased personnel costs, facilities expenses, equipment depreciation,
leasehold amortization and laboratory supplies and reagents as the Company
expands its efforts to support its existing collaborations along with making
investments in software development, chemical library production, proprietary
drug discovery, and high throughput screening.
Sales, general and administrative expenses were $31.8 million and $28.6
million in the years ended December 31, 1997 and 1996, respectively. The
increase is largely attributable to increased expenses associated with the
Company's sales force and increased customer support requirements along with
increased payroll and personnel expenses as the Company continued to hire
additional management and administrative personnel.
The Company had net interest and other income of $4.3 million and $4.0
million for the twelve months ended December 31, 1997 and 1996, respectively.
The increase of $0.3 million resulted primarily from an increase in the average
balance of cash, cash equivalents and marketable securities.
The Company's provision for income tax consists primarily of foreign income
taxes withheld from foreign revenue associated with the Company's wholly owned
subsidiary MSI. The tax provision for 1996 reflects the impact of foreign
income taxes withheld on revenue as well as MSI's inability to completely offset
its operating income with loss carryforwards because of minimum tax
requirements. MSI was able in 1997 to offset a substantial portion of its
income with net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had working capital of $57.3 million.
The Company has funded its activities through December 31, 1998 primarily
through the sale of equity securities, funding under collaborative arrangements
and sales of software licenses and hardware.
The Company's funds are currently invested in U.S. Treasury and government
agency obligations, investment grade commercial paper and other short-term money
market instruments. The Company may also invest such proceeds in investment
grade, interest-bearing securities having a maximum maturity of two years. As
of December 31, 1998, the Company's cash, cash equivalents and marketable
securities totaled $81.1 million.
In connection with the Company's agreement with the Trustees of Columbia
University and Cold Spring Harbor Laboratory, the Company is required to pay
annual license fees. The Company is also required to pay to Columbia University
certain royalties.
The Company's primary investing activities have consisted of capitalized
software development costs, leasehold improvements and purchases of equipment
and software rights. The Company anticipates that its capital requirements will
continue at approximately the same level over the next two years as the Company
continues to invest in capital assets, capitalized software development and
research and development activities to support its growth.
As of December 31, 1998, MSI had a note outstanding to Teijin in the amount
of $0.7 million, which is due within the next twelve months.
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $45.8 million. These federal net operating loss
carryforwards, which are fully reserved, will begin to expire in 2008 through
2018. Utilization of the net operating loss carryforwards will be subject to
limitation under Section 382 of the Internal Revenue Code.
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<PAGE>
The Company anticipates that its existing capital resources will be
adequate to fund the Company's operations at least through 2000. There can be
no assurance that changes will not occur that would consume available capital
resources before such time. The Company's capital requirements depend on
numerous factors, including the ability of the Company to extend existing
collaborations and 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 and the outcome
of related litigation, the purchase of additional capital equipment,
acquisitions of other businesses or technologies, the progress of the Company's
drug discovery programs and the progress of the customer activities that could
produce milestone and royalty payments to the Company. There can be no
assurance that additional funding, if necessary, will be available on favorable
terms, if at all.
YEAR 2000
The year 2000 presents concerns for business computing because the use of
certain two digit date formats could cause date sensitive software to recognize
"00" as the year 1900 rather than the year 2000. The problem exists for many
kinds of software and hardware, including mainframes, mini-computers, PC's, and
embedded systems. The year 2000 issue could affect the Company's software
products, its internal systems, and the systems used by its distributors,
customers and vendors.
The Company is continuing to test its MSI software products and to classify
its tested products as "compliant," "compliant with minor issues," and "not
compliant." To date, all major MSI product lines have been tested and none have
been classified as "not compliant." Of the more than 100 application modules
comprising MSI's product lines, only one module has been identified as "not
compliant," and a minor correction has been identified to make this module
"compliant." The Company is also developing software updates to address those
products that have been classified as "compliant with minor issues." None of
these corrections or updates is expected to require a substantial resource
commitment or to disrupt the Company's ongoing business activities.
Pharmacopeia's policy is to make its commercially offered software products year
2000 "compliant."
Pharmacopeia is also testing the readiness of its internal systems,
including information technology (IT) and non-IT systems, for handling the year
2000, and has started the remediation and certification process. The Company is
also reviewing its facilities and infrastructures. Contingency plans will be
developed, where appropriate, in parallel with the testing and remediation
efforts.
Pharmacopeia is evaluating its third-party distribution and supply chain to
understand their ability to continue providing services and products through the
change to the year 2000. The Company is monitoring and working directly with key
vendors, service providers, hardware manufacturers and distributors to avoid any
business interruption in the year 2000. If critical third parties are identified
to have issues, contingency plans will be developed.
While year 2000 issues present a potential risk to Pharmacopeia's internal
systems, distribution and supply chain, and facilities, the Company is
minimizing risk with a worldwide effort. Pharmacopeia is performing an extensive
assessment and is in the process of testing and remediating mission critical
components. The current plan is to have all of these components resolved by
September 1999. Management currently believes that all critical systems will be
ready by the year 2000 and that the cost to address all issues will not exceed
$.7 million.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's international operations are subject to risks inherent with
exchange rate fluctuations. During 1998, approximately 57% of the Company's
consolidated revenue was derived from customers outside the United States.
Approximately 38% of the Company's revenue was derived from customers in Europe
and approximately 19% was derived from customers in the Asia/Pacific region.
The Company's exchange rate risk is greatest for dollar/euro and dollar/yen
fluctuations. The Company's direct international sales generally are
denominated in local currencies. Fluctuations in the value of currencies in
which the Company conducts business relative to the United States dollar results
in currency transaction gains and losses. When deemed appropriate, the Company
engages in currency exchange rate hedging transactions in an attempt to mitigate
the impact of adverse exchange rate fluctuations. The Company does not
currently have any hedging arrangements in place.
The Company does not use derivative financial instruments in its operations
or investment portfolio. However, the Company regularly invests excess
operating cash in overnight repurchase agreements that are subject to changes in
short-term interest rates. Accordingly, the Company believes that the market
risk arising from its holding of these financial instruments is minimal.
The Company does not have exposure to market risks associated with changes
in interest rates as it has no variable interest rate debt outstanding. The
Company does not believe it has any other material exposure to market risks
associated with interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and notes thereto and the
independent auditors' report appear beginning on page F-1 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) The information required by this Item concerning the Company's
directors is incorporated by reference from the section captioned "Election of
Directors" in the Company's Proxy Statement related to the 1999 Annual Meeting
of Stockholders to be held on May 4, 1999 (the "Proxy Statement").
(b) The information required by this Item concerning the Company's
executive officers is set forth in Part I of this Form 10-K.
(c) On the basis of reports and representations submitted by or on behalf
of the directors, executive officers and ten percent stockholders of the
Company, all Forms 3, 4 and 5 showing ownership of and change of ownership in
the Company's equity securities during 1998 were timely filed with the
Securities and Exchange Commission as required by Section 16 (a) of the Exchange
Act, except that a Form 4 was not filed until March of 1999 to reflect the
conversion of MSI options held by Dr. Bartlett to Pharmacopeia options, and a
Form 3 in respect of each of the Company's executive officers Richard J. Walsh,
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Kenneth P. McCarthy and Ronald Goldstein that was due by June 22, 1998 was not
filed until August 6, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference from
the section entitled "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference from
the section captioned "Stock Ownership of Principal Stockholders and Management"
in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference from
the section captioned "Certain Transactions" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following Consolidated Financial Statements are included:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 and 1998
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not
applicable, or not required, or because the required information is
included in the financial statements or notes thereto.
<TABLE>
<CAPTION>
(a)(3) Exhibits:
<S> <C>
3.1****** Restated Certificate of Incorporation of the Registrant.
3.3****** Bylaws of the Registrant, as amended.
3.3(a)******** Amendment to Bylaws of Pharmacopeia dated July 31, 1997.
4.3* Stockholders Rights Agreement, dated February 15, 1995.
10.1* Series A and Series B Preferred Stock Purchase Agreement, dated July 21,
1993.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.2* Series B Preferred Stock Purchase Agreement, dated March 11, 1994.
10.3* Series C Preferred Stock Purchase Agreement, dated December 22, 1994.
10.4* Series D Preferred Stock Purchase Agreement, dated February 15, 1995.
10.5**# Amended 1994 Incentive Stock Plan.
10.5(a)*******# Amendment No. 3 to the 1994 Incentive Stock Plan dated May 9, 1997.
10.6*# 1995 Employee Stock Purchase Plan.
10.7*# 1995 Director Option Plan.
10.8*+ Library Collection Agreement, dated as of October 1, 1995, between
Pharmacopeia and Novartis Corporation.
10.9*+ Research, License, and Royalty Agreement, dated as of February 15, 1995,
between Pharmacopeia and Berlex Laboratories, Inc.
10.9(a)*******+ Amendment No. 1 to Research, License and Royalty Agreement between the
Company and Berlex Laboratories, Inc. dated November 27, 1996.
10.9(b)*******+ Amendment No. 2 to Research, License and Royalty Agreement between the
Company and Berlex Laboratories, Inc. dated June 30, 1997.
10.9(c)*********+ Amendment No.3 to Research, License and Royalty Agreement between the
Company and Berlex Laboratories, Inc. dated November 21, 1997.
10.10*+ License Agreement, dated as of October 6, 1995, among Pharmacopeia, the
Trustees of Columbia University in the City of New York and Cold Spring
Harbor Laboratory.
10.11*+ Collaboration Agreement, dated as of December 22, 1994, between
Pharmacopeia and Schering Corporation and Schering-Plough, Ltd.
10.11(b)*******+ Amendment No. 2 to Collaboration Agreement and Random Library Agreement
between the Company and Schering Corporation and Schering-Plough, Ltd.
dated as of April 22, 1996.
10.11(c)*******+ Amendment No. 3 to Collaboration Agreement and Random Library Agreement
between the Company and Schering Corporation and Schering-Plough, Ltd.
dated as of April 21, 1997.
10.12*+ Random Library Agreement, dated as of December 22, 1994, between
Pharmacopeia and Schering Corporation and Schering-Plough, Ltd.
10.13* Lease Agreement between Pharmacopeia and Eastpark at 8A.
10.13(a)** Amendment dated as of January 22, 1996 to Lease Agreement between
Pharmacopeia and Eastpark at 8A.
10.13(b)**** Third Amendment to Lease Agreement dated March 31, 1996 between
Pharmacopeia and Eastpark at 8A.
10.14* Sublease, dated as of December 7, 1994, between Pharmacopeia and Enichem
Americas, Inc.
10.15* Lease, dated as of May 2, 1994, between Pharmacopeia and College Road
Associates Limited, as amended.
10.15(a)** Lease dated as of December 1, 1995 between Pharmacopeia and College Road
Associates, as amended.
10.15(b)**** Third Execution and Modification of lease dated June 7, 1996, between
Pharmacopeia and College Road Associates Limited.
10.17*# Employment Agreement, dated October 4, 1994, between the Company and Lewis
J. Shuster.
</TABLE>
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<TABLE>
<S> <C>
10.18*********# Employment Agreement effective November 1, 1997 between the Company and
Joseph A. Mollica, Ph.D.
10.19************# Employment Agreement, dated January 30, 1998, between the Company and
Richard Walsh
10.20*# Employment Agreement, dated June 3, 1993, between the Company and John J.
Baldwin, Ph.D.
10.21*# Employment Agreement, dated December 2, 1993, between the Company and
Nolan H.
Sigal, M.D., Ph.D.
10.22*# Consulting Agreement, dated April 30, 1993, between the Company and W.
Clark Still, Ph.D.
10.23* Warrant to purchase Common Stock issued to Columbia University.
10.24* Warrant to purchase Common Stock issued to Cold Spring Harbor Laboratory.
10.25**+ Collaboration Agreement effective as of December 31, 1995 between
Pharmacopeia and Bayer.
10.26**+ Random Library Agreement effective as of December 31, 1995 between
Pharmacopeia and Bayer.
10.27***********# Employment Agreement effective November 30, 1995 between Molecular
Simulations Incorporated and Michael J. Savage
10.27(a)************# Amendment No. 1 to Employment Agreement between Molecular Simulations
Incorporated and Michael J. Savage dated as of October 1, 1997
10.28***********# Employment Agreement effective November 30, 1995 between Molecular
Simulations Incorporated and Saiid Zarrabian
10.28(a)************# Amendment No. 1 to Employment Agreement between Molecular Simulations
Incorporated and Saiid Zarrabian dated as of October 1, 1997
10.30***+ Collaborative Agreement dated as of March 29, 1996 with Daiichi
Pharmaceutical Co., Ltd.
10.30(a)*******+ Amendment No. 1 to Collaboration Agreement between the Company and Daiichi
Pharmaceutical Co., Ltd. dated April 14, 1997.
10.31****+ Research Agreement, between Pharmacopeia, Inc. and N.V. Organon dated May
31, 1996.
10.32*****# Employment Agreement, dated June 20, 1996, between the Company and Stephen
A. Spearman, Ph.D.
10.33***** Lease Agreement, dated June 21, 1996, between Pharmacopeia and South
Brunswick Rental I, Ltd.
10.34**********+ Collaboration and License Agreement between Pharmacopeia, Inc. and
Bristol-Myers Squibb Company dated November 26, 1997.
10.35************+ Joint Venture Agreement dated February 14, 1992 between Polygen Corporation
and Teijin Limited.
10.36************ Amendment No. 1 to Joint Venture Agreement dated March 30, 1998 between
Teijin Limited and Molecular Simulations Incorporated.
10.37************+ Distributorship Agreement dated April 1, 1992 between Polygen
</TABLE>
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<TABLE>
<S> <C>
Corporation and Teijin Molecular Simulations Incorporated
10.38************ Amendment to Distributorship Agreement dated October 17, 1994 between
Molecular Simulations Incorporated and Teijin Molecular Simulations
Incorporated.
10.39************+ Amendment No. 2 to Distributorship Agreement dated September 30, 1996
between Molecular Simulations Incorporated and Teijin Molecular Simulations
Incorporated.
10.40*************+ Amended and Restated Distributorship Agreement, dated March 1, 1998,
between Molecular Simulations Incorporated and Teijin Molecular Simulations
Incorporated
10.41************* Indemnity Agreement, dated March 1, 1998, between Molecular Simulations
Incorporated and Teijin Molecular Simulations Incorporated
10.42************* Lease Agreement, dated February 26, 1987, as amended, between Sorrento Tech
Limited and Biosym Technologies, Inc.
10.43++ Collaboration and License Agreement, dated as of October 29, 1998, between
Pharmacopeia, Inc. and Schering-Plough Ltd.
10.44++ Collaboration and License Agreement, dated as of October 29, 1998, between
Pharmacopeia, Inc. and Schering Corporation.
10.45 Guarantee, dated as of October 29, 1998, between Pharmacopeia, Inc. and
Schering-Plough Corporation
10.46# Employment Agreement, dated December 17, 1998, between the Company and
Lewis Shuster
10.47 Lease dated November 12, 1998 between Molecular Simulations Inc. and San
Diego Tech Center, LLC
10.48# Indemnity Agreement dated July 21, 1997 between Molecular Simulations Inc.
and C. Peter W. Booth
11.1* Statement re Computation of Per Share Earnings.
21.0 Subsidiaries of Pharmacopeia, Inc.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Arthur Andersen LLP.
24.1 Powers of Attorney (See signature page)
27.1 Financial Data Schedule
27.2************* Restated Financial Data Schedule as of June 30, 1997
</TABLE>
* Incorporated by reference to the same numbered exhibit filed with the
Company's Registration Statement on Form S-1 No. 33-93460.
** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-K for the year ended December 31, 1995.
*** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-Q for the quarter ended March 31, 1996.
**** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-Q for the quarter ended June 30, 1996.
***** Incorporated by reference to the same numbered exhibit filed with the
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Company's Form 10-Q for the quarter ended September 30, 1996.
****** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-K for the year ended December 31, 1996.
******* Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-Q for the quarter ended June 30, 1997.
******** Incorporated by reference to the same numbered exhibit filed with the
Company's form 10-Q for the quarter ended September 30, 1997.
********* Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-K for the year ended December 31, 1997.
********** Incorporated by reference to the same numbered exhibit filed with the
Company's Form 10-K/A-2 for the year ended December 31, 1997.
*********** Incorporated by reference to Exhibit 10.15 and 10.16 to Molecular
Simulations Incorporated's Registration Statement on Form S-1 (Registration No.
333-21427) listed on February 10, 1997.
************ Incorporated by reference to the same numbered exhibit filed with
the Company's Form 10-Q for the quarter ended June 30, 1998.
*************Incorporated by reference to the same numbered exhibit filed with
the Company's Form 10-Q for the quarter ended September 30, 1998.
+ Confidential treatment granted.
++ Confidential treatment requested.
# Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
There were no reports on Form 8-K required to be filed for the quarter
ended December 31, 1998.
(c) Exhibits
See Item 14 (a)(3) above.
(d) Financial Statement Schedule
See Item 14(a)(2) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PHARMACOPEIA, INC.
By: /s/ Lewis J. Shuster
--------------------------------
Lewis J. Shuster
President and
Chief Operating Officer - Pharmacopeia Labs
(Principal Accounting Officer)
Date: March 29, 1999
[Rest of Page intentionally left blank]
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lewis J. Shuster and Joseph A. Mollica,
Ph.D., jointly and severally, as his attorney-in-fact, each with full power of
substitution, for him or her, in any and all capacities, to sign each amendment
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-
fact or his or her substitute or substitutes may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Joseph A. Mollica, Ph.D. Chairman of the Board, President and March 29, 1999
- --------------------------------------- Chief Executive Officer (Principal
Joseph A. Mollica, Ph.D. Executive Officer)
/s/ Lewis J. Shuster President and Chief Operating Officer March 29, 1999
- --------------------------------------- - Pharmacopeia Labs (Principal
Lewis J. Shuster Financial and Accounting Officer)
/s/ Gary E. Costley, Ph.D. Director March 29, 1999
- ---------------------------------------
Gary E. Costley, Ph.D.
/s/ C. Peter W. Booth Director March 29, 1999
- ---------------------------------------
C. Peter W. Booth
Director March 29, 1999
- ---------------------------------------
Frank Baldino, Jr., Ph.D.
Director March 29, 1999
- ---------------------------------------
Edith W. Martin, Ph.D.
/s/ Charles A. Sanders, M.D. Director March 29, 1999
- ---------------------------------------
Charles A. Sanders, M.D.
Director March 29, 1999
/s/ Paul A. Bartlett, Ph.D.
- ---------------------------------------
Paul A. Bartlett, Ph.D.
</TABLE>
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PHARMACOPEIA, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Auditors .......................................... F-1
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets ............................................. F-3
Consolidated Statements of Operations ................................... F-4
Consolidated Statements of Stockholders' Equity ......................... F-5
Consolidated Statements of Cash Flows ................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Pharmacopeia, Inc.
We have audited the accompanying consolidated balance sheet of Pharmacopeia,
Inc. and subsidiaries as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pharmacopeia, Inc.
and subsidiaries at December 31, 1998 and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
We previously audited and reported on the balance sheet as of December 31, 1997
and the related statements of operations, stockholders' equity, and cash flows
of Pharmacopeia, Inc. for the years ended December 31, 1996 and 1997, prior to
their restatement for the 1998 pooling of interests as described in Note 3. The
contribution of Pharmacopeia, Inc. to total assets represented 68.3% as of
December 31, 1997 and its contribution to revenues represented 23.8% and 30.2%
of the restated totals for 1996 and 1997, respectively. Financial statements of
the other pooled company included in the 1996 and 1997 restated consolidated
statements were audited and reported on separately by other auditors. We also
have audited, as to combination only, the accompanying consolidated balance
sheet as of December 31, 1997 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years ended December
31, 1996 and 1997, after restatement for the 1998 pooling of interests; in our
opinion, such consolidated financial statements have been properly combined on
the basis described in Note 3 to the consolidated financial statements.
Ernst & Young LLP
Princeton, New Jersey
January 28, 1999
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Molecular Simulations Incorporated:
We have audited the consolidated balance sheet of Molecular Simulations
Incorporated (a Delaware Corporation) and subsidiaries as of December 31, 1997
and the related consolidated statements of income, stockholders' equity and cash
flows for the years ended December 31, 1996 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Molecular
Simulations Incorporated and subsidiaries as of December 31, 1997 and the
results of their operations and their cash flows for the years ended December
31, 1996 and 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Diego, California
February 4, 1998
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998
-----------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 24,609 $ 36,863
Marketable securities 60,166 44,235
Trade receivables, net of allowance for doubtful accounts of
$466 and $609, respectively 19,424 22,771
Prepaid expenses and other current assets 4,671 5,774
-----------------------------------
Total current assets 108,870 109,643
-----------------------------------
Non-current investments in marketable securities 12,865 -
Property and equipment, net 13,141 13,700
Software development costs, net of accumulated amortization of
$5,813 and $2,725, respectively 3,437 3,492
Other assets 1,738 1,030
-----------------------------------
$140,051 $127,865
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,232 $ 5,158
Accrued liabilities 18,118 21,427
Notes payable, current portion 1,566 1,316
Deferred revenue, current portion 29,345 24,415
-----------------------------------
Total current liabilities 53,261 52,316
Notes payable, long-term portion 1,852 328
Deferred revenue, long-term portion 4,342 1,764
Other long-term liabilities - 1,240
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.0001 par value, 2,000,000 shares - -
authorized; none issued and outstanding
Common stock, $.0001 par value, 40,000,000 shares authorized;
18,804,780 and 19,120,604 shares issued and outstanding
at December 31, 1997 and 1998, respectively 1 1
Additional paid-in capital 144,440 145,499
Accumulated deficit (62,657) (72,820)
Accumulated other comprehensive loss (1,188) (463)
-----------------------------------
Total stockholders' equity 80,596 72,217
-----------------------------------
$140,051 $127,865
===================================
</TABLE>
See accompanying notes to these consolidated financial statements.
F-3
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
-----------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Contract $14,799 $24,523 $29,677
Software license, service and other 41,083 49,108 54,420
Hardware 6,178 7,566 8,114
-----------------------------------------------------------
Total revenue 62,060 81,197 92,211
Cost and Expense:
Software, license and other 2,517 3,512 3,476
Hardware 5,242 6,720 7,061
Research and development:
Collaborative 13,129 16,931 20,307
Proprietary 20,945 25,251 28,656
Sales, general and administrative 28,585 31,807 38,169
Merger related costs - - 7,998
-----------------------------------------------------------
Total cost and expenses 70,418 84,221 105,667
-----------------------------------------------------------
Operating loss (8,358) (3,024) (13,456)
Interest and other income, net 4,043 4,292 4,202
-----------------------------------------------------------
Income (loss) before provision for income
taxes (4,315) 1,268 (9,254)
Provision for income taxes 3,071 2,996 909
-----------------------------------------------------------
Net loss $(7,386) $(1,728) $(10,163)
===========================================================
Basic net loss per share $(.42) $(.09) $(.54)
Diluted net loss per share $(.42) $(.09) $(.54)
Weighted average shares of common stock
outstanding-basic 17,736 18,445 18,916
Weighted average shares of common stock
outstanding-diluted 17,736 18,445 18,916
</TABLE>
See accompanying notes to these consolidated financial statements.
F-4
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
--------------------------- --------------------
ADDITIONAL
NUMBER OF SHARES PAID-IN NUMBER OF ACCUMULATED
AMOUNT CAPITAL Shares AMOUNT DEFICIT
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 17,204,635 $1 $113,025 - $ - $(53,543)
Acquisition of treasury stock 7,594 (2)
Retirement of treasury stock (7,594) (2) (7,594) 2
Issuance of common stock in private
placements 973,206 23,641
Issuance of common stock for exercise
of options 66,112 153
Issuance of common stock in employee
stock purchase plan 7,171 111
Translation adjustment
Net loss (7,386)
----------------------------------------------------------------------------
Balance at December 31, 1996 18,243,530 1 136,928 - - (60,929)
Acquisition of treasury stock 1,646 (1)
Retirement of treasury stock (1,646) (1) (1,646) 1
Issuance of common stock in private
placements, net 438,323 6,861
Issuance of common stock for exercise of
options 93,477 201
Issuance of common stock in employee
stock purchase plan 18,488 235
Issuance of common stock for 401k
matching 12,608 216
Translation adjustment
Net loss (1,728)
----------------------------------------------------------------------------
Balance at December 31, 1997 18,804,780 1 144,440 - - (62,657)
Acquisition of treasury stock 3,584 (1)
Retirement of treasury stock (3,584) (1) (3,584) 1
Issuance of common stock for exercise
of options 263,481 502
Issuance of common stock in employee
stock purchase plan 32,264 298
Issuance of common stock for 401k
matching 23,663 260
Translation adjustment
Net loss (10,163)
----------------------------------------------------------------------------
Balance at December 31, 1998 19,120,604 $1 $145,499 - $ - $(72,820)
============================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME (LOSS) EQUITY
-----------------------------------
<S> <C> <C>
Balance at December 31, 1995 $ (33) $ 59,450
Acquisition of treasury stock (2)
Retirement of treasury stock
Issuance of common stock in private
placements 23,641
Issuance of common stock for exercise
of options 153
Issuance of common stock in employee
stock purchase plan 111
Translation adjustment (466) (466)
Net loss (7,386)
-----------------------------------
Balance at December 31, 1996 (499) 75,501
Acquisition of treasury stock (1)
Retirement of treasury stock
Issuance of common stock in private
placements, net 6,861
Issuance of common stock for exercise of
options 201
Issuance of common stock in employee
stock purchase plan 235
Issuance of common stock for 401k
matching 216
Translation adjustment (689) (689)
Net loss (1,728)
-----------------------------------
Balance at December 31, 1997 (1,188) 80,596
Acquisition of treasury stock (1)
Retirement of treasury stock
Issuance of common stock for exercise
of options 502
Issuance of common stock in employee
stock purchase plan 298
Issuance of common stock for 401k
matching 260
Translation adjustment 725 725
Net loss (10,163)
-----------------------------------
Balance at December 31, 1998 $(463) $ 72,217
===================================
</TABLE>
See accompanying notes to these consolidated financial statements.
F-5
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
----------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $ (7,386) $ (1,728) $(10,163)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 2,833 3,599 4,110
Amortization 1,205 2,162 1,881
Changes in operating assets and liabilities:
Accounts receivable (1,347) (3,246) (3,347)
Prepaid expenses and other current assets (682) (258) (1,103)
Other assets (159) 353 708
Accounts payable (599) 1,856 926
Accrued liabilities 3,440 3,316 3,309
Deferred revenue 13,395 (314) (7,508)
Other (84) 37 1,227
----------------------------------------------------------
Net cash provided by (used in) operating activities 10,616 5,777 (10.960)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (7,590) (7,549) (5,283)
Increase in capitalized software development costs (1,520) (1,923) (1,322)
Effect of TMSI consolidation - - (1,113)
Purchases of held to maturity securities (95,750) (90,373) (26,756)
Purchases of available for sale securities - - (36,231)
Proceeds from sales of held to maturity securities 63,615 81,765 35,758
Proceeds from sales of available for sale securities - - 56,025
----------------------------------------------------------
Net cash provided by (used in) investing activities (41,245) (18,080) 21,078
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 23,905 7,477 1,059
Payments on note payable (1,196) (1,313) (1,590)
Additions to capital lease obligations 1,344 - -
Principal payments on capital leases (373) (193) (184)
----------------------------------------------------------
Net cash provided by financing activities 23,680 5,971 (715)
Exchange rate effect on cash (466) (627) 725
----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,415) (6,959) 10,128
Cash and cash equivalents beginning of period
(including TMSI in 1998) 38,983 31,568 24,609
----------------------------------------------------------
Cash and cash equivalents at end of period $ 31,568 $ 24,609 $ 36,863
==========================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 307 $ 379 $ 333
Income taxes $ 817 $ 1,555 $ 1,277
</TABLE>
See accompanying notes to these consolidated financial statements.
F-6
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Pharmacopeia, Inc., ("Pharmacopeia") develops combinatorial chemistry libraries
and uses these libraries alone and through collaborations to discover new, low
molecular weight compounds principally for use as pharmaceuticals.
Pharmacopeia's wholly-owned subsidiary, Molecular Simulations Incorporated and
its subsidiaries ("MSI"), which was acquired on June 12, 1998 (see Note 3)
designs, develops, markets and supports software that facilitates the discovery
and development of new products and processes in the pharmaceutical,
biotechnology, chemical, petrochemical and materials industries and also offers
consulting, training and maintenance services in support of its customers' use
of its software products. Pharmacopeia and MSI are collectively referred to
herein as the "Company".
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of Pharmacopeia,
its wholly-owned subsidiaries and, beginning in 1998, its 50% owned joint
venture (see Note 10). All significant intercompany balances and transactions
have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company invests its cash in
deposits with major financial institutions, money market funds, U.S. Treasury
securities and other investment grade securities such as prime rated commercial
paper.
MARKETABLE SECURITIES
Marketable securities consist of fixed income investments with a maturity of
greater than three months such as United States treasury securities, obligations
of United States government agencies, other investment grade securities such as
prime rated commercial paper and corporate bonds. As a result of the Company's
strategic acquisition intentions, initiated with the merger of MSI (see Note 3),
the Company as of June 30, 1998, transferred the classification of its
marketable securities of $64,029 from held-to-maturity to available-for-sale.
Available-for-sale securities are carried at market which approximates cost as
of December 31, 1998.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided over the
estimated useful lives of the related assets, which range from three to ten
years using the straight-line method. Assets under capital leases are amortized
over the lesser of the useful life of the assets or the applicable lease terms,
whichever is shorter, which approximates 5 years.
F-7
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as incurred
until technological feasibility has been established. Thereafter, the Company
capitalizes software development costs in accordance with Statement of Financial
Accounting Standards No. 86 (SFAS 86), "Accounting for the Cost of Computer
Software to be Sold, Leased or Otherwise Marketed". The Company amortizes such
capitalized costs over the estimated product life, not to exceed three years
from the date on which the product is available for general release. The
Company capitalized approximately $1,520, $1,923 and $1,394 in 1996, 1997 and
1998, respectively. Included in the accompanying consolidated statements of
operations for 1996, 1997 and 1998, respectively, is approximately $902, $1,585,
and $1,339 of amortization expense related to capitalized software.
REALIZATION OF ASSETS
The Company periodically re-evaluates the original assumptions and rationale
utilized in the establishment of the carrying value and estimated life of its
assets. The criteria used for these evaluations include management's estimates
of the assets continuing ability to generate income from operations and positive
cash flow in future periods, as well as the strategic significance of its assets
to the Company's business objectives.
FOREIGN CURRENCY TRANSLATION
The Company translates certain of its accounts and the financial statements of
its foreign operations in accordance with Statement of Financial Accounting
Standards No. 52 (SFAS No. 52), "Foreign Currency Translation". Assets and
liabilities are translated into U.S. dollars at the rate of exchange at the end
of the period. Resulting translation adjustments are reflected as a cumulative
translation adjustment which is included in accumulated other comprehensive
income (loss) within stockholders' equity. Revenue and expense accounts are
translated using the weighted average exchange rate for the period. Transaction
gains and losses are reflected in the results of operations.
CONCENTRATIONS OF RISK
The Company purchases substantially all hardware products that it resells to its
licensees from a single vendor. Management believes that other vendors could be
identified who could provide the Company and its licensees with similar hardware
products at comparable terms. However, any disruption of supply could cause a
temporary adverse effect in the Company's revenues during any period requiring
porting of the Company's software products to alternative hardware platforms or
negotiation of alternative supply and distribution agreements.
The Company licenses its products primarily to corporations, including value
added resellers and academic institutions, serving a wide variety of domestic
and foreign markets. The Company extends credit to its licensees based on its
evaluation of the customer's financial condition, generally without requiring a
deposit or collateral. Exposure to losses on receivables is principally
dependent on each customer's financial condition. The Company monitors its
exposure for credit losses and maintains allowances for estimated losses.
F-8
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's international sales are generally denominated in foreign
currencies. Losses on the conversion of foreign-denominated receivables into
U.S. dollars could have a material adverse effect on the Company's financial
statements. The Company conducts business in the Asia/Pacific region primarily
in Japan. Any significant decline in the Japanese economy or the value of its
currency could have a material adverse impact on the Company.
REVENUE RECOGNITION
Contract revenue from collaborative agreements relates to research and
development work and is recognized primarily using the percentage of completion
method. The application of this revenue recognition method is dependent on the
contractual arrangement of each agreement. Accordingly, revenue is recognized
as research and development labor (based on a contractually agreed upon dollar
amount per person) is expended against a total research and development plan
(based on a total amount of labor as defined in each agreement). Payments
received under these agreements prior to the completion of the related work are
recorded as deferred revenue. Non-refundable milestone payments and up-front
fees are recognized as contract revenue when received as the Company has no
other performance obligations.
The Company recognizes revenue from licenses of computer software provided that
the customer has signed a non-cancelable license agreement, the software and
related documentation has been shipped, no material uncertainties regarding
customer acceptance exist, collection of the resulting receivable is deemed
probable and no other significant obligations by the Company exist. Prepaid
post contract support and maintenance ("PCS") revenue bundled with software
license agreements is unbundled using objective, vendor specific evidence. PCS
revenue is recognized pro-rata over the related license period, which is
generally one year. Revenue generated from consulting, training and software
customization sold separately from license agreements are recognized as the
services are performed.
The Company earns revenue under product development and consortia agreements
wherein several unrelated parties enter into a joint product development
agreement with the Company. The Company's product development and consortia
agreements are generally one to three years in length, require an annual fee and
contain progressive milestones. In exchange for a consortia fee, customers
receive consortia membership, a software library of certain Company products and
related software maintenance support. The portion of consortia fees associated
with the initial software library is recognized by the Company in the first
month of membership, while consortia fees associated with consortia membership
and software maintenance are recognized by the Company on a straight-line basis
over the term of the agreement. The Company is not required to deliver
specified products under the agreements and the consortia fees are non-
refundable. If the Company is successful in developing products under the
product development and consortia agreements described above, a non-transferable
license is typically awarded to the consortia members.
F-9
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Under certain circumstances, the Company sells computer hardware to a licensee
of the Company's software products. In these instances, the Company typically
orders the hardware from an unrelated vendor and records revenue upon shipment
of the hardware to the licensee by the vendor.
RESEARCH AND DEVELOPMENT
All research and development costs are charged to operations as incurred.
STOCK BASED COMPENSATION
As permitted by FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company has elected to follow Accounting Principal
Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations in accounting for its employee stock option plans.
Under APB 25, no compensation expense is recognized at the time of option grant
because the exercise price of the Company's employee stock option equals the
fair market value of the underlying common stock on the date of grant.
EARNINGS PER SHARE
Basic and diluted earnings per share is calculated in accordance with FASB
Statement No. 128, earnings per share. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
requirements of Statement 128.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income ("SFAS No. 130"). SFAS No. 130 establishes new rules for the reporting
and display of comprehensive income (loss) and its components; however, the
adoption of this Statement had no impact on the Company's net loss or
stockholders' equity. SFAS No. 130 requires that foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, be included in accumulated other comprehensive income. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130. All of the Company's amounts in accumulated other comprehensive
income (loss) are attributable to translation adjustments.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company adopted the new requirements
retroactively in 1998.
F-10
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In March 1998, the AICPA issued SOP 98-1, Accounting For the Costs of Computer
Software Developed For or Obtained for Internal use. The Company is required to
adopt the SOP effective January 1, 1999. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The Company
currently expenses such costs as incurred. The Company has determined the
historical impact of adopting this SOP to be immaterial.
3. ACQUISITION
On June 12, 1998 Pharmacopeia completed its merger with MSI through the issuance
of approximately 7.1 million shares of Pharmacopeia common stock for all of the
issued and outstanding MSI Common Stock, MSI Class B Common Stock and MSI Series
A Convertible Preferred Stock. The merger has been accounted for as a pooling
of interests and accordingly, the financial statements for the periods prior to
the merger have been restated to include MSI. In connection with the merger,
the Company recorded merger-related charges of approximately $8.0 million. Such
charges consist of transaction costs, principally investment banking and
professional fees.
The following table summarizes 1998 information on a separate company basis for
Pharmacopeia and MSI prior to the completion of the merger:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1998 TO
JUNE 12, 1998
------------------------
Total revenue:
<S> <C>
Pharmacopeia $12,322
MSI 20,437
Net income (loss):
Pharmacopeia $(3,588)
MSI (1,483)
</TABLE>
4. MARKETABLE SECURITIES
Marketable securities consist of the following as of
December 31,
<TABLE>
<CAPTION>
1997 1998
-------------------------------- --------------
CURRENT NONCURRENT Current
---------------- -------------- --------------
<S> <C> <C> <C>
U.S. treasury securities and obligations of
U.S. government agencies $31,732 $ 8,501 $36,245
U.S. corporate debt securities 28,434 4,364 7,990
------- ------- -------
$60,166 $12,865 $44,235
======= ======= =======
</TABLE>
At December 31, 1997 and 1998 the fair value of the Company's marketable
securities approximated cost and therefore, there were no unrealizable gains or
losses.
F-11
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
-----------------------------------
<S> <C> <C>
Laboratory equipment $ 7,388 $ 8,477
Furniture, fixtures and equipment 4,076 4,553
Computers and software 5,633 8,287
Leasehold improvements 4,213 5,780
Other 954 453
-----------------------------------
22,264 27,550
Accumulated depreciation and amortization (9,123) (13,850)
-----------------------------------
Property and equipment, net $13,141 $ 13,700
===================================
</TABLE>
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
-----------------------------------
<S> <C> <C>
Accrued payroll and other compensation $ 7,796 $ 8,529
Royalties 1,041 946
Merger related costs - 3,867
Accrued taxes 4,975 5,108
Other 4,306 2,977
-----------------------------------
$18,118 $21,427
====================================
</TABLE>
7. INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes" which requires the
asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates applicable to
future years to differences between the financial carrying amounts and the tax
basis of existing assets and liabilities.
F-12
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
7. Income Taxes (continued)
Significant components of the Company's deferred tax assets and liabilities as
of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1998
-----------------------------------
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 16,541 $ 17,873
Unused tax credits 2,134 2,261
Accruals and reserves 2,203 2,628
Other - 258
-------------- ----------------
Gross deferred tax asset 20,878 23,020
Deferred tax liabilities:
Fixed assets and intangibles 825 948
-------------- ----------------
Net asset before valuation allowance 20,053 22,072
Valuation allowance (20,053) (22,072)
-------------- ----------------
Net deferred tax asset (liability) $ - $ -
============== ================
</TABLE>
Under SFAS No. 109, a valuation allowance is established, if based on the weight
of available evidence, it is more likely than not that a portion of the deferred
tax asset will not be realized. Accordingly, a full valuation allowance has
been provided to offset the Company's net deferred tax assets.
The provision for income taxes consists of the following for the years ended
December 31,:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal $ 47 $1,603 $ -
State 59 480 310
Foreign 1,365 913 599
Deferred:
Federal 1,600 - -
State - - -
Foreign - - -
---------------------------------
Total $3,071 $2,996 $ 909
===================================
</TABLE>
F-13
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
7. Income Taxes (continued)
The reconciliation of income taxes computed at the U.S. statutory federal tax
rate to income tax expense for the years ended December 31 are:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- ---------------
<S> <C> <C> <C>
Tax expense (benefit) at U.S.
statutory rate $(1,467) $ 431 $(3,146)
State income taxes, net of
federal income tax benefit 39 317 205
Nondeductible merger costs - - 1,788
Change in valuation allowance 2,941 1,537 1,986
Foreign Taxes 1,534 975 ( 12)
Other Items 24 (264) 88
------------- ------------- ---------------
Income tax expense $ 3,071 $2,996 $ 909
============= ============= ===============
</TABLE>
Pretax income (loss) before extraordinary item from the Company's domestic
operations totaled approximately ($3,800), $1,400 and ($10,900) for the years
ended December 31, 1996, 1997 and 1998, respectively. Pretax income (loss) from
the Company's foreign operations totaled approximately ($500), ($200) and
$1,800 for the years ended December 31, 1996, 1997 and 1998, respectively.
As of December 31, 1998, the Company has federal net operating loss
carryforwards of approximately $45.8 million. The federal net operating losses
and credits begin to expire in 2008 through 2018, if not fully utilized.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards.
As a result of certain transactions involving the Company's stock, the Company
believes an ownership change, as defined in Section 382 of the Internal Revenue
Code, has occurred. Consequently, future utilization of the Company's federal
net operating loss carryforwards may be subject to limitations.
8. STOCK PLANS
The Company has three Stock Plans, the 1994 Incentive Stock Plan, the 1995
Employee Stock Purchase Plan and the 1995 Director Option Plan.
In accordance with the 1994 Incentive Stock Plan (the "Plan"), the Company may
grant up to 2,750,000 shares of both incentive or non-qualified stock options or
stock purchase rights to officers, directors, employees, sales representatives
and consultants of the Company. The term of each incentive and non-qualified
stock option and stock purchase right is ten years or ten years and one day from
the date of grant. Vesting generally occurs over a period of not greater than
five years.
F-14
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
8. STOCK PLANS (CONTINUED)
Under the 1994 Incentive Stock Plan, 1,819,408 outstanding options and stock
purchase rights were exercisable at December 31, 1998 and there were 409,324
shares available for future grants. In addition,1,181,484 of the outstanding
options issued and exercisable were from various former MSI plans. All stock
purchase rights which are not vested are subject to repurchase by the Company.
In 1995, the Company adopted the 1995 Employee Stock Purchase Plan ("ESPP")
under Section 423 of the Internal Revenue Code. An aggregate of 250,000 shares
of common stock are reserved for offering under the ESPP. In 1998, 32,204
shares of common stock were purchased at prices ranging from $7.01 to $12.54 per
share, as determined by the ESPP. At December 31, 1998, there were 192,077
shares available for future purchase.
In accordance with the 1995 Directors Option Plan, the Company may grant up to
150,000 options to purchase shares of common stock to non-employee members of
the Board. The exercise price of the stock options shall be equal to the fair
market value per share of common stock on the option grant date. Each option
has a term of ten years from the option grant date and shall become exercisable
in a series of three equal and successive annual installments. In 1998 45,000
options were granted at an exercise price of $17.125. At December 31, 1998,
33,336 of the outstanding options were exercisable and there were 45,000 shares
available for future grants.
FASB 123 requires pro forma information regarding net income and earnings per
share as if the Company has accounted for its employee stock options and
warrants granted subsequent to December 31, 1994 and shares of common stock
purchased by employees in connection with the ESPP ("equity awards") under the
fair value method of FASB 123. The fair value of these equity awards was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for 1996, 1997 and 1998,
respectively: risk-free interest rates of 6.17%, 5.44% and 4.49%; expected
volatility of 59.70, 47.00 and 81.00; expected option life of 5.6, 5.8 and 5.9
years from vesting and an expected dividend yield of 0.0%.
For purposes of pro forma disclosures, the estimated fair value of the equity
awards is amortized to expense over the options' vesting period. The Company's
pro forma information is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net loss................................. $(9,014) $(5,224) $(17,209)
Pro forma basic net loss per share................. $ (.51) $ (.28) $ (.91)
</TABLE>
F-15
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, 1998
8. STOCK PLANS (CONTINUED)
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1996, 1997, and 1998 follows:
<TABLE>
<CAPTION>
------------------------------- ------------------------------ ------------------------------
1996 1997 1998
------------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
Common Stock Average Common Average Common Stock Average
Options Exercise Stock Exercise Options Exercise
Price Options Price Price
-------------- -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,152,343 $ 1.91 2,650,397 $ 6.41 3,164,229 $ 8.19
Granted....................... 722,906 19.22 778,524 13.94 1,217,504 12.45
Exercised..................... (81,700) 2.91 (109,169) 3.32 (295,578) 2.42
Forfeited..................... (143,152) 2.26 (155,523) 9.01 (361,133) 13.01
-------------- ------------- --------------
Outstanding at end of year 2,650,397 6.41 3,164,229 8.19 3,725,022 9.54
============== ============= ==============
Exercisable at end of year 843,258 1,450,000 1,852,744
============== ============= ==============
Weighted average fair value of
options granted during the year 8.03 10.58 6.52
</TABLE>
Stock options outstanding at December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Outstanding Weighted Average Exercise
Range of Options at Remaining Price
Exercise Prices December 31, 1998 Contractual Life
- ------------------- -------------------------- --------------------------- ---------------------
<S> <C> <C> <C>
$ .48 68,991 5.9 $ .46
$ 1.24 - $19.00 3,331,049 6.5 8.66
$19.38 - $26.75 324,982 7.7 21.81
--------------------------
$ .48 - $26.75 3,725,022 6.6 9.66
--------------------------
</TABLE>
F-16
<PAGE>
Pharmacopeia, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
DECEMBER 31, 1998
9. Segment information
Pharmacopeia operates in two business segments. The Company's Laboratory
Services segment develops combinatorial chemistry libraries and uses these
libraries alone and through funded collaborations to discover new, low molecular
weight compounds principally for use as pharmaceuticals. The Company's Software
segment designs, develops, markets and supports software that facilitates the
discovery and development of new products and processes in the pharmaceutical,
biotechnology, chemical petrochemical and materials industries. Summarized
financial information concerning the industry segments and geographic areas in
which the Company operated at December 31, 1996, 1997 and 1998 and for each of
the years then ended is presented in the following tables:
<TABLE>
<CAPTION>
BUSINESS SEGMENTS 1996 1997
-------------------------------------------- --------------------------------------------
Laboratory Laboratory
SOFTWARE Services TOTAL SOFTWARE Services TOTAL
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Contract $ - $ 14,799 $ 14,799 $ - $ 24,523 $ 24,523
Software licenses, service and
Other 41,083 - 41,083 49,108 - 49,108
Hardware 6,178 - 6,178 7,566 - 7,566
---------------------------------------------------------------------------------------------
Total Revenue $47,261 $ 14,799 $ 62,060 $56,674 $ 24,523 $ 81,197
============================================================================================
Operating income (loss) $ 3,700 ($12,058) ($8,358) $ 7,820 ($10,844) ($3,024)
============================================================================================
Total Assets $39,665 $ 91,979 $131,644 $44,364 $ 95,687 $140,051
============================================================================================
GEOGRAPHIC INFORMATION
Revenues (2)(3):
U.S. $ 48,910 $ 62,444
Europe 13,150 18,753
------------- -------------
Asia-Pacific - -
Total: $ 62,060 $ 81,197
============= =============
</TABLE>
<TABLE>
<CAPTION>
BUSINESS SEGMENTS 1998
-------------------------------------------------
Laboratory
SOFTWARE Services Total
-------------------------------------------------
<S> <C> <C> <C>
Revenue:
Contract $ - $ 29,677 $ 29,677
Software licenses, service and
Other 54,420 - 54,420
Hardware 8,114 - 8,114
-------------------------------------------------
Total Revenue $62,534 $ 29,677 $ 92,211
=================================================
Operating income (loss) $ 1,090 ($14,546) (1)($13,456)
=================================================
Total Assets $52,889 $ 74,976 $ 127,865
=================================================
GEOGRAPHIC INFORMATION
Revenues (2)(3):
U.S. $ 58,601
Europe 22,739
Asia-Pacific 10,871
-----------------
Total: $ 92,211
=================
</TABLE>
(1) Includes $8.0 million of merger related costs.
(2) Revenue in the U.S. category for 1996 and 1997 includes export sales
primarily to TMSI, the Company's sales and distribution entity for Asia
Pacific region. TMSI was accounted for under the equity method during 1996
and 1997, and was consolidated in 1998.
(3) Export sales totaled $28,944, $21,811 and $18,489 in 1996, 1997 and 1998,
respectively.
F-17
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
DECEMBER 31, 1998
10. Joint Venture Agreement
The Company owns a 50% interest in Teijin Molecular Simulations Incorporated
(TMSI), a Japan corporation formed for the purpose of marketing, distribution,
licensing, selling and supporting the Company's products in Asia. For periods
through December 31, 1997 the Company used the equity method of accounting for
the joint venture. The Company had product sales to TMSI of approximately
$5,924 and $8,478 in 1996 and 1997, respectively. The products are typically
shipped directly to the end user by the Company.
Condensed financial information of TMSI as of and for the years ended December
31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1996 1997
----------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Current assets...................................... $5,425 $ 4,790
Non-current assets.................................. 642 583
Current liabilities................................. 4,028 3,353
Stockholders' Equity................................ 2,039 2,020
Revenue............................................. 6,490 11,067
Operating income.................................... 267 848
Net income.......................................... 110 343
</TABLE>
As a result of certain changes to the joint venture agreement related to the
management and control of the joint venture, in 1998 the Company began to
consolidate its interest in TMSI.
As of December 31, 1998 the Company has a remaining obligation to Teijin Limited
of $700 which will be paid in 1999.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has several operating leases or sub-leases for office and laboratory
space, which expire at various dates through February 28, 2007.
The future minimum lease commitments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999 $ 4,361
2000 4,370
2001 4,359
2002 4,322
2003 4,365
Thereafter 11,339
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998 was $2,846,
$3,793 and $4,435, respectively.
F-18
<PAGE>
PHARMACOPEIA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATE)
DECEMBER 31, 1998
11. Commitments and Contingencies (continued)
ROYALTIES
The Company pays royalties to approximately forty-five partners for the
worldwide licenses to enhance and market certain software developed at
universities, corporations and other institutions. A majority of the royalty
agreements are long term or perpetual in nature and the royalty obligations
thereunder are generally based on a percentage of revenues derived from certain
software licenses plus associated revenues from post contract support and
maintenance. The royalty agreements require quarterly payments and generally do
not limit the maximum royalty amount under the agreement. Certain agreements
contain provisions for quarterly and annual minimum royalties of approximately
$457. The Company paid royalties under these agreements of approximately $606,
$1,333 and $2,110 in 1996, 1997 and 1998, respectively. Approximately $701,
$1,304 and $1,623 of royalty expense related to royalty agreements is included
in license cost of revenue for the year ended December 31, 1996, 1997 and 1998,
respectively. Based on existing royalty agreements the Company expects to incur
significant future royalty obligations.
On July 16, 1993, the Company entered into a license agreement with the Trustees
of Columbia University and Cold Spring Harbor Laboratory. The agreement grants
to the Company an exclusive, worldwide license to certain technology for making
and using combinatorial chemical libraries. The agreement includes annual
license fees and certain royalties to be made by the Company. In October 1995,
the Company amended this license agreement and issued warrants to purchase
100,000 shares of common stock at $10.00 per share, exercisable through October
5, 2000 or earlier as defined in the warrants the years ended December 31, 1996,
1997, and 1998 the Company paid royalties and license fees to Columbia
University of $590, $550 and $514, respectively.
Litigation
In the ordinary course of business, the Company is subject to claims and, from
time to time, is named in various legal proceedings. In the opinion of
management, the amount of ultimate liability, if any, with respect to any
pending actions will not materially affect the financial position or results of
operations of the Company.
F-19
<PAGE>
Pharmacopeia, Inc. and Subsidiaries
Report on Form 10-K for the
Year ended December 31, 1998
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Exhibit Name Numbered
Page
<S> <C>
10.43++ Collaboration and License Agreement, dated as of October 29, 1998,
between Pharmacopeia, Inc. and Schering-Plough Ltd.
10.44++ Collaboration and License Agreement, dated as of October 29, 1998,
between Pharmacopeia, Inc. and Schering Corporation
10.45 Guarantee, dated as of October 29, 1998, between Pharmacopeia, Inc.
and Schering-Plough Corporation
10.46# Employment Agreement, dated December 17, 1998, between the Company
and Lewis Shuster
10.47 Lease dated November 12, 1998 between Molecular Simulations Inc. and
San Diego Tech Center, LLC
10.48# Indemnity Agreement dated July 21, 1997 between Molecular
Simulations Inc. and C. Peter W. Booth
21.0 Subsidiaries of Pharmacopeia, Inc.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
24.1 Powers of Attorney (see signature page)
27.1 Financial Data Schedule (filed electronically with the SEC only)
++ Confidential treatment requested
# Represents a management contract or compensatory plan or arrangement
</TABLE>
F-20
<PAGE>
Exhibit 10.43
COLLABORATION AND LICENSE AGREEMENT
By and Among
PHARMACOPEIA, INC.
and
SCHERING-PLOUGH LTD.
<PAGE>
Table of Contents
ARTICLE I - DEFINITIONS 1
1.1 ACCEPTANCE 1
1.2 ACTIVE COMPOUND 1
1.3 AFFILIATE 1
1.4 AGREEMENT COMPOUND 2
1.5 AGREEMENT PRODUCT 2
1.6 COLLABORATION 2
1.7 COLLABORATION COMMITTEE 2
1.8 COLLABORATION RESEARCH PLAN 2
1.9 COLLABORATION PLATFORM TECHNOLOGY 2
1.10 COLLABORATION TARGET-SPECIFIC TECHNOLOGY 2
1.11 COLLABORATION TECHNOLOGY 2
1.11.1 Collaboration Patent Rights 2
1.11.2 Collaboration Know-How 3
1.12 COLUMBIA LICENSE 3
1.13 COMBINATION PRODUCT 3
1.14 DERIVATIVE COMPOUND 3
1.15 DEVELOPMENT CANDIDATE 3
1.16 DISCOVERY LIBRARY 3
1.16.1 Collaboration Discovery Library 3
1.16.2 SP Discovery Library 3
1.17 EXCLUSIVITY PERIOD 3
1.18 FDA 4
1.19 FIRST COMMERCIAL SALE 4
1.20 FTE 4
1.21 HRD 4
1.22 IND 4
1.23 LEAD COMPOUND 4
1.24 LIBRARY 4
1.25 LIBRARY COMPOUND 4
1.26 MAJOR MARKET 4
-i-
<PAGE>
1.27 NDA 4
1.28 NET SALES 4
1.29 OPTIMIZATION LIBRARY 5
1.30 PHARMACOPEIA CHANGE IN CONTROL 5
1.31 PHARMACOPEIA ENABLING TECHNOLOGY 5
1.32 PHARMACOPEIA TECHNOLOGY 5
1.32.1 Existing Pharmacopeia Patent Rights 5
1.32.2 Existing Pharmacopeia Know-How 6
1.32.3 Pharmacopeia Improvements 6
1.33 PHASE III 6
1.34 PRODUCT 6
1.35 REGULATORY APPROVAL 6
1.36 SCHERING COMPOUND 6
1.37 SCHERING TECHNOLOGY 6
1.37.1 Schering Patent Rights 6
1.37.2 Schering Know-How 7
1.37.3 Schering Improvements 7
1.38 SP PRODUCT 7
1.39 SUBLICENSEE 7
1.40 TARGET 7
1.41 TERRITORY 7
1.42 THIRD PARTY 7
1.43 US AGREEMENT 7
ARTICLE II - COLLABORATION 8
2.0 COLLABORATION EFFECTIVE DATE 8
2.1 COLLABORATION RESEARCH PLAN 8
2.2 COLLABORATION TERM 8
2.2.1 Extension of Collaboration Term 8
2.2.2 Termination of Collaboration Upon Pharmacopeia
Change in Control 8
2.3 PHARMACOPEIA RESPONSIBILITIES 8
2.4 SPL RESPONSIBILITIES 9
2.5 COLLABORATION STAFFING 9
2.5.1 PHARMACOPEIA FTE COMMITMENTS 9
2.5.2 SPL FTE COMMITMENTS 10
2.6 ADDITIONAL COLLABORATION EXPENSES 10
2.6.1 Capital Expenditures 10
2.6.2 Third Party Licenses re Pharmacopeia Enabling Technology 11
-ii-
<PAGE>
2.6.3 Other Third Party Licenses 11
2.7 RESERVED TARGETS 11
2.8 RECORD KEEPING AND INSPECTION OF RECORDS 12
2.9 LIBRARIES 12
2.9.0 Discovery Libraries 12
2.9.1 Classification; Limit on SP Discovery Libraries 12
2.9.2 Identification of Targets 13
2.9.3 Coded Targets 13
2.9.4 Targets for Optimization Libraries 13
2.10 COMPOUND IDENTIFICATION 13
2.11 COPIES OF LIBRARIES 13
2.12 ACTIVE COMPOUNDS 14
2.13 RETAINED RIGHTS 14
2.14 PHARMACOPEIA INDEPENDENT RESEARCH ACTIVITIES 14
2.14.1 Activities Outside the Collaboration 14
2.14.2 Restrictions on Use of Collaboration Technology 14
ARTICLE III - COLLABORATION MANAGEMENT 14
3.1 COLLABORATION COMMITTEE 14
3.2 DESIGN OF LIBRARIES; FRESH LIBRARIES 15
3.3 COLLABORATION COMMITTEE MEETINGS 15
3.4 COLLABORATION COMMITTEE DECISIONS 15
3.5 DEVELOPMENT STATUS; NOTICE OF SALE OF PRODUCTS 16
3.6 DILIGENCE 16
ARTICLE IV - LICENSES AND EXCLUSIVITY 16
4.1 LICENSE TO SPL 16
4.1.1 Compounds and Products 16
4.1.2 Collaboration Target-Specific Technology 17
4.2 SUBLICENSES 17
4.3 DIRECT AFFILIATE LICENSES 17
4.4 COLLABORATION PLATFORM TECHNOLOGY 17
4.5 THIRD PARTY RIGHTS 17
4.5.1 Pharmacopeia Third Party Activities 17
4.5.2 No Liability 18
4.5.3 Pharmacopeia Reports to SPL On Third Party Rights 18
4.6 COLUMBIA SUBLICENSE 18
4.7 COLLABORATION RESEARCH ACTIVITIES 18
-iii-
<PAGE>
4.8 PHARMACOPEIA'S USE OF LIBRARY COMPOUNDS FOR QUALITY CONTROL 19
4.9 LIBRARY EXCLUSIVITY 19
4.9.1 Optimization Libraries 19
4.9.2 SP Discovery Libraries 19
4.9.3 Collaboration Discovery Libraries 19
4.9.4 Extension of Exclusivity for Collaboration
Discovery Libraries 20
4.9.5 Co-Exclusive Collaboration Discovery Libraries 20
4.10 NO OTHER PRODUCTS 21
4.11 LICENSE GRANT BACK FOR ABANDONED AGREEMENT COMPOUNDS 21
ARTICLE V - PAYMENTS 21
5.1 PAYMENTS BY SPL 21
5.2 COLLABORATION FUNDING 21
5.2.1 Funding During Year One 21
5.2.2 Funding During Subsequent Years 21
5.2.3 Increased FTE Requirements 21
5.2.4 Wind-Down in Final Year 21
5.2.5 Annual FTE Rate Adjustments 22
5.2.6 Quarterly Adjustment 22
5.2.7 Manner of Payment 22
5.3 MILESTONE PAYMENTS 23
5.3.1 Events and Amounts 23
(a) Discovery Library Milestones 23
(b) Optimization Library Milestones 23
5.3.2 Lead Compound 23
5.3.3 Development Candidate 24
5.3.4 Manner of Payment 24
5.3.5 Announcement of Milestones 24
5.4 ROYALTIES 24
5.4.1 Base Royalty 24
5.4.2 Royalty Term for Agreement Products 25
5.4.3 Royalty Terms for SP Products 25
5.4.4 Single Royalty; Non-Royalty Sales 25
5.4.5 Third Party Royalties 26
(a) SPL Responsibilities 26
(b) * 26
5.4.6 Compulsory Royalty Reductions 26
5.4.7 Royalty Overpayment 26
5.5 REPORTS; PAYMENT OF ROYALTY; PAYMENT EXCHANGE RATE
AND CURRENCY CONVERSIONS 26
5.5.1 Royalty Reports and Payments 26
5.5.2 Payment Method 27
5.5.3 Place of Royalty Payment and Currency Conversions 27
5.6 MAINTENANCE OF RECORDS; AUDITS 27
5.6.1 Records; Inspection 27
_________________
* CONFIDENTIAL TREATMENT REQUESTED
-iv-
<PAGE>
5.7 COORDINATION WITH PAYMENTS UNDER US AGREEMENT 28
5.8 TAX MATTERS 28
5.8.1 Withholding Taxes 28
5.8.2 Sales Taxes 28
5.9 PRODUCT DEVELOPMENT COSTS 28
ARTICLE VI - PATENTS AND INVENTIONS 28
6.1 OWNERSHIP OF SCHERING TECHNOLOGY AND PHARMACOPEIA TECHNOLOGY 28
6.2 OWNERSHIP OF COLLABORATION TECHNOLOGY 29
6.3 FILING, PROSECUTION AND MAINTENANCE OF PATENTS 29
6.3.1 Collaboration Technology 29
6.3.2 Collaboration Platform Technology 29
6.3.3 Schering Technology 29
6.3.4 Pharmacopeia Technology 30
6.3.5 Pharmacopeia's Rights Regarding Patents Relating
to Agreement Compounds 30
6.4 COOPERATION 30
6.4.1 Cooperation 30
6.5 ENFORCEMENT 31
6.5.1 Notice 31
6.5.2 Collaboration Technology 31
6.5.3 Collaboration Platform Technology 31
6.5.4 Schering Technology and Pharmacopeia Technology 31
6.5.5 Cooperation; Costs and Recoveries 31
6.6 INFRINGEMENT CLAIMS 32
6.7 CERTIFICATION UNDER DRUG PRICE COMPETITION AND
PATENT RESTORATION ACT 32
6.8 PATENT TERM RESTORATION 32
ARTICLE VII - CONFIDENTIALITY 32
7.1 CONFIDENTIAL INFORMATION 32
7.2 PERMITTED USE AND DISCLOSURES 33
7.3 RETURN OF CONFIDENTIAL INFORMATION 33
7.4 NONDISCLOSURE OF TERMS 33
7.5 PUBLICATION 33
7.6 PHARMACOPEIA EMPLOYEES 34
ARTICLE VIII - REPRESENTATION, WARRANTIES AND COVENANTS 34
8.1 SPL 34
8.2 PHARMACOPEIA 34
8.3 COMPLIANCE WITH AGREEMENT AND LAWS 35
-v-
<PAGE>
8.4 DISCLAIMER 35
ARTICLE IX - INDEMNIFICATION 35
9.1 INDEMNIFICATION BY SPL 35
9.2 INDEMNIFICATION BY PHARMACOPEIA 36
9.3 NO CONSEQUENTIAL DAMAGES 36
9.4 PROCEDURE 36
9.5 INSURANCE 36
ARTICLE X - TERM AND TERMINATION 36
10.1 TERM AND EXPIRATION 36
10.2 TERMINATION FOR CAUSE 37
10.3 TERMINATION UPON BANKRUPTCY OR INSOLVENCY 37
10.4 TERMINATION FOR PHARMACOPEIA CHANGE IN CONTROL 38
10.5 CONCURRENT TERMINATION WITH THE US AGREEMENT 38
10.6 EFFECT OF TERMINATION 38
10.6.1 Accrued Obligations 38
10.6.2 Return of Materials 38
10.6.3 Effect on Agreement Products 39
10.6.4 Licenses 39
(a) Termination by Pharmacopeia Pursuant to Section 10.2 39
(b) Termination by SPL Pursuant to Sections 10.2 or 10.3 39
(c) Termination by Pharmacopeia Pursuant to Section 10.3 39
(D) TERMINATION BY SCHERING PURSUANT TO SECTION 10.4 39
10.6.5 Surviving Provisions 39
ARTICLE XI - MISCELLANEOUS 40
11.1 ASSIGNMENT 40
11.2 GOVERNING LAW 40
11.3 DISPUTE RESOLUTION 40
11.4 NO IMPLIED LICENSES 40
11.5 REPRESENTATION BY LEGAL COUNSEL 40
11.6 WAIVER 40
11.7 INDEPENDENT CONTRACTORS 40
11.8 SOLICITATION OF EMPLOYEES 41
11.9 COMPLIANCE WITH LAWS 41
-vi-
<PAGE>
11.10 EXPORT CONTROL 41
11.11 PATENT MARKING 41
11.12 NOTICES 41
11.13 FORCE MAJEURE 42
11.14 SEVERABILITY 42
11.15 COUNTERPARTS 42
11.16 CAPTIONS 42
11.17 COMPLETE AGREEMENT 42
11.17.1 Final Agreement and Amendments 43
11.17.2 Relationship to US Agreement; Controlling Provisions 43
11.18 RECORDING 43
11.19 FURTHER ACTIONS 43
EXHIBIT A - CURRENCY CONVERSION
SCHEDULE 1.28 - Elements Of Fully Absorbed Manufacturing Costs
-vii-
<PAGE>
COLLABORATION AND LICENSE AGREEMENT
This COLLABORATION AND LICENSE AGREEMENT (the "Agreement"), effective as of
October 29, 1998 (the "Effective Date"), is made by and among: Pharmacopeia,
Inc., a Delaware corporation having its principal place of business at 3000 East
Park Boulevard, Cranbury, New Jersey 08512, (hereinafter referred to as
"Pharmacopeia"); and Schering-Plough Ltd., a Swiss corporation having its
principal place of business at Toepferstrasse 5, CH 6004, Lucerne, Switzerland,
(hereinafter referred to as "SPL"). Pharmacopeia and SPL are sometimes referred
to herein individually as a Party and collectively as the Parties. References
to "SPL" and "Pharmacopeia" shall include their respective Affiliates (as
hereinafter defined).
WHEREAS, Pharmacopeia has developed proprietary technologies relating to
the design and preparation of encoded compound libraries based upon
combinatorial chemistry; and
WHEREAS, SPL and Pharmacopeia desire to collaborate to design, prepare and
screen compound libraries against SPL's biological targets; and
WHEREAS, Pharmacopeia and SPL's Affiliate Schering Corporation have entered
into a collaboration and license agreement relating to the United States, its
territories, possessions and commonwealths, of even date herewith;
NOW, THEREFORE, in consideration of the covenants, conditions, and
undertakings herein contained, SPL and Pharmacopeia hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following capitalized terms, whether used in
the singular or plural, shall have the respective meanings set forth below:
1.1 "Acceptance" shall mean, with respect to an IND, NDA or HRD submitted
----------
by or on behalf of SPL or its Affiliate or Sublicensee, notice by the FDA (or an
analogous regulatory authority in another country) that the IND, NDA or HRD has
been accepted for review by the FDA (or analogous regulatory authority). In the
event that the FDA (or analogous regulatory authority) is not required to
provide such a notice of acceptance of an IND, NDA or HRD, then "Acceptance"
shall be deemed to occur: (i) in the case of an IND, thirty (30) days following
the date of submission, or if previously rejected any resubmission, of such IND;
or (ii) in the case of an NDA or HRD, sixty (60) days following the date of
submission, or if previously rejected any resubmission, of such NDA or HRD,
unless in each case SPL or its Affiliates or Sublicensee receives notice from
the FDA (or analogous regulatory authority), during the applicable thirty (30)
or sixty (60) day period, that the NDA or HRD is not acceptable for review.
1.2 "Active Compound" shall mean, except as otherwise provided in
---------------
Section 2.12, a Library Compound that demonstrates activity against a specific
Target, which Library Compound (i) was found to have such activity at a
concentration set forth in the applicable Collaboration Research Plan during
screening of one or more Libraries by Pharmacopeia in the conduct of the
Collaboration or (ii) was found to have such activity during screening by or on
behalf of SPL.
1.3 "Affiliate" shall mean any individual or entity directly or indirectly
---------
controlling, controlled by or under common control with, a Party to this
Agreement. For purposes of this Agreement, the direct or indirect ownership of
fifty percent (50%) or more of the outstanding voting
-1-
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securities of an entity, or the right to receive fifty percent (50%) or more of
the profits or earnings of an entity shall be deemed to constitute control, or
if not meeting the preceding requirements, any company owned or controlled by or
owning or controlling Pharmacopeia or SPL at the maximum control or ownership
right permitted in a country where such company exists. Such other relationship
as in fact results in actual control over the management, business and affairs
of an entity shall also be deemed to constitute control.
1.4 "Agreement Compound" shall mean any Active Compound or Derivative
------------------
Compound as well as any compositions-of-matter claimed in patent applications
filed or patents issued under Article VI which claim an Active Compound or
Derivative Compound.
1.5 "Agreement Product" shall mean any product containing an Agreement
-----------------
Compound, including, without limitation, products for the therapeutic or
prophylactic treatment or prevention of diseases and conditions in human beings
or animals.
1.6 "Collaboration" shall mean the research and drug discovery programs
-------------
to be performed at Pharmacopeia's facilities by SPL or Pharmacopeia under this
Agreement to discover Agreement Compounds for further development by SPL.
1.7 "Collaboration Committee" shall have the meaning set forth in
-----------------------
Section 3.1.
1.8 "Collaboration Research Plan" shall have the meaning set forth in
---------------------------
Section 2.1.
1.9 "Collaboration Platform Technology" shall mean Collaboration
---------------------------------
Technology relating to assays, compound screening methods and biological
research tools, in each case which are demonstrated to be broadly applicable
(i.e., can be readily applied and used in research directed to a variety of
pharmacologically distinct Targets); provided, however, that Collaboration
-------- -------
Platform Technology shall not include any rights in or to (1) any of SPL's
Targets, (2) any Library Compounds, or (3) any Agreement Compounds.
1.10 "Collaboration Target-Specific Technology" shall mean
----------------------------------------
Collaboration Technology relating to assays, compound screening methods and
biological research tools, in each case which are discovered and developed
through Collaboration research directed to a specific Target, or a small number
of closely related Targets (e.g. a family of biological receptor subtypes), and
are not readily applicable to other types of Targets; provided, however, that
-------- -------
Collaboration Target-Specific Technology shall not include any rights in or to
(1) any of SPL's Targets, (2) any Library Compounds, or (3) any Agreement
Compounds.
1.11 "Collaboration Technology" shall mean Collaboration Patent Rights and
------------------------
Collaboration Know-How.
1.11.1 "Collaboration Patent Rights" shall mean: (i) all patents and
---------------------------
patent applications claiming any invention or discovery made by or on behalf of
Pharmacopeia in performance of the Collaboration (including, without limitation,
the synthesis and composition of matter of any Agreement Compound, or method of
use thereof); and (ii) any divisions, continuations, continuations-in-part,
reissues, reexaminations, extensions or other governmental actions which extend
any of the subject matter of the patent applications or patents in (i) above,
and any substitutions, confirmations, registrations, revalidations, or additions
of any of the foregoing, in each case, which is owned or controlled, in whole or
part, by license, assignment or otherwise by Pharmacopeia during the term of
this Agreement; provided, however, that Collaboration Patent Rights shall not
-------- -------
include any patents or patent applications which are Schering Technology,
Pharmacopeia Technology or Pharmacopeia Enabling Technology.
-2-
<PAGE>
1.11.2 "Collaboration Know-How" shall mean all proprietary ideas,
----------------------
inventions, data, know-how, instructions, processes, formulas, materials,
expert opinion and information (including, without limitation, (i) biological,
chemical, physical and analytical data and information relating to Agreement
Compounds, and (ii) any structure-function data obtained from Library Compounds)
discovered and/or developed in performance of the Collaboration by or on behalf
of Pharmacopeia, in each case, to the extent Pharmacopeia has the right to
license or sublicense the same, and subject to any limitations and prohibitions
of such license or sublicense; provided, however, that Collaboration Know-How
-------- -------
shall not include Collaboration Patent Rights, Schering Technology, Pharmacopeia
Technology or Pharmacopeia Enabling Technology.
1.12 "Columbia License" shall mean that certain License Agreement
----------------
effective as of July 16, 1993, as amended and restated as of October 6, 1995,
entered by and between Pharmacopeia, Inc., the Trustees of Columbia University
in the City of New York and the Cold Spring Harbor Laboratory.
1.13 "Combination Product" shall mean a Product which comprises two
-------------------
(2) or more active therapeutic ingredients at least one (1) of which is an
Agreement Compound or a Schering Compound.
1.14 "Derivative Compound" shall mean any compound, other than a Library
-------------------
Compound, derived (a) by or on behalf of SPL, or (b) in the performance of the
Collaboration by Pharmacopeia, in each case from an Active Compound, and having
activity against the same Target as such Active Compound. As used herein, a
compound shall be deemed to have been "derived from" an Active Compound if it *.
1.15 "Development Candidate" shall mean a Lead Compound or derivative
---------------------
thereof which possesses the desirable properties of a therapeutic agent for the
prevention or treatment of a clinical condition, in the absence of required
safety trials necessary to begin human testing.
1.16 "Discovery Library" shall mean a Library transferred to SPL pursuant
-----------------
to this Agreement for screening against one or more Targets and which is not an
Optimization Library.
1.16.1 "Collaboration Discovery Library" shall mean a Discovery
-------------------------------
Library that is not an SP Discovery Library.
1.16.2 "SP Discovery Library" shall mean a Discovery Library based
--------------------
on one or more specific SPL proprietary core structures which core structures
are (i) discovered, designed or developed by or on behalf of SPL without
assistance or information from Pharmacopeia or any Pharmacopeia employee, or
(ii) designed or developed by Pharmacopeia based on proprietary SPL structures
or structure-function data.
1.17 "Exclusivity Period" shall mean, with respect to any Collaboration
------------------
Discovery Library and for all Library Compounds contained in such Library, that
period commencing on the date Pharmacopeia first provides SPL notice that such
Collaboration Discovery Library is available to be shipped to SPL or Schering
Corporation. (the "Notice Date"), and continuing until *,
or such later date as may be established under Section 4.9.4 below. In the
event that SPL is unable to accept delivery of any Collaboration Discovery
Library at the time of the applicable Notice Date, SPL may, upon written notice
to Pharmacopeia, delay delivery of such Collaboration Discovery Library, in
which case the Notice Date with respect to such Collaboration Discovery Library
shall be deemed to be the earlier of (i) the date that SPL notifies Pharmacopeia
that
__________________
* CONFIDENTIAL TREATMENT REQUESTED
-3-
<PAGE>
SPL is ready to accept delivery of the first plates from such Collaboration
Discovery Library or (ii) the date three (3) months after the original Notice
Date.
1.18 "FDA" shall mean the United States Food and Drug Administration
---
or any corresponding foreign registration or regulatory authority.
1.19 "First Commercial Sale" shall mean, with respect to any Product,
---------------------
the first sale for end use of such Product in the Territory after receipt of the
requisite Regulatory Approval.
1.20 "FTE" shall mean a full-time employee dedicated to the conduct
---
of the Collaboration or, in the case of less than full-time dedication, a full-
time equivalent person-year, based on a total of forty-six and one-fourth
(46.25) weeks or one thousand eight hundred fifty (1,850) hours per year, of
work on or directly related to the Collaboration.
1.21 "HRD" shall mean a health registration dossier or its equivalent
---
covering an Agreement Product filed in any country outside the United States and
which is analogous to an NDA and including, where applicable, applications for
pricing, pricing reimbursement approval, labeling and Regulatory Approval.
1.22 "IND" shall mean an Investigational New Drug application, as defined
---
U.S. Food, Drug and Cosmetic Act and the regulations promulgated thereunder for
initiating clinical trials in the United States, or any corresponding foreign
application, registration or certification.
1.23 "Lead Compound" shall mean any Active Compound or Derivative
-------------
Compound with respect to which SPL or its Affiliates initiates a program of
medicinal chemistry to identify a Development Candidate based upon the structure
of such Active Compound or Derivative Compound.
1.24 "Library" shall mean any chemical compound library prepared by
-------
Pharmacopeia employees working on the Collaboration, and/or SPL employees
working at Pharmacopeia's facilities on the Collaboration, under the terms of
this Agreement using (i) combinatorial chemistry techniques or (ii) such other
techniques as may, from time to time, be agreed by the Parties.
1.25 "Library Compound" shall mean any compound which is contained in
----------------
a Discovery Library or Optimization Library hereunder.
1.26 "Major Market" shall mean Japan or any three (3) of the following
------------
countries; France, Germany, Italy, Spain or the United Kingdom.
1.27 "NDA" shall mean a New Drug Application, Product License
---
Application, or Biologic License Application, as defined in the U.S. Food Drug
and Cosmetics Act and regulations promulgated hereunder, or the equivalent filed
with the FDA seeking approval to market and sell a Product in the United States.
1.28 "Net Sales" shall mean, with respect to each country in the
---------
Territory, the invoice price billed by SPL or its Affiliates, or their
respective Sublicensees, to Third Parties (whether an end-user, a distributor or
otherwise) for the sale of Products, and exclusive of intercompany transfers or
sales among SPL, its Affiliates and/or Sublicensees in the Territory, less the
reasonable and customary deductions from such gross amounts including: (i)
normal and customary trade, cash and quantity discounts, allowances and credits;
(ii) credits or allowances actually granted for damaged goods, returns or
rejections of Product and retroactive price reductions; (iii) sales or similar
taxes (including duties or other governmental charges levied on, absorbed or
otherwise imposed on the sale of Product including, without limitation, value
added taxes or other governmental charges otherwise measured by the billing
amount, when included in billing); (iv) freight, postage, shipping, customs
duties and
-4-
<PAGE>
insurance charges, when included in billing; (v) charge back payments and
rebates granted to managed health care organizations or their agencies, and
purchasers and reimbursers or to trade customers, including but not limited to,
wholesalers and chain and pharmacy buying groups; (vi) commissions paid to
Third Parties other than sales personnel and sale representatives or sales
agents; and (vii) rebates (or equivalents thereof) granted to or charged by
national, state or local governmental authorities in a country in the Territory.
In determining Net Sales of a Product any of the above discounts shall be
accounted for and apportioned based on the list price of each such Product.
In the event that a Product is sold in the form of a Combination Product,
Net Sales for such Combination Product will be calculated by multiplying actual
Net Sales of such Combination Product by the fraction A/(A+B) where: A is the
invoice price of the Agreement Product and/or Schering Compound contained in the
Combination Product if sold separately by SPL, an Affiliate or Sublicensee; and
B is the invoice price of any other active therapeutic ingredients in the
Combination Product if sold separately by SPL, an Affiliate or Sublicensee. In
the event that the Product is sold in the form of a Combination Product
containing one or more active therapeutic ingredients other than an Agreement
Product and/or Schering Compound and one or more such active therapeutic
ingredients of the Combination Product are not sold separately, then the above
formula shall be modified such that A shall be the fully allocated manufacturing
cost to SPL, its Affiliates or Sublicensee of the Agreement Product and/or
Schering Compound and B shall be the fully allocated manufacturing cost to SPL,
its Affiliate or Sublicensee of any other active therapeutic ingredients in the
combination, in each case, determined in accordance with the schedule of fully
allocated manufacturing costs set forth in Schedule 1.28.
1.29 "Optimization Library" shall mean a Library based upon one or more
--------------------
Active Compound or Schering Compound structures, and which is designed to
optimize such structures with respect to activity against one or more specific
Targets.
1.30 "Pharmacopeia Change in Control" shall mean any of the following:
------------------------------
(i) a reorganization, merger or consolidation of Pharmacopeia with a Major
Pharmaceutical Company if the shareholders of Pharmacopeia (determined
immediately prior to the reorganization, merger or consolidation taking effect)
hold, directly or indirectly, less than fifty percent (50%) of the surviving
corporation (determined immediately after such reorganization, merger or
consolidation takes effect); (ii) an acquisition by a Major Pharmaceutical
Company of direct or indirect beneficial ownership of voting stock of
Pharmacopeia representing more than fifty percent (50%) of the total current
voting power of Pharmacopeia then issued and outstanding; (iii) a sale of all or
substantially all the assets of Pharmacopeia to a Major Pharmaceutical Company;
or (iv) a liquidation or dissolution of Pharmacopeia. As used in this Section
1.30, the term "Major Pharmaceutical Company" shall mean any entity (including
any corporation, joint venture, partnership or unincorporated entity) having
annual sales of pharmaceutical products of at least five hundred million dollars
($500,000,000), as well as any Affiliates or division(s) of such entity, that is
engaged in the research, development, manufacturing, registration and/or
marketing of drug products that are approved under NDAs, HRDs, ANDAs or
Biologics License Applications.
1.31 "Pharmacopeia Enabling Technology" shall mean the Columbia License
--------------------------------
and any other proprietary technology owned or controlled by Pharmacopeia with
the right to grant sublicenses which is necessary or useful for the design,
preparation and use of Libraries.
1.32 "Pharmacopeia Technology" shall mean Existing Pharmacopeia Patent
-----------------------
Rights, Existing Pharmacopeia Know-How, and Pharmacopeia Improvements (except
for Pharmacopeia Improvements which are Pharmacopeia Enabling Technology).
1.32.1 "Existing Pharmacopeia Patent Rights" shall mean (i) all
-----------------------------------
patents and patent applications existing as of the Effective Date that claim the
synthesis or composition of matter of an
-5-
<PAGE>
Active Compound, or the method of use thereof, and (ii) any divisions,
continuations, continuations-in-part, reissues, reexaminations, extensions or
other governmental actions which extend any of the subject matter of the patent
applications or patents in (i) above, and any substitutions, confirmations,
registrations, revalidations, or additions of any of the foregoing, in each
case, which is owned or controlled, in whole or part, by license, assignment or
otherwise by Pharmacopeia during the term of this Agreement, and subject to any
limitations and prohibitions of such license or sublicense; provided, however,
-------- -------
it is understood that Existing Pharmacopeia Technology shall not include any
Pharmacopeia Enabling Technology.
1.32.2 "Existing Pharmacopeia Know-How" shall mean all ideas,
------------------------------
inventions, data, know-how, instructions, processes, formulas, expert opinion
and information, including, without limitation, biological, chemical, physical
and analytical data and information, existing as of the Effective Date, owned or
controlled in whole or part by Pharmacopeia by license, assignment or otherwise,
which is necessary for the discovery, development, manufacture or use of
Agreement Compounds and/or the discovery, development, manufacture, use, sale or
commercialization of Agreement Products, in each case, to the extent
Pharmacopeia has the right to license or sublicense the same, and subject to any
limitations and prohibitions of such license or sublicense; provided, however,
-------- -------
that Existing Pharmacopeia Know-How shall not include Existing Pharmacopeia
Patent Rights or Pharmacopeia Enabling Technology.
1.32.3 "Pharmacopeia Improvements" shall mean all patentable
-------------------------
inventions conceived and reduced to practice, solely or jointly, by Pharmacopeia
or SPL in the conduct of the Collaboration that are within the scope of a claim
of an issued patent within the Existing Pharmacopeia Patent Rights or
Pharmacopeia Enabling Technology (i) which patent issued prior to the Effective
Date or (ii) which claim has an effective filing date prior to the Effective
Date; provided, however, that Pharmacopeia Improvements shall not include
-------- -------
Pharmacopeia Independent Technology (as defined in Section 2.14).
1.33 "Phase III" shall mean Phase III clinical trials as prescribed
---------
by applicable FDA regulations, regardless of whether such trials are conducted
in the United States or elsewhere
1.34 "Product" means any Agreement Product or SP Product.
-------
1.35 "Regulatory Approval" shall mean any applications or approvals,
-------------------
including any INDs, NDAs, supplements, amendments, pre- and post-approvals,
marketing authorizations based upon such approvals (including any prerequisite
manufacturing approvals or authorizations related thereto) and labeling
approval(s), technical, medical and scientific licenses, registrations or
authorizations of any national, supra-national (e.g. the European Commission,
the Council of the European Union, or the European Agency for the Evaluation of
Medicinal Products), regional, state or local regulatory agency, department,
bureau, commission, council or other governmental entity, necessary for the
manufacture, distribution, use, import, export or sale of Product(s) in the
Territory.
1.36 "Schering Compound" shall mean a compound which is independently
-----------------
discovered by or on behalf of SPL, without the use of Collaboration Technology
or Pharmacopeia Technology as demonstrated by documented evidence created at the
time of such discovery, and which is active against a specific Target.
1.37 "Schering Technology" shall mean Schering Patent Rights, Schering
-------------------
Know-How and Schering Improvements.
1.37.1 "Schering Patent Rights" shall mean (i) all existing patents
----------------------
and patent applications owned or controlled in whole or in part by SPL or its
Affiliates as of the Effective Date (including, without limitation, those which
claim the synthesis or composition of matter of an Active Compound, or the
method of use thereof, or which relate to any Target or any assay provided by
SPL
-6-
<PAGE>
for use in the Collaboration or the corresponding Targets for such assays), (ii)
all patents and patent applications claiming any invention or discovery made by
or behalf of SPL or its Affiliates, other than in performance of the
Collaboration, in connection with the discovery and/or development of any
Agreement Compounds and/or Schering Compounds, and/or the development and
commercialization of any Product, and (iii) any divisions, continuations,
continuations-in-part, reissues, reexaminations, extensions or other
governmental actions which extend any of the subject matter of the patent
applications or patents in (i) or (ii) above, and any substitutions,
confirmations, registrations, revalidations, or additions of any of the
foregoing.
1.37.2 "Schering Know-How" shall mean all ideas, inventions, data,
-----------------
know-how, instructions, processes, formulas, materials, expert opinion and
information, including, without limitation, biological, chemical,
pharmacological, toxicological, pharmaceutical, physical and analytical,
clinical, safety, manufacturing and quality control data and information (except
for any of the above arising in performance of the Collaboration) owned or
controlled in whole or part by SPL by license, assignment or otherwise, which is
necessary for the discovery, development, manufacture, use, sale or
commercialization of Products, in each case, to the extent SPL has the right to
license or sublicense the same, and subject to any limitations and prohibitions
of such license or sublicense; provided, however, that Schering Know-How does
-------- -------
not include Schering Patent Rights.
1.37.3 "Schering Improvements" shall mean all patentable inventions
---------------------
conceived and reduced to practice solely or jointly by SPL or Pharmacopeia in
the conduct of the Collaboration that are within the scope of the claims of any
issued patent within the Schering Patent Rights (i) which patent issued prior to
the Effective Date or (ii) which claim has an effective filing date prior to the
Effective Date.
1.38 "SP Product" shall mean any product for the therapeutic or
----------
prophylactic treatment or prevention of diseases and conditions in human beings
containing a Schering Compound, provided such SP Product is not a Combination
Product containing both a Schering Compound and an Agreement Compound.
1.39 "Sublicensee" shall mean with respect to a particular Product, a
-----------
Third Party to whom SPL has granted a sublicense under the applicable
Pharmacopeia Technology, Schering Technology or Collaboration Technology to
make, use and/or sell such Product. As used in this Agreement, it is understood
that "Sublicensee" shall also include a Third Party or Third Parties to whom SPL
has granted the right to distribute such Product, provided that such Third Party
or parties has (have) the primary responsibility for marketing and promotion at
its (their) expense of such Product within the field or territory for which such
distribution rights are granted, which marketing and promotional activities are
not subsidized directly or indirectly by SPL.
1.40 "Target" shall mean a biomolecular entity (including, without
------
limitation, receptors, enzymes, nucleic acids and proteins, and/or fragments
thereof) that a small molecule is screened against in order to determine whether
the small molecule demonstrates a specific biochemical or pharmaceutical effect.
1.41 "Territory" shall mean the shall mean all the countries and
---------
territories in the world except for the United States and its territories,
possessions and commonwealths.
1.42 "Third Party" shall mean any Party other than Pharmacopeia and its
-----------
Affiliates, Schering-Plough Ltd. and its Affiliates, Schering Corporation and
its Affiliates, and their permitted assigns.
11.43 "US Agreement" shall mean that certain Collaboration and License
------------
Agreement entered into by and between Pharmacopeia and Schering Corporation of
even date herewith.
-7-
<PAGE>
ARTICLE II
COLLABORATION
2.0 Collaboration Effective Date. The Parties wish Pharmacopeia to begin
---------------------------------
performance of the Collaboration effective as of October 1, 1998 (the
"Collaboration Effective Date") and agree that upon execution of this Agreement
on the Effective Date the Parties' respective obligations relating to
performance of the Collaboration hereunder shall be deemed to be effective as of
the Collaboration Effective Date. Notwithstanding the foregoing, the
effectiveness of this Agreement is expressly conditioned upon the Board of
Directors of Schering-Plough Corporation approving this Agreement and the
execution of this Agreement by the Parties on the Effective Date.
2.1 Collaboration Research Plan. Within thirty (30) days of the Effective
--------------------------------
Date, the Collaboration Committee shall agree upon a written overall plan for
the research and drug discovery activities to be conducted by the Parties (the
"Collaboration Research Plan"). The Collaboration Research Plan shall be
periodically revised and updated (at least annually) by the Collaboration
Committee during the term of the Collaboration. The Collaboration Research Plan
shall set forth the responsibilities of each of the Parties with respect to
performance of the Collaboration. The Collaboration Committee shall have
responsibility for monitoring the performance of Collaboration research
programs. Notwithstanding the foregoing, the Parties acknowledge and agree
that, subject to Section 2.7 below, SPL, in its sole discretion, shall have
primary responsibility and decision making authority with respect to the
selection of the Targets and specific research programs to be conducted during
the Collaboration.
2.2 Collaboration Term. The term of the Collaboration shall be for a
-----------------------
period of five (5) years unless extended pursuant to Section 2.2.1, or earlier
terminated pursuant to Section 2.2.2 or Article X.
2.2.1 Extension of Collaboration Term. SPL shall have the right, in
--------------------------------------
its sole discretion, to extend the Collaboration for an additional * period by
providing written notice to Pharmacopeia on or before the * of the Collaboration
Effective Date. If SPL does not provide such notice, the Collaboration shall
expire on the fifth anniversary of the Collaboration Effective Date.
2.2.2 Termination of Collaboration Upon Pharmacopeia Change in
---------------------------------------------------------------
Control. In the event of a Pharmacopeia Change in Control during the term of
- -------
the Collaboration, SPL shall have the right, in its discretion, (i) to terminate
the Agreement pursuant to Section 10.4, below, or (ii) to terminate the
Collaboration and not the Agreement upon ninety (90) days written notice to
Pharmacopeia after such Change in Control expressly stating its intention to
terminate the Collaboration. In the event that SPL elects to terminate the
Collaboration and not the Agreement, then (a) SPL will not be obligated to make
the payments set forth in Section 5.2 for the period after the effective date of
such termination, (b) subject to Sections 2.10 and 2.11, Pharmacopeia shall not
be obligated to conduct any Collaboration research activities after the
effective date of such termination, and (c) the remaining terms and conditions
of this Agreement, including without limitation the licenses and royalty
obligations set forth herein, shall remain in full force and effect until the
Agreement expires or is terminated as set forth in Article X, below.
2.3 Pharmacopeia Responsibilities. Pharmacopeia shall use commercially
----------------------------------
reasonable efforts to provide:
(i) the number of scientist FTEs agreed to by the Parties, as set
forth in Section 2.5, and such additional scientists as may be mutually agreed
to in writing by the Parties and paid for by
__________________
* CONFIDENTIAL TREATMENT REQUESTED
-8-
<PAGE>
SPL, for performance of the Collaboration during each year of the Collaboration
(it being understood and agreed that FTEs provided by Pharmacopeia for the
Collaboration under the US Agreement shall also be deemed to be provided to this
Collaboration for purposes of determining the number of FTEs provided by
Pharmacopeia hereunder);
(ii) research facilities, laboratories and equipment sufficient to
enable the Collaboration scientists (including Pharmacopeia employees and one
(1) SPL employee to be provided pursuant to Section 2.4(i)) to perform the
Collaboration in a fashion similar to the operation of Pharmacopeia's own
operations, and which shall be located in dedicated laboratories at
Pharmacopeia's research facilities in Monmouth Junction, New Jersey;
(iii) access to Pharmacopeia Enabling Technology by the Pharmacopeia
scientists working on the Collaboration and by SPL scientists, if any, working
on the Collaboration at Pharmacopeia's facilities as set forth in Section 2.4,
as Pharmacopeia, in its discretion, deems is reasonably necessary and useful for
the optimal performance of the Collaboration;
(iv) administrative services necessary to conduct the business of
the Collaboration in a manner comparable to that of Pharmacopeia's own business
activities; and
(v) during the term of the Collaboration, on an as needed basis, up
to an additional * miscellaneous FTEs, at Pharmacopeia's expense, to assist with
SPL's requests for Library plate production and/or Library Compound decodes
pursuant to Sections 2.10 and 2.11, which additional FTEs shall not be dedicated
FTEs assigned to the Collaboration and shall not be included in the FTE
allocations set forth in Section 2.5.
It is understood and agreed that, except as may be mutually agreed by the
Parties, Pharmacopeia shall not be obligated hereunder to conduct research or
development activities in the Collaboration which are outside the scope of the
Collaboration Research Plan.
2.4 SPL Responsibilities. SPL shall provide research funding for the
-------------------------
Collaboration as set forth in Section 5.1 and shall use commercially reasonable
efforts to provide:
(i) one scientific director provided by Schering Corporation, in
combination with Schering-Plough, Ltd., to work full-time at Pharmacopeia during
the term of the Collaboration managing the day-to-day operations of the
Collaboration (the "Collaboration Director"); and
(ii) additional support for Collaboration research projects,
including, without limitation, scientists, facilities and materials to perform
biological research to identify Targets, assay development, Library screening,
medicinal chemical research and analytical support services.
2.5 Collaboration Staffing.
---------------------------
2.5.1 Pharmacopeia FTE Commitments. Pharmacopeia will provide *
-----------------------------------
FTEs at the start of the first year of the Collaboration consisting of
* chemists and * biologists (each of which shall be a *
and * miscellaneous FTEs to handle Library production, engineering,
decoding, quality control, etc. for the Collaboration (which
miscellaneous FTEs *.
During the first quarter of the 1999 calendar year, Pharmacopeia will
add an additional * FTEs to the Collaboration from personnel currently assigned
to work on research projects under the December 22, 1994 Collaboration Agreement
between Pharmacopeia, Schering Corporation and Schering-Plough Ltd. The total
number of Collaboration FTEs shall be increased to *, consisting of * chemists,
* biologists and *
miscellaneous FTEs, by the start of the second year of the Collaboration.
Subject to the wind-down
__________________
* CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE>
provisions set forth in Section 5.2.4, Pharmacopeia shall continue to provide *
FTEs to the Collaboration during each subsequent year of the Collaboration, or
such other number as the Parties shall agree upon in writing. With the
exception of the * FTEs responsible for support activities for the Collaboration
(such as Library production, engineering, decoding, quality control, etc.), all
of the Pharmacopeia FTEs assigned to work on the Collaboration *
In the event that SPL determines that it will be
unable to screen the number of Discovery Libraries anticipated to be delivered
in year *
of the Collaboration *,
SPL may, upon written notice to Pharmacopeia at least six (6) months prior to
the beginning of such year, reduce the number of chemistry FTEs to be provided
to the Collaboration by Pharmacopeia in such year; provided, however, that such
-------- -------
reduction shall be in whole FTE increments, and SPL shall not so reduce the
number of chemistry FTEs to be provided by Pharmacopeia to less than eighty
percent (80%) of the number of Pharmacopeia chemistry FTEs assigned to the
Collaboration at the time of such notice. On or before the Effective Date
Pharmacopeia will provide to SPL a list individually identifying those
Pharmacopeia FTEs assigned to the Collaboration, which list shall be updated
from time to time during the term of the Collaboration as FTEs assigned to work
exclusively for the Collaboration are added, removed and/or replaced. It is
understood that, in the aggregate, the education, training and experience levels
of Pharmacopeia FTEs assigned to the Collaboration will be reasonably
representative of Pharmacopeia employees working on Pharmacopeia's internal
research programs. Within fifteen (15) business days after the Effective Date,
Pharmacopeia will provide SPL with: (i) a copy of the * Collaboration; and (ii)
Pharmacopeia's written representation and warranty that *.
2.5.2 SPL FTE Commitments. During the term of the Collaboration SPL
--------------------------
shall, in combination with Schering Corporation under the US Agreement, provide
a single scientific director as set forth in Section 2.4(i). Such director
shall be subject to Pharmacopeia's confidentiality restrictions such as limited
access to laboratories and access only to data that specifically relate to the
Collaboration. It is understood that the scientific director shall remain an
employee of Schering Corporation, and that SPL shall remain responsible for, and
indemnify Pharmacopeia for any claims arising from or relating to, the conduct,
activities, salary and benefits of such director, except to the extent caused by
the gross negligence or willful misconduct of Pharmacopeia. In addition, SPL
shall provide such additional FTEs located at SPL's research facilities as SPL
determines, in its sole discretion, are reasonably necessary to support the
ongoing research programs of the Collaboration, including, without limitation,
assay development, screening, medicinal chemistry, analytical services and
animal testing services.
2.6 Additional Collaboration Expenses.
--------------------------------------
2.6.1 Capital Expenditures. In the event that the Parties determine
---------------------------
that one or more Collaboration research projects to be performed at
Pharmacopeia, as identified in the Collaboration Research Plan, will require
Pharmacopeia to incur unanticipated reasonable out-of-pocket expenses in
connection with such research project(s) for capital expenditures on specialized
equipment, the Parties shall agree on the additional monies to be paid by SPL to
Pharmacopeia therefor. It is understood and agreed that Pharmacopeia shall not
be obligated hereunder to pay any such unanticipated capital expenditures
without its express consent, and that the failure of Pharmacopeia to conduct
research activities that cannot be performed without such expenditures shall not
constitute a breach of this Agreement. It is further understood and agreed that
SPL may, by providing written notice, prohibit Pharmacopeia from using
specialized equipment acquired pursuant to this Section 2.6.1, and for which SPL
has paid and/or reimbursed Pharmacopeia for all of the acquisition costs and
major operating costs, for activities outside of the Collaboration. The Parties
acknowledge and agree that, at SPL's
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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option, SPL may elect to provide on loan to Pharmacopeia any such specialized
equipment required for performance of the Collaboration, which equipment shall
be returned to SPL upon termination of the Collaboration.
2.6.2 Third Party Licenses re Pharmacopeia Enabling Technology. In
--------------------------------------------------------------
the event that the Parties agree that it is necessary for Pharmacopeia to obtain
any license from a Third Party to Pharmacopeia Enabling Technology (existing as
of the Effective Date) for the performance of Library encoding and/or decoding
in connection with one or more Collaboration research projects, SPL shall pay to
Pharmacopeia SPL's equitable share of any amounts paid by Pharmacopeia pursuant
to such license. Pharmacopeia shall provide SPL notice of such payment
obligations and invoice SPL for such costs and SPL shall pay the invoice within
* days. SPL's share, which may be subject to adjustment periodically, shall be
determined by ascertaining the independent value the licensed technology has to
Pharmacopeia and Third Parties collaborating with Pharmacopeia, as reasonably
determined by Pharmacopeia, and apportioning the license costs between
Pharmacopeia, SPL and such Third Parties in an equitable manner; provided,
--------
however, that SPL may reduce any royalty otherwise due Pharmacopeia hereunder to
- -------
reimburse it for any royalties actually paid to Pharmacopeia pursuant to this
Section 2.6.2, as set forth below. The amount of the reduction shall be equal to
* of the royalty paid to Pharmacopeia pursuant to this Section 2.6.2, but in
no event shall the royalty due Pharmacopeia for any calendar quarter, with
respect to any Product, be thereby reduced to less than * of the royalty due
Pharmacopeia under Section 5.4.1 with respect to Net Sales of such Product. In
the event that Pharmacopeia enters into a royalty-bearing license or agreement
during the term of this Agreement with respect to Pharmacopeia Enabling
Technology, and SPL does not approve and agree to pay for its equitable share of
such license or agreement within * days after a request by Pharmacopeia, the
subject matter covered by such license or agreement shall not be within this
Agreement for any purpose
2.6.3 Other Third Party Licenses. In the event that the Parties
---------------------------------
agree that it is necessary for Pharmacopeia to obtain a license (except for any
licenses relating to Pharmacopeia Enabling Technology obtained pursuant to
Section 2.6.2) from a Third Party in order to perform one or more Collaboration
research projects selected by SPL, the Parties shall agree on the respective
amounts to be paid by SPL and Pharmacopeia to obtain any such license. Each
Party's share of such license costs shall be determined by ascertaining the
independent value the licensed technology has to SPL (as reasonably determined
by SPL), and to Pharmacopeia and any Third Parties collaborating with
Pharmacopeia (as reasonably determined by Pharmacopeia) and apportioning the
license costs between Pharmacopeia, SPL and such Third Parties in an equitable
manner. It is understood and agreed that Pharmacopeia shall not be obligated
hereunder to pay for any such license without its express consent, and that the
failure of Pharmacopeia to conduct research activities that cannot be performed
without such license shall not constitute a breach of this Agreement. It is
further understood and agreed that, in the event that no Third Parties have
shared in the costs and SPL has paid and/or reimbursed Pharmacopeia for all of
the costs of such licenses, SPL shall have the right, by providing written
notice, to prohibit Pharmacopeia from using licensed technology, or other
license rights, acquired pursuant to this Section 2.6.3 for activities outside
of the Collaboration.
2.7 Reserved Targets. The Parties acknowledge that , as of the Effective
---------------------
Date, there are certain Targets with respect to which Pharmacopeia may have
obligations under its existing agreements with Third Parties, and that
Pharmacopeia will not conduct certain research activities with respect to such
Targets in connection with the Collaboration (each such Target a "Reserved
Target"). SPL shall not knowingly request Pharmacopeia to develop assays with
respect to, or screen any Libraries against, such Reserved Targets. *
In the event that during the term of the Collaboration Pharmacopeia's
Third Party obligations with respect to a given Reserved Target expire, or such
Reserved Target otherwise becomes available for unrestricted use in the
Collaboration, Pharmacopeia shall promptly notify SPL and such Target shall
thereafter cease to be a Reserved Target. It is further
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* CONFIDENTIAL TREATMENT REQUESTED
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understood and agreed that, notwithstanding any other provision of this
Agreement, Pharmacopeia shall not be obligated to conduct any activities in
performance of the Collaboration that would constitute a breach of any of its
obligations to any Third Party.
2.8 Record Keeping and Inspection of Records. Each of SPL and
---------------------------------------------
Pharmacopeia, and their respective Affiliates, shall maintain records of its
Collaboration activities (or cause such records to be maintained) in sufficient
detail and in good scientific manner appropriate for patent and regulatory
purposes as will properly reflect all work performed and the results achieved in
performance of the Collaboration. SPL shall also maintain analogous records of
its development activities with respect to Agreement Compounds and Agreement
Products. Such records may include books, records, reports, research notes,
charts, graphs, comments, computations, analyses, recordings, photographs,
computer programs and documentation thereof, computer information storage media,
samples of materials and other graphic or written data generated in connection
with the Collaboration, including any data required to be maintained pursuant to
all requirements of applicable laws, rules and regulations, or as directed by
the Collaboration Committee. Pharmacopeia's records shall also document by name
which individuals assigned to the Collaboration pursuant to Section 2.5.1 are
working on each specific Collaboration research project (identifying the
Target(s) involved, to the extent known by Pharmacopeia at the time of the
research). During the Collaboration and for * years thereafter, each of SPL
and Pharmacopeia shall have the right, upon at least five (5) business days'
prior notice, to inspect all such records of the other Party (or legible copies
thereof) during normal business hours. Each Party's rights under this Section
2.8 shall be limited to one (1) inspection in any calendar year. In each case,
the Party conducting the inspection shall maintain such records and the
information disclosed therein in confidence in accordance with Section 7.1, and
shall use such information solely for purposes of this Agreement. Upon request
and tender of payment for the actual cost in providing copies, Pharmacopeia
and/or SPL, as appropriate, shall provide to the requesting Party copies of such
records
2.9 Libraries.
--------------
2.9.0 Discovery Libraries. A Discovery Library is generally a large
--------------------------
collection of compound (typically containing anywhere from 10,000 to 100,000
compounds, but more typically around 30,000 to 50,000 compounds) prepared by
combinatorial chemistry techniques based on one or more core structures such
that the compounds in the library represent a number of structurally diverse
classes of compounds useful for screening against a variety of Targets. The
selection of core structures and the design of Discovery Libraries based thereon
are generally handled such that the compounds contained in the Discovery Library
are novel compounds (i.e, are not generally known and have not been included in
compound libraries previously prepared by Pharmacopeia). The Parties
acknowledge and agree (i) that the Discovery Library descriptions set forth in
this Section 2.9.0 represent general guidelines for the size and composition of
Discovery Libraries, (ii) that SPL and Pharmacopeia will generally be
cooperating in the design of Discovery Libraries, and that Discovery Libraries
prepared for the Collaboration may therefore vary from the general guidelines
set forth herein, and (iii) that nothing in the Section 2.9.0 shall be construed
as a commitment or representation by Pharmacopeia that any given Discovery
Library prepared for the Collaboration will conform to such guidelines.
2.9.1 Classification; Limit on SP Discovery Libraries. At the time
------------------------------------------------------
SPL and Pharmacopeia agree that Pharmacopeia will prepare and provide to SPL any
given Library, SPL and Pharmacopeia shall agree upon the appropriate
classification of such Library as a Collaboration Discovery Library, SP
Discovery Library, or Optimization Library. It is understood and agreed that
the number of SP Discovery Libraries provided to SPL in a given year during the
term of the Collaboration * in
such year without the prior written consent of Pharmacopeia. It is further
understood and agreed that if the *
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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*, for all purposes of this Agreement, unless otherwise agreed in writing by the
Parties. In determining the number of SP Discovery Libraries and total number
of all Discovery Libraries for purposes of this Section, *.
2.9.2 Identification of Targets. At the time that SPL notifies
--------------------------------
Pharmacopeia of an Active Compound from any Library pursuant to Section 2.12,
SPL shall also notify Pharmacopeia of the applicable Target(s) (in coded form
only) and the general therapeutic area relevant to such Target.
2.9.3 Coded Targets. To the extent that SPL identifies Targets to
--------------------
Pharmacopeia in coded form pursuant to Section 2.9.2, SPL shall use a unique
code for each Target, and shall not use more than one code to identify the same
Target unless SPL tells Pharmacopeia that more than one code identifies the same
Target and specifies the applicable codes. SPL shall have no obligation to
disclose to Pharmacopeia the identity of any Targets on a non-coded basis prior
to the publication of a patent application disclosing both (i) the structure of
an Active Compound having activity against the Target and (ii) the identity of
the Target. If, at any time, SPL has identified a Target to Pharmacopeia on a
non-coded basis, SPL shall identify the codes, if any, that SPL had used to
identify such Target, and shall thereafter only identify such Target on a non-
coded basis.
2.9.4 Targets for Optimization Libraries. At the time that SPL and
-----------------------------------------
Pharmacopeia initiate the design and preparation of an Optimization Library, SPL
shall identify the Target (in coded form only) and the relevant general
therapeutic area for which the Optimization Library is being prepared.
2.10 Compound Identification. Following SPL's screening of the Discovery
-----------------------------
Libraries and/or Optimization Libraries, at SPL's request, during the term of
this Agreement (for so long as Pharmacopeia's business operations include
preparing and providing libraries and related services), Pharmacopeia shall
decode and identify to SPL any Library Compound in such Libraries that
demonstrates activity in SPL's screening assays; provided, however, Pharmacopeia
-------- -------
shall have no obligation (i) to decode more Library Compounds than can
reasonably be accomplished by * Pharmacopeia FTEs, in conjunction with their
other assigned tasks in the Collaboration. *
If SPL requests the decoding of additional Library Compounds during the
Collaboration, or requests any decoding after the end of the Collaboration, then
Pharmacopeia shall decode such compounds and invoice SPL for the actual direct
labor and material costs associated with, and other allocated costs directly
required for, such decoding, and SPL shall pay such invoice within *days of
receipt.
2.11 Copies of Libraries. Until the exhaustion of all copies of a
-------------------------
particular Library, SPL may provide Pharmacopeia notice that SPL wishes to
obtain sets of plates from such Library containing sufficient quantities of
compounds to perform an agreed number of assays, and Pharmacopeia will deliver
such plates to SPL as soon as practicable; provided, however, that during the
-------- -------
term of the Collaboration, Pharmacopeia shall have no obligation to prepare more
such Library plates than can reasonably be accomplished by * Pharmacopeia FTEs,
in conjunction with their other assigned tasks in the Collaboration. * If SPL
requests the preparation of additional Library plates during the Collaboration,
or requests any preparation of such Library plates after the end of the
Collaboration, then Pharmacopeia shall prepare such plates and invoice SPL for
the actual direct labor and material costs associated with, and other allocated
costs directly required for, such preparation, and SPL shall pay such invoice
within * days of receipt. Following the exhaustion of all copies of a
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* CONFIDENTIAL TREATMENT REQUESTED
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Library, SPL may request a further set of plates for any such Library, and the
Parties shall negotiate in good faith the terms on which such plates may be
provided.
2.12 Active Compounds. Any Library Compound identified as meeting the
----------------------
definition of an Active Compound through (i) screening of one or more Libraries
by Pharmacopeia and/or SPL in the conduct of the Collaboration, or (ii)
screening of one or more Libraries by SPL after the term of the Collaboration,
shall be an Active Compound. It is understood that no grant of any licenses by
Pharmacopeia to SPL, its Affiliates or Sublicensees under Section 4.1 with
respect to any Library Compound shall become effective unless and until
Pharmacopeia has received notice that such Library Compound is an Active
Compound. Pharmacopeia shall be deemed to have received such notice effective
upon receipt of a request by SPL to decode a Library Compound. In the event
that SPL or its Affiliates or Sublicensees identifies, without decoding by
Pharmacopeia pursuant to Section 2.10, a particular Library Compound with
activity against a Target, SPL shall give Pharmacopeia notice identifying such
Library Compound as an Active Compound, which notice shall be effective upon
receipt by Pharmacopeia. Notwithstanding the foregoing, any Active Compound
that is subject to a license by Pharmacopeia to a Third Party (as set forth in
Section 4.5 or 4.9.5) granted prior to the time the Library Compound is decoded
as set forth in Section 2.10 above or, with respect to a Library Compound which
is not decoded, the time that Pharmacopeia receives actual notice from SPL as
set forth in this Section 2.12, shall not be deemed to be licensed to SPL under
Section 4.1.
2.13 Retained Rights. Subject to the rights and licenses granted to SPL
---------------------
hereunder, and the limitations expressly set forth in Section 4.6, Pharmacopeia
shall retain ownership of the tangible property embodied in the encoded
Discovery Libraries and Optimization Libraries.
2.14 Pharmacopeia Independent Research Activities.
--------------------------------------------------
2.14.1 Activities Outside the Collaboration. The Parties
--------------------------------------------
acknowledge that during and after the term of the Collaboration Pharmacopeia may
(either alone or in collaboration with one or more Third Parties) perform
independent research and development activities with respect to Targets,
including, without limitation, to identify, develop and commercialize products,
which activities are not within the scope of this Agreement ("Pharmacopeia
Independent Technology"). The Parties further acknowledge that Pharmacopeia
Independent Technology may include technology independently acquired, discovered
or developed by Pharmacopeia (as demonstrated by documented evidence created at
the time of such acquisition, discovery or development) and which coincidentally
is substantially the same as technology within the scope of Collaboration
Technology and/or Schering Technology. SPL shall have no rights or licenses
whatsoever to any Pharmacopeia Independent Technology.
2.14.2 Restrictions on Use of Collaboration Technology. To the
-------------------------------------------------------
extent that Pharmacopeia is entitled to use Collaboration Technology under this
Agreement for purposes outside the Collaboration, Pharmacopeia will not
knowingly use such Collaboration Technology to jeopardize the commercial value
of Agreement Products.
ARTICLE III
COLLABORATION MANAGEMENT
3.1 Collaboration Committee. The Parties shall establish a Collaboration
-----------------------------
Committee to oversee, review and coordinate the conduct of the Collaboration.
The Collaboration Committee shall be comprised of two (2) representatives from
each of SPL and Pharmacopeia, or such other equal number of representatives as
the Parties may agree, each Party's members selected by that Party. Each of
Pharmacopeia and SPL may replace its Collaboration Committee representatives at
any time upon written notice to the other Party. The Collaboration Committee
shall be chaired by the Collaboration Director appointed by SPL, unless
otherwise agreed by the Parties. From time to time the
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Collaboration Committee may establish various subcommittees, constituted as
agreed by the Collaboration Committee, to oversee particular projects or
activities within the Collaboration.
3.2 Design of Libraries; Fresh Libraries. At SPL's discretion, SPL's
-----------------------------------------
representatives on the Collaboration Committee may contribute to the development
of the design of one or more Discovery Libraries or Optimization Libraries, or
contribute particular starting materials for use in synthesis of the Discovery
Libraries or Optimization Libraries. Except as set forth in Section 4.9.5, or
as the Parties may otherwise agree in writing, the Libraries made available to
SPL under this Agreement shall not have been provided to Third Parties, or
screened by Pharmacopeia for itself or for Third Parties. Notwithstanding any
other provision of this Agreement, Pharmacopeia shall not be obligated to
prepare or deliver to SPL any Library containing one or more compounds
previously delivered by Pharmacopeia to any Third Party.
3.3 Collaboration Committee Meetings. During the term of the
-------------------------------------
Collaboration, as it may be extended, the Collaboration Committee shall meet six
(6) times per year, or more often as agreed by the Parties, at such locations as
the Parties shall agree. At such meetings the Collaboration Committee will
formulate and review the Collaboration objectives with respect to each
Collaboration research project (including, without limitation, review and
approval of the design of Libraries), monitor the progress of the Collaboration
toward those objectives, and take such other actions as may be specified under
this Agreement or which the Parties deem appropriate. The Collaboration
Committee may designate a patent committee comprised of employees or
representatives of the Parties to oversee the patent prosecution and/or
enforcement activities described in Article VI, and to facilitate communication
and agreement between the Parties regarding inventorship of inventions made in
the Collaboration and the classification of such inventions (e.g., as SPL
Improvements, Pharmacopeia Improvements, Collaboration Platform Technology,
Collaboration Target-Specific Technology, etc.). Additional non-voting
representatives or consultants from either Party may from time to time be
invited by SPL or Pharmacopeia to attend and participate in Collaboration
Committee meetings (e.g., to evaluate and advise on business or scientific
issues) subject to compliance with the confidentiality provisions of Section
7.1. Each Party shall be responsible for its own expenses in connection with
the Collaboration Committee.
3.4 Collaboration Committee Decisions. Decisions of the Collaboration
--------------------------------------
Committee shall be based upon the consensus of all the members. In the event
that the Collaboration Committee cannot or does not, after good faith efforts,
reach agreement on an issue, such issue shall be referred to the respective
Presidents of SPL's Affiliate, the Schering-Plough Research Institute ("SPRI"),
and Pharmacopeia for resolution. In the event that the Presidents of SPRI and
Pharmacopeia are unable to resolve the issue within fifteen (15) business days
after submission of the issue to them, then the unresolved issue may be
submitted by either Party to binding arbitration pursuant to Section 11.3 of
this Agreement, except that the decision shall be made by one (1) arbitrator
with expertise in pharmaceutical product development, and the decision of the
arbitrator shall be rendered within six (6) months of initiation of the
arbitration. During the pendency of any such arbitration proceedings, the
Parties shall proceed with performance of the Collaboration following the course
of conduct determined by SPL; provided, however, that notwithstanding the
-------- -------
foregoing, Pharmacopeia shall not be obligated to (i) take any action that would
violate its obligations to any Third Party, (ii) spend or forego receiving any
amounts of money (except as necessary in connection with the fulfillment of
Pharmacopeia's responsibilities under Section 2.3), (iii) conduct any of the
activities referred to in Section 2.7 with respect to Reserved Targets, or (iv)
knowingly prepare or deliver to SPL any Library containing one or more compounds
previously provided to any Third Party. Notwithstanding the foregoing, SPL, in
its sole discretion, shall have complete and final control over SPL's research,
development and commercialization of Schering Compounds, Agreement Compounds
and/or Product(s) in accordance with the terms and conditions of this Agreement.
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3.5 Development Status; Notice of Sale of Products. During the term of
---------------------------------------------------
this Agreement, SPL shall provide Pharmacopeia written semi-annual reports
within thirty (30) days after the end of each six (6) month period, providing:
(i) a brief report summarizing the development status of each Lead Compound
and/or Development Candidate under development at SPL; (ii) the status of all
patent applications claiming any Library Compounds or Derivative Compounds, and
(iii) copies of all such patent applications which have published during such
six (6) month period and were not previously provided to Pharmacopeia. Such
reports shall contain information sufficient to allow Pharmacopeia to monitor
the status of SPL's efforts with respect to the accomplishment of the milestones
set forth in Section 5.3; provided, however, that nothing hereunder shall be
-------- -------
construed as requiring SPL to provide Pharmacopeia with any specific research
data or results, including, without limitation, information relating to Targets
or data obtained from screening programs being conducted at SPL. Until the
First Commercial Sale of each Agreement Product by or on behalf of SPL
hereunder, SPL shall keep Pharmacopeia reasonably informed as to the status of
the pre-clinical, clinical and commercial development of such Agreement Product
by providing Pharmacopeia with semi-annual written reports summarizing such
activities with respect to each potential Agreement Product under development
during the term of this Agreement. Within thirty (30) days of the First
Commercial Sale of any Agreement Product, or any SP Product as to which
Pharmacopeia is entitled to receive royalty payments hereunder, SPL shall give
Pharmacopeia written notice thereof, which notice shall describe the relevant
Product, identify the active ingredients in such Product, and identify the
specific Target(s) which led to the development of such Product, it being
understood that SPL shall identify such Target(s) on a non-coded basis, and
shall identify the code(s), if any, used by SPL under this Agreement to identify
such Target; provided, however, that nothing herein shall require SPL to
-------- -------
disclose to Pharmacopeia any of SPL's proprietary information which has not been
previously publicly disclosed, beyond that which is necessary to satisfy SPL's
reporting requirements under this Section 3.5.
3.6 Diligence. The Parties acknowledge and agree that all business
--------------
decisions regarding research, development and commercialization of Agreement
Products including, without limitation, decisions relating to the development
and manufacture of Agreement Compounds, or to the design, development,
manufacture, sale, price, distribution, marketing and promotion of Agreement
Products under this Agreement, and the decision whether to develop a particular
Agreement Compound, or to develop and commercialize a particular Agreement
Product, shall be within the sole discretion of SPL. SPL shall use reasonable
good faith efforts to discover and develop Agreement Compounds, and to discover,
develop and commercialize Agreement Products; provided, however, that SPL shall
-------- -------
have no quotas or other minimum diligence obligations with regard to number of
Agreement Compounds and Agreement Products to be developed and commercialized
hereunder. SPL's diligence obligations hereunder are expressly conditioned upon
the continuing absence of any adverse condition or event which warrants a delay
in commercialization of an Agreement Product including, but not limited to, an
adverse condition or event relating to the safety or efficacy of the Agreement
Product or unfavorable pricing, pricing reimbursement, labeling or lack of
Regulatory Approval, and SPL shall have no obligation to develop or market any
such Agreement Product so long as in SPL's opinion any such condition or event
exists. SPL shall use commercially reasonable efforts to overcome any
unfavorable pricing or pricing reimbursement. The Parties acknowledge and agree
that none of the diligence obligations in this Section 3.6 shall apply to any
Schering Compounds or SP Products, the discovery, development and
commercialization of which are the sole and exclusive responsibility of SPL.
ARTICLE IV
LICENSES AND EXCLUSIVITY
4.1 License to SPL.
-------------------
4.1.1 Compounds and Products. Pharmacopeia agrees to grant, and
-----------------------------
hereby grants to SPL an exclusive license under the Pharmacopeia Technology and
Pharmacopeia's interest in the
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Collaboration Technology (exclusive even as to Pharmacopeia and its Affiliates),
to make, have made, use, sell, offer to sell, import and export Agreement
Products in the Territory. It is understood that such licenses shall include
the right to conduct drug research and development, and the exclusive right to
discover, develop, make, have made and use Agreement Compounds, during the term
of this Agreement.
4.1.2 Collaboration Target-Specific Technology. Pharmacopeia agrees
-----------------------------------------------
to grant, and hereby grants, to SPL an exclusive license (exclusive even as to
Pharmacopeia and its Affiliates), under all of Pharmacopeia's interest in the
Collaboration Target-Specific Technology for any and all purposes in the
Territory, including the right to grant sublicenses.
4.2 Sublicenses. SPL shall have the right to sublicense the rights
----------------
granted in Section 4.1 above; provided, however, that SPL and its Affiliates
-------- -------
shall not provide any Discovery Library or Optimization Library to any Third
Party without the prior written consent of Pharmacopeia, except that such
consent shall not be required if the Third Party is a contractor or academic
collaborator conducting Library screening on behalf of SPL and is not granted,
and will not be granted or otherwise acquire, any rights to Agreement Compounds
or Agreement Products. Each such sublicense shall be consistent with all the
terms and conditions of this Agreement. It is further understood that SPL's
Sublicensees shall have no rights under the sublicense granted in Section 4.6
herein, but may make, have made, use, sell, offer to sell, import and export
Agreement Products. SPL shall remain responsible to Pharmacopeia for all of
each such Sublicensee's applicable financial and other obligations due under
this Agreement. Such Sublicensee shall not have the right to grant further
sublicenses, and such sublicenses may not be assigned or transferred to any
Third Party without the prior written consent of Pharmacopeia. Each sublicense
shall provide for its continuation following early termination of the license
rights of SPL hereunder and its assignment to Pharmacopeia. Promptly following
the execution of each sublicense requiring Pharmacopeia's consent hereunder, SPL
shall give Pharmacopeia written notice of the existence and identity of each
Sublicensee and identify the Agreement Product(s) sublicensed to such
Sublicensee.
4.3 Direct Affiliate Licenses. Whenever SPL shall reasonably demonstrate
------------------------------
to Pharmacopeia that, in order to facilitate direct royalty payments by an
Affiliate, it is desirable that a separate license agreement be entered into
between Pharmacopeia and such Affiliate, Pharmacopeia will grant such licenses
directly to such Affiliate by means of an agreement which shall be consistent
with all of the provisions hereof and SPL shall guarantee the Affiliate's
obligations thereunder and otherwise provide to Pharmacopeia assurances of
performance satisfactory to Pharmacopeia. SPL shall reimburse Pharmacopeia for
its reasonable attorneys' fees and costs incurred in connection with any such
separate license agreement.
4.4 Collaboration Platform Technology. Upon conclusion of the
--------------------------------------
Collaboration Term, Pharmacopeia and SPL each agree to grant, and hereby grant,
to the other a co-exclusive license under their respective interests in the
Collaboration Platform Technology in the Territory, as follows: (i) SPL and
Pharmacopeia may each use such Collaboration Platform Technology for any and all
internal uses, including without limitation, in collaboration with Third Parties
for drug discovery, and (ii) neither Pharmacopeia nor SPL may license,
sublicense or otherwise transfer the Collaboration Platform Technology to any
Third Party.
4.5 Third Party Rights.
-----------------------
4.5.1 Pharmacopeia Third Party Activities. It is understood that
------------------------------------------
Pharmacopeia is in the business of providing combinatorial libraries to Third
Parties, and that Pharmacopeia will grant such Third Parties rights after the
Effective Date to acquire licenses for compounds derived from such libraries
similar to SPL's rights under this Article IV. Notwithstanding the licenses
granted to SPL under Section 4.1 above, it is possible that a Third Party may
acquire rights from Pharmacopeia with
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respect to one or more compounds of which Pharmacopeia is a sole or joint owner,
which compounds were made and designed independently of Pharmacopeia's
activities in the Collaboration; accordingly, Pharmacopeia's grant of rights
under Section 4.1 is limited to the extent that (i) a Third Party (either alone
or jointly with Pharmacopeia) has filed a patent application with respect to
such a compound prior to the filing by SPL (either alone or jointly with
Pharmacopeia) of a patent application with respect to such a compound, or (ii)
Pharmacopeia has previously granted a Third Party a license, an option to
acquire a license, a right of first negotiation, field exclusivity, or a non-
competition covenant with respect to such a compound, and is subject to any such
grant of rights to a Third Party.
4.5.2 No Liability. It is understood and agreed that, even if
-------------------
Pharmacopeia complies with its obligations under this Agreement, compounds
provided to Third Parties in the course of Pharmacopeia's other business
activities may result in Third Party patent applications and patents, including
patent applications and patents owned by such Third Parties, or owned jointly by
Pharmacopeia and such Third Parties, which could conflict with patent
applications and patents owned by SPL, or jointly owned by SPL and Pharmacopeia
hereunder. Pharmacopeia shall use reasonable efforts to avoid such conflict,
which efforts shall be comparable to those used by Pharmacopeia in performing
similar obligations under its agreements with Third Parties. It is understood
that, unless SPL is damaged as a proximate result of a material breach by
Pharmacopeia of Section 4.9, or of any of the representations and warranties in
Article VIII, then Pharmacopeia shall have no liability under this Agreement
with respect to any such conflict
4.5.3 Pharmacopeia Reports to SPL On Third Party Rights. During the
--------------------------------------------------------
period from the Effective Date until the First Commercial Sale of an Agreement
Product, within thirty (30) days of a written demand by SPL concerning a
Pharmacopeia license to a Third Party of a patent application owned or co-owned
by Pharmacopeia, Pharmacopeia shall, to the extent it may do so without
breaching any contractual or other legal obligation, provide SPL with a
statement explaining why the invention(s) claimed in the patent application or
technology licensed to such Third Party is independent of Pharmacopeia's
activities in the Collaboration. Such statement shall be supported by written
records kept in the ordinary course of business consistent with pharmaceutical
industry standards, provided that such records need not be provided to SPL at
the time of providing such statement, but may have to be provided pursuant to
Section 11.3. Such information shall be deemed Confidential Information of
Pharmacopeia pursuant to this Agreement.
4.6 Columbia Sublicense. Pharmacopeia agrees to grant, and hereby grants,
------------------------
to SPL a non-exclusive sublicense, without the right to sublicense, under the
Columbia License, to make, have made, use, offer to sell, sell, import and
export Agreement Products in the Territory, (including, without limitation, the
right to decode Library Compounds). It is understood and agreed that such
sublicenses do not include the right to create, make or have made encoded
combinatorial libraries or use methods or processes relating to the preceding,
except as expressly provided in this Agreement. It is further understood and
agreed that SPL's right to decode Library Compounds, as granted hereunder, shall
only be exercisable in the event that Pharmacopeia is unable or unwilling to
provide decoding services to SPL, in which event Pharmacopeia shall promptly
provide to SPL the technology and know-how necessary to perform such decoding.
4.7 Collaboration Research Activities. SPL agrees to grant, and hereby
--------------------------------------
grants, to Pharmacopeia a royalty-free, non-exclusive license under (i) SPL's
interest in the Collaboration Technology, and (ii) any Schering Technology which
SPL, in its sole discretion, reasonably determines is necessary or useful for
Pharmacopeia's performance of the Collaboration, in each case to use during the
term of the Collaboration and solely in performance of the Collaboration such
intellectual property of SPL (including, without limitation, research materials
and reagents, as are reasonably necessary or useful to assay compounds in
certain Optimization Libraries, to be selected by SPL, for activity against the
applicable Target). Pharmacopeia will not be required to pay any fees to use
such intellectual property, but will as a condition precedent to such use
execute any consents or
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sublicenses required by any SPL licensor. Pharmacopeia shall not be required to
execute any unreasonable consents or licenses and will not be in breach of this
Agreement for failure to do so.
4.8 Pharmacopeia's Use of Library Compounds for Quality Control.
----------------------------------------------------------------
Notwithstanding Section 4.1 above or Section 4.9 below, and subject to the other
applicable provisions of this Agreement, Pharmacopeia shall retain the right
under the Collaboration Technology to make, have made and use Library Compounds
solely for Pharmacopeia's internal quality control purposes, provided that such
rights shall not include the right to conduct any research other than quality
control research on any individual Library Compounds. Pharmacopeia agrees to
use reasonable efforts not to conduct quality control research pursuant to this
Section 4.8 which would adversely affect SPL's ability to commercialize
Agreement Products or which would jeopardize the commercial or research value of
the Collaboration Technology.
4.9 Library Exclusivity.
------------------------
4.9.1 Optimization Libraries. SPL shall have exclusivity with
-----------------------------
respect to all Optimization Libraries, as follows: Pharmacopeia shall not *
for any purpose, * for any purpose. Solely to ensure such exclusivity
Pharmacopeia agrees to *
This Section 4.9.1 shall
survive the termination or expiration of this Agreement.
4.9.2 SP Discovery Libraries. SPL shall have exclusivity with
-----------------------------
respect to all SP Discovery Libraries, as follows: Pharmacopeia shall not *
for any purpose, *
for any purpose. Solely to ensure such exclusivity, Pharmacopeia
agrees to *. This Section 4.9.2 shall survive the
termination or expiration of this Agreement.
4.9.3 Collaboration Discovery Libraries. To provide SPL a period of
----------------------------------------
exclusivity for screening of the Collaboration Discovery Libraries provided to
SPL hereunder, Pharmacopeia agrees that until the termination of the Exclusivity
Period for a Collaboration Discovery Library, including as such period may be
extended, Pharmacopeia shall not * for any purpose,
* for any purpose. The undertakings in this
Section 4.9.3 shall be in addition to and not in derogation of any
undertakings of Pharmacopeia expressly set forth in the other terms of this
Agreement with respect to Collaboration Discovery Libraries, Agreement Compounds
and Agreement Products. Solely to ensure such exclusivity, Pharmacopeia agrees
to *. Upon expiration of the applicable Exclusivity Period with respect to a
Collaboration Discovery Library, including as it may be extended pursuant to
Section 4.9.4, below, the *
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* CONFIDENTIAL TREATMENT REQUESTED
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provided, however, that Pharmacopeia's rights shall be subject to SPL's rights
- -------- -------
to Active Compounds and to the provisions of Section 4.9.5 below.
4.9.4 Extension of Exclusivity for Collaboration Discovery Libraries.
---------------------------------------------------------------------
SPL shall have the right, in its sole discretion, to extend the Exclusivity
Period with respect to any particular Collaboration Discovery Library for
successive * periods by notifying Pharmacopeia no later than sixty (60) days
prior to the date on which such Exclusivity Period will expire, and concurrently
paying to Pharmacopeia a maintenance fee of*
for each such Collaboration Discovery Library. In the event that SPL
has paid to Pharmacopeia milestone payments totaling * with respect to Library
Compounds contained in any given Collaboration Discovery Library and/or
Derivative Compounds derived from such Library Compounds, SPL's exclusivity with
respect to such Collaboration Discovery Library shall become perpetual and
irrevocable; provided, however, that if the Exclusivity Period for such
Collaboration Discovery Library has lapsed prior to the payment of such
milestone payments totaling *, then such exclusivity shall be subject to and
limited by (i) applicable rights, if any, granted to Third Parties during any
period of co-exclusive rights as set forth in Section 4.9.5, and (ii)
Pharmacopeia's rights regarding the Library Compounds identified before such
time in an "Outlicensing Notice" as set forth in Section 4.9.5.
4.9.5 Co-Exclusive Collaboration Discovery Libraries. Following the
-----------------------------------------------------
expiration of the Exclusivity Period (including any extensions thereof) for any
given Collaboration Discovery Library, Pharmacopeia shall have the right to *
provided, however, that Pharmacopeia shall not *
- -------- -------
If after the expiration of the applicable Exclusivity Period, Pharmacopeia *
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* CONFIDENTIAL TREATMENT REQUESTED
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*
4.10 No Other Products. With the exception of (i) any Schering Compounds
-----------------------
which are the same as a Library Compound and with respect to which Schering
notifies Pharmacopeia in writing prior to finalization by the Collaboration
Committee of the design the relevant Library, or (ii) as otherwise agreed or
specifically provided in the terms of this Agreement, neither SPL nor its
Affiliates or Sublicensees shall commercialize any Library Compound, Active
Compound, Derivative Compound, or other composition-of-matter claimed in patent
applications filed, or patents issued, under Article VI which claim an Active
Compound or Derivative Compound, other than as an Agreement Product in
accordance with this Agreement.
4.11 License Grant Back for Abandoned Agreement Compounds. In the event
----------------------------------------------------------
that Pharmacopeia acquires rights to patent applications and/or patents claiming
any Agreement Compounds pursuant to Section 6.3.5, SPL agrees to grant and
hereby grants to Pharmacopeia an exclusive license to make, have made, use,
sell, offer for sale, import and export products containing such Agreement
Compounds, in the Territory; provided, however, that such license shall be
-------- -------
limited to the general therapeutic area identified for the relevant Optimization
Library in accordance with Section 2.9.4. SPL will retain the rights to such
Agreement Compounds for all other therapeutic uses.
ARTICLE V
PAYMENTS
5.1 Payments By SPL. In partial consideration for Pharmacopeia's
--------------------
conducting research activities in the Collaboration and the rights and licenses
granted SPL herein, SPL agrees to pay to Pharmacopeia the amounts set forth in
Sections 5.2, 5.3 and 5.4.
5.2 Collaboration Funding.
--------------------------
5.2.1 Funding During Year One. SPL shall pay to Pharmacopeia
------------------------------
research funding for the Collaboration at a rate of * per FTE
during the first year of the Collaboration based upon the actual
number of Pharmacopeia FTEs assigned to the Collaboration as set forth in
Section 2.5.1, plus any additional FTEs agreed upon by the Parties under Section
5.2.3.
5.2.2 Funding During Subsequent Years. SPL shall pay to Pharmacopeia
--------------------------------------
research funding for the Collaboration at a rate of *,
plus any adjustment pursuant to Section 5.2.5, per FTE during each subsequent
year of the Collaboration, other than the final year of the Collaboration, based
upon the actual number of Pharmacopeia FTEs assigned to the Collaboration as set
forth in Section 2.5.1, plus any additional FTEs agreed upon by the Parties
under Section 5.2.3.
5.2.3 Increased FTE Requirements. In the event that the Parties
---------------------------------
agree that additional FTEs are necessary to meet unanticipated increases in
workload under the Collaboration, the Parties may agree to add additional
Pharmacopeia FTEs, which shall be provided at the then current FTE rate.
5.2.4 Wind-Down in Final Year. In the final year of the
------------------------------
Collaboration (i.e., year five if the Collaboration is not extended),
Pharmacopeia shall have the right, starting at the end of the
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
second quarter of the final year, to remove FTEs from the Collaboration during
the remainder of the term of the Collaboration. The foregoing notwithstanding,
the Parties agree that the minimum number of Pharmacopeia FTEs assigned to the
Collaboration at the end of the third and fourth quarters of the fifth year of
the Collaboration shall be * and * , respectively. It is understood and agreed
that, except as the Parties may otherwise agree, SPL shall pay Pharmacopeia
for*
FTEs (at the then-current FTE rate, as adjusted) for the first three quarters of
the final year, and for * FTEs during the fourth quarter of the final year. In
the event that SPL requests additional Pharmacopeia manpower be available to the
Collaboration during the final year of the Collaboration (i.e., in excess of the
numbers set forth in the second sentence of this Section 5.2.4), SPL shall, in
addition to payment for such FTEs (at the then-current rate) during the
Collaboration, pay an additional wind-down fee per additional FTE at * of the
then-current FTE rate, which shall be payable in two equal payments due on the
first day of each of the first and second quarter of the year following the end
of the Collaboration.
5.2.5 Annual FTE Rate Adjustments. Starting on January 1, 2000, and
-----------------------------------
annually thereafter during the term of the Collaboration, the FTE rate to be
paid by SPL shall be adjusted to account for increases in salaries and other
costs. The annual FTE rate adjustment shall be determined based upon: * of the
percentage increase in the SIRS Salary Survey (Biotech Sector) over the previous
one (1) year period; and * of the percentage increase in the Consumer Price
Index over the previous one (1) year period; provided, however, that the first
-------- -------
adjustment shall account for such increases over a two (2) year period.
5.2.6 Quarterly Adjustment. At the conclusion of each quarter,
---------------------------
Pharmacopeia will calculate the actual number of FTEs provided by Pharmacopeia
during that quarter and calculate any difference between the actual number of
FTEs provided by Pharmacopeia and the number prepaid by SPL. Any overpayment or
underpayment shall be reflected as a credit or additional charge, as the case
may be, in the next quarterly invoice as per Section 5.2.7 below, and in the
event that no further quarterly payments are due under this Section 5.2, then
(i) any underpayment shall be paid by SPL to Pharmacopeia within * business days
of receiving notice and invoice therefor, or (ii) Pharmacopeia shall within *
days reimburse SPL for any overpayment.
5.2.7 Manner of Payment. Funding for the Collaboration under this
------------------------
Section 5.2 shall be payable quarterly in advance on the first day of each
calendar quarter, except that payment for the calendar quarter beginning on the
Collaboration Effective Date shall be due within * business days of the
Effective Date. Pharmacopeia shall send an invoice therefor to SPL * business
days prior to the end of the preceding quarter, and SPL shall pay such invoiced
amounts. The invoice will indicate the number of Pharmacopeia FTEs to be
assigned to the Collaboration for such quarter and any adjustment from the prior
quarter as determined in accordance with Section 5.2.6. The Collaboration
funding payment for the first quarter of 1999 shall be due within * business
days of January 1, 1999. SPL will use commercially reasonable efforts during
each calendar year during the term of the Collaboration to pay its first
calendar quarter Collaboration funding payments to Pharmacopeia on or before the
* day of January; provided, however, that in the event SPL is unable to complete
-------- -------
such payment, payment by SPL on or before the * day of January in such calendar
year shall not constitute a breach or default by SPL.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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5.3 Milestone Payments.
- -----------------------
5.3.1 Events and Amounts.
-------------------------
(a) Discovery Library Milestones. SPL agrees to pay to
----------------------------
Pharmacopeia the following amounts upon attainment, by or on behalf of SPL, its
Affiliates or Sublicensees, of the indicated milestones with respect to
Agreement Products arising from a Discovery Library where no Optimization
Library was prepared:
(i) identification of a Lead Compound *;
(ii) * upon nomination of a Development Candidate;
(iii) * upon the filing and Acceptance of an
IND or its equivalent;
(iv) *upon initiation of treatment of the first patient in
a Phase III clinical study;
(v) * upon filing and Acceptance of an HRD with the
applicable regulatory authority in a Major Market; and
(vi) * upon Regulatory Approval in a Major Market.
(b) Optimization Library Milestones. SPL agrees to pay to
-------------------------------------
Pharmacopeia the following amounts upon attainment, by or on behalf of SPL, its
Affiliates or Sublicensees, of the indicated milestones with respect to
Agreement Products arising from an Optimization Library or from a Discovery
Library where an Optimization Library was prepared:
(i) identification of a Lead Compound *;
(ii) * upon nomination of a Development
Candidate;
(iii) *upon the filing and Acceptance of an
IND or its equivalent;
(iv) *upon initiation of treatment of the first patient in a
Phase III clinical study;
(v) *upon filing and Acceptance of an HRD with the
applicable regulatory authority in a Major Market; and
(vi) * upon Regulatory Approval in a Major Market.
It is understood and agreed that all amounts payable under this Section 5.3.1
are in addition to any milestone payments that may be due to Pharmacopeia under
the terms of the US Agreement.
5.3.2 Lead Compound. A "Lead Compound" shall be deemed to have been
--------------------
identified at such time as SPL, its Affiliates or Sublicensees initiates a
program of medicinal chemistry optimization with respect to an Agreement
Compound. Within thirty (30) days after the initiation of such a program, SPL
shall notify Pharmacopeia thereof, which notification will include
identification
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
of the applicable Target(s) (in coded form only) and the general therapeutic
area relevant to such Target.
5.3.3 Development Candidate. A Development Candidate shall have been
----------------------------
deemed to have been nominated upon the earlier of the date (i) the Schering-
Plough Research Institute Project Assessment Committee or its successor approves
proceeding with full development of such compound, or (ii) SPL (or its
Affiliate) initiates in vivo toxicology trials necessary, and meeting U.S. FDA
(or corresponding European or Japanese) standards, for obtaining approval for
use of such Agreement Compound in human clinical trials. Within thirty (30)
days after the nomination of a Development Candidate, SPL shall notify
Pharmacopeia thereof, which notification will include identification of the
applicable Target(s) (in coded form only) and the general therapeutic area
relevant to such Target
5.3.4 Manner of Payment. All payments made to Pharmacopeia by SPL
------------------------
pursuant to Section 5.3.1(a) or (b) shall be due within * days after the
achievement of the corresponding milestone and shall be nonrefundable and not
creditable against other amounts due to Pharmacopeia. The payments provided for
under this Section 5.3 shall only be payable once upon the first achievement of
the indicated milestone with respect to an Agreement Compound and/or Agreement
Product developed against a particular Target and no additional payments shall
be due on subsequent or repeated achievement of the same milestone for another
Agreement Compound and/or Agreement Product developed against the same Target.
No milestones shall be payable under this Section 5.3 with respect to any
compounds or products other than Agreement Compounds and Agreement Products.
5.3.5 Announcement of Milestones. The Parties acknowledge and agree
---------------------------------
that the achievement of a milestone under Section 5.3.1(a) or 5.3.1(b) may, at
Pharmacopeia's discretion, be the subject of a press announcement, in accordance
with the terms of Section 7.4 of this Agreement, and irrespective of the
payment, if any, associated therewith.
5.4 Royalties. In partial consideration for the Library exclusivity, know-
--------------
how licenses, patent licenses and other rights granted to SPL hereunder, SPL
shall pay royalties to Pharmacopeia based upon the sales of Products in the
Territory. The parties acknowledge and agree that, except as expressly set
forth herein, SPL's obligation to pay such royalties is not conditioned upon the
existence of patent protection for the Products.
5.4.1 Base Royalty. SPL shall pay to Pharmacopeia running royalties
-------------------
on Net Sales of Products by SPL, its Affiliates and Sublicensees, as follows:
(i) * of Net Sales of Agreement Products where the Agreement
Compound in such Agreement Product (A) was contained in an
Optimization Library based upon an Active Compound that was
contained in a Discovery Library or (B) is a Derivative Compound
derived from an Active Compound in such Optimization Library.
(ii) * of Net Sales of Agreement Products where the Agreement
Compound in such Agreement Product (A) was contained in an
Optimization Library based on a compound, other than a Library
Compound, identified by SPL in an internal SPL research program
or obtained from a Third Party source or (B) is a Derivative
Compound derived from an Active Compound in such Optimization
Library.
(iii) * of Net Sales of Agreement Products where the Agreement
Compound in such Agreement Product (A) was contained in a
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
Discovery Library; (B) is a Derivative Compound, made by SPL,
derived from an Active Compound in a Discovery Library, and no
Optimization Library was made based on such Active Compound; (C)
was contained in an Optimization Library and identified through
SPL's screening of such Optimization Library against a Target
other than the specific Target(s) for which the Optimization
Library was prepared; or (D) is a Derivative Compound derived
from an Active Compound identified through SPL's screening of an
Optimization Library against a Target other than the specific
Target(s) for which the Optimization Library was prepared.
(iv) * of Net Sales of SP Products containing a Schering Compound
active against any Target for which the Collaboration prepared
an Optimization Library leading to the discovery of an Agreement
Compound claimed in a Patent or patent application owned or
controlled by SPL
5.4.2 Royalty Term for Agreement Products. SPL's obligation to pay
------------------------------------------
royalties to Pharmacopeia under Section 5.4.1(i), 5.4.1(ii) and 5.4.1(iii) shall
continue for each Agreement Product, on a country-by-country basis, until the
date which is the later of (i) * years after the first commercial sale of such
Agreement Product in such country by SPL, its Affiliates or Sublicensees or (ii)
the expiration of the last to expire issued patent within the Pharmacopeia
Technology or Collaboration Technology containing any claim which would be
infringed by making, using or selling the applicable Agreement Product in the
applicable country in the absence of the license grants in this Agreement and
provided that the claims of such patent which would be so infringed are not
declared invalid or unenforceable in a final decision by a court of competent
jurisdiction from which no appeal can be or is taken.
5.4.3 Royalty Terms for SP Products. SPL's obligation to pay
------------------------------------
royalties to Pharmacopeia under Section 5.4.1(iv) shall continue for each SP
Product, on a country-by-country basis, until the expiration of the last to
expire issued patent in the applicable country within the Pharmacopeia
Technology, Schering Technology or Collaboration Technology containing a
composition-of-matter claim which would be infringed by making, using or selling
one or more Agreement Compounds active against the same Target as such SP
Product and which were discovered based upon an Optimization Library prepared
against such Target, and provided that the claims of such patent are not
declared invalid or unenforceable in a final decision by a court of competent
jurisdiction from which no appeal can be or is taken. Notwithstanding the
foregoing, in the event that SPL abandons or ceases to maintain such patent (or
the relevant patent application) on or after the date on which Phase III
clinical trials with the SP Product are initiated by or on behalf of SPL, its
Affiliates of Sublicensees, then SPL shall be obligated to pay royalties to
Pharmacopeia under Section 5.4.1(iv) with respect to such SP Product at a * rate
of *, which obligation
shall continue, on a country-by-country basis, until the date which is
* years after the first commercial sale of such SP Product in the applicable
country by SPL, its Affiliates or Sublicensees; provided, however that SPL shall
-------- -------
have no such royalty payment obligation with respect to any such patent which
was declared invalid or unenforceable in a final decision by a court of
competent jurisdiction from which no appeal can be or is taken, or in the case
of a patent application which was the subject of a final and unappealable
determination of unpatentability by the relevant governmental authority in the
applicable country.
5.4.4 Single Royalty; Non-Royalty Sales. No royalty shall be
----------------------------------------
payable under Section 5.4.1 above with respect to sales of Products among SPL,
its Affiliates and Sublicensees for resale; however, a royalty shall be payable
upon such resale by SPL's Affiliates and Sublicensees. In no event shall more
than one royalty be due hereunder with respect to any Product unit even if
covered by more than one patent included in the Pharmacopeia Technology or
Collaboration Technology. It is understood and agreed that if a Product is
manufactured outside the Territory and sold in the Territory,
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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a royalty shall be due hereunder on Net Sales of such Product in the Territory.
No royalties shall accrue on the disposition of any Product in reasonable
quantities by SPL, its Affiliates or its Sublicenses as samples (promotional or
otherwise) or as donations (for example, to non-profit institutions or
government agencies for a non-commercial purpose) or for clinical studies.
5.4.5 Third Party Royalties.
--------------------------
(a) SPL Responsibilities. SPL shall be responsible for the
------------------------
payment of any royalties due to licenses obtained from Third Parties relating to
the manufacture, use, marketing, sale or distribution of Products by SPL, its
Affiliates or Sublicensees under the Collaboration Technology, Pharmacopeia
Technology or Schering Technology (except for any payments due to Columbia
University pursuant to the Columbia License, which shall be the responsibility
of Pharmacopeia).
(b) * . Notwithstanding Section 5.4.5(a) above, if a Third
-------
Party alleges that the manufacture, use or sale of a Product infringes its
patents, based solely on the practice of the Pharmacopeia Enabling Technology
used by Pharmacopeia in connection with the encoding or decoding by Pharmacopeia
of Libraries pursuant to the performance of this Agreement, *
Any settlement of any infringement claim or action that would
require the payment of any royalty to a Third Party shall require the
mutual agreement of SPL and Pharmacopeia, except that if the Parties cannot
promptly reach agreement they shall appoint an independent patent counsel
reasonably acceptable to each of them to give an opinion, which will be binding
as between the Parties, as to whether the Third Party patent is valid and if so
whether it is infringed, and the parties shall have no further recourse to
dispute such opinion (including , without limitation, the provisions of Section
11.3, which shall not apply). If it is the independent patent counsel's opinion
that the patent is valid and infringed by the sale of such Agreement Product,
solely due to Pharmacopeia's practice of the Pharmacopeia Enabling Technology in
connection with the encoding or decoding of Libraries pursuant to the
performance of this Agreement, SPL may settle the matter in its sole discretion
on such terms as it deems appropriate, provided that such settlement does not
contain an admission or acknowledgment of infringement or invalidity.
5.4.6 Compulsory Royalty Reductions. If the royalties set forth
------------------------------------
herein are higher than the maximum royalties permitted by the law or regulation
in any country or territory or possession thereof in the world, the royalty
payable for sales in such country, territory or possession shall be equal to the
maximum permitted royalty under such law or regulations.
5.4.7 Royalty Overpayment. In the event SPL pays Pharmacopeia
--------------------------
royalties in excess of the amounts due under Section 5.4.1 herein, SPL shall
promptly notify Pharmacopeia providing a written explanation of the amount of
overpayment. Any such overpayment shall be fully creditable against royalties
subsequently due hereunder.
5.5 Reports; Payment of Royalty; Payment Exchange Rate and Currency
--------------------------------------------------------------------
Conversions.
- -----------
5.5.1 Royalty Reports and Payments. After the First Commercial Sale
-----------------------------------
of an Agreement Product or SP Product on which royalties are payable by SPL, its
Affiliate or Sublicensees
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
hereunder, SPL shall make quarterly written reports to Pharmacopeia within *
days after the end of each calendar quarter, stating in each such report
separately for SPL and each of its Affiliates and Sublicensees the number,
description, and aggregate Net Sales by country of each Product sold during the
calendar quarter upon which a royalty is payable under Section 5.4 above.
Subject to any reductions permitted pursuant to the express terms of this
Agreement, concurrently with the making of such reports, SPL shall pay to
Pharmacopeia royalties at the rates specified in Section 5.4.1.
5.5.2 Payment Method. All payments due under this Agreement shall be
---------------------
made by bank wire transfer in immediately available funds to an account
designated by Pharmacopeia. All payments hereunder shall be made in U.S.
dollars. Any payments that are not paid on the date such payments are due under
this Agreement shall bear interest, calculated on the number of days such
payment is delinquent, at the lesser of: (i) the prime rate as reported by the
Chase Manhattan Bank, New York, New York, on the date such payment is due, plus
an additional *, or (ii) the maximum rate permitted by applicable law.
5.5.3 Place of Royalty Payment and Currency Conversions. Royalties
--------------------------------------------------------
shall be deemed payable by the entity making the Net Sales from the country in
which earned in local currency and subject to foreign exchange regulations then
prevailing. Royalty payments shall be made in United States dollars to the
extent that free conversion to United States dollars is permitted. The rate of
exchange to be used in any such conversion from the currency in the country
where such Net Sales occurs shall be in accordance with the policy set forth in
Exhibit A hereto. If, due to restrictions or prohibitions imposed by national
or international authority, payments cannot be made as aforesaid, the Parties
shall consult with a view to finding a prompt and acceptable solution, and SPL
or its designated Affiliates will, from time to time, deal with such monies as
Pharmacopeia may lawfully direct at no additional out-of-pocket expense to SPL.
Notwithstanding the foregoing, if royalties in any country cannot be remitted to
Pharmacopeia for any reason within six (6) months after the end of the calendar
quarter during which they are earned, then SPL shall be obligated to deposit the
royalties in a bank account in such country in the name of Pharmacopeia.
5.6 Maintenance of Records; Audits.
-----------------------------------
5.6.1 Records; Inspection. SPL and its Affiliates shall keep
--------------------------
complete, true and accurate books of account and records for the purpose of
determining the royalty amounts payable under this Agreement, which books and
records shall be maintained in accordance with SPL's records retention policies.
Upon prior written notice from Pharmacopeia, SPL shall, within a period not to
exceed forty-five (45) days, permit an independent certified public accounting
firm of nationally recognized standing selected by Pharmacopeia and reasonably
acceptable to SPL, at Pharmacopeia's expense, to have access during normal
business hours to examine pertinent books and records of SPL and/or its
Affiliates as may be reasonably necessary to verify the accuracy of the royalty
reports hereunder. The examination shall be limited to pertinent books and
records for any calendar year ending not more than * months prior to the date of
such request. Such inspections may be made no more than once each calendar year.
In the event that the accounting firm correctly concludes that a variation or
error has occurred resulting in an underpayment of royalties by SPL of * or more
of the amount actually due for the period covered by the inspection, SPL shall
pay to Pharmacopeia such additional amounts, as well as the costs relating to
the inspection, within * days of receipt of an invoice for such amounts. Any
overpayment of royalties by SPL discovered through such audit shall be
fully creditable against royalties subsequently due hereunder. SPL may
designate competitively sensitive information which such auditor may not
disclose to Pharmacopeia; provided, however, that such designation shall not
-------- -------
encompass the auditor's conclusions. The accounting firm shall disclose to
Pharmacopeia only whether the royalty reports are correct or incorrect and the
specific details concerning any discrepancies. No other information shall be
provided to Pharmacopeia. The accounting firm employees shall sign
confidentiality agreements acceptable to SPL as a condition precedent to their
inspection. SPL shall include in each sublicense granted by it
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* CONFIDENTIAL TREATMENT REQUESTED
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pursuant to this Agreement a provision requiring the Sublicensee to make reports
to SPL, to keep and maintain records of sales made pursuant to such sublicense
and to grant access to such records by Pharmacopeia's independent accountant to
the same extent required of SPL under this Agreement. Upon expiration of the *
month period immediately following the receipt by Pharmacopeia of SPL's fourth
quarter royalty report for a given calendar year in accordance with Section
5.5.1, the calculation of royalties payable with respect to such year shall be
binding and conclusive upon Pharmacopeia, and SPL, its Affiliates and its
Sublicensees shall be released from any liability or accountability with respect
to royalties for such year, except for instances of fraud or other intentional
misconduct by Schering.
5.7 Coordination With Payments under US Agreement. The milestones and
--------------------------------------------------
royalties payable by SPL under Sections 5.3 and 5.4 are in consideration for the
rights and licenses granted to SPL under this Agreement and are in addition to
any amounts payable to Pharmacopeia under the US Agreement. It is understood
and agreed that, with respect to the specific milestones payable under Sections
5.3.1(a)(ii)-(iv) and 5.3.1(b)(ii)-(iv), the occurrence of the same milestone
event will result in milestone payment obligations under both this Agreement and
the corresponding provisions of the US Agreement.
5.8 Tax Matters.
-----------------
5.8.1 Withholding Taxes. All royalty amounts required to be paid to
------------------------
Pharmacopeia pursuant to this Agreement shall be paid with deduction for
withholding for or on account of any taxes (other than taxes imposed on or
measured by net income) or similar governmental charge imposed by a jurisdiction
other than the United States ("Withholding Taxes") to the extent Pharmacopeia
and/or its Affiliates or their successors has the lawful rights to utilize the
Withholding Taxes paid by SPL as a credit against Pharmacopeia's and/or its
Affiliates regular U.S. tax liability. SPL shall provide Pharmacopeia
documentation evidencing payment of any Withholding Taxes hereunder in a manner
that is satisfactory for purposes of the U.S. Internal Revenue Service. Any
Withholding Taxes paid when due hereunder shall be for the account of
Pharmacopeia and shall not be included in the calculation of Net Sales.
Payments of Withholding Taxes made by SPL pursuant to this Section 5.8.1 shall
be made based upon financial information provided to SPL by Pharmacopeia, and to
the extent that such information is incorrect Pharmacopeia shall be liable for
any deficiency, and any fine, assessment or penalty imposed by any taxing
authority in the Territory for any deficiency in the amount of any such
Withholding Taxes, or the failure to make payment of Withholding Taxes, based
upon such incorrect information. If SPL is required to pay any such deficiency,
or any fine, assessment or penalty for any such deficiency based upon such
incorrect information (except to the extent caused by SPL's gross negligence or
willful misconduct), Pharmacopeia shall promptly reimburse SPL for such
payments, which shall not be included in the calculation of Net Sales.
5.8.2 Sales Taxes. Any sales taxes, use taxes, transfer taxes or
------------------
similar governmental charges required to be paid in connection with the transfer
of the Discovery Libraries and Optimization Libraries shall be the sole
responsibility of SPL. In the event that Pharmacopeia is required to pay any
such amounts, SPL shall promptly remit payment to Pharmacopeia of such amounts.
5.9 Product Development Costs. SPL shall, at SPL's expense, be
------------------------------
responsible for conducting all development of Agreement Compounds, Agreement
Products, Schering Compounds and SP Products, and all commercialization of
Products.
ARTICLE VI
PATENTS AND INVENTIONS
6.1 Ownership of Schering Technology and Pharmacopeia Technology. It is
-----------------------------------------------------------------
understood and agreed that (i) SPL shall own all Schering Technology including,
without limitation, SPL
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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Improvements, and (ii) Pharmacopeia shall own all Pharmacopeia Technology
including, without limitation, Pharmacopeia Improvements, and all Pharmacopeia
Enabling Technology.
6.2 Ownership of Collaboration Technology. The Parties anticipate that
------------------------------------------
the Collaboration may result in new inventions, discoveries and innovations, as
well as improvements to existing technologies, whether patentable or not, within
the Collaboration Technology. Ownership of Collaboration Technology shall be
determined based upon U.S. Patent Laws and the following guidelines; provided,
--------
however, that ownership rights to all Collaboration Technology shall be subject
- -------
to the applicable licenses and other rights granted under Article IV of this
Agreement.
(a) Inventions by SPL Employees. Title to all Collaboration
--------------------------------
Technology invented solely by employees of SPL working on the Collaboration at
Pharmacopeia shall be deemed to be owned by SPL
(b) Inventions by Pharmacopeia Employees. Title to all Collaboration
-----------------------------------------
Technology invented solely by employees of Pharmacopeia shall be deemed to be
owned by Pharmacopeia.
(c) Joint Inventions. Title to all Collaboration Technology invented
---------------------
jointly by one or more employees of SPL working on the Collaboration at
Pharmacopeia, and one or more employees of Pharmacopeia shall be deemed to be
jointly owned by SPL and Pharmacopeia.
6.3 Filing, Prosecution and Maintenance of Patents.
---------------------------------------------------
6.3.1 Collaboration Technology. SPL shall have the right to prepare,
-------------------------------
file, prosecute and maintain in such countries as it deems appropriate in its
discretion, at its own expense and upon appropriate consultation with
Pharmacopeia, patent applications and patents, and to conduct any interferences,
re-examinations, reissues, oppositions or requests for patent term extension or
governmental equivalents thereto within the Collaboration Technology (excluding
Collaboration Platform Technology), and Pharmacopeia shall give reasonable
cooperation in connection therewith, at SPL's request and expense. In the event
that SPL does not file a patent or patent application claiming an invention
within such Collaboration Technology, or if it ceases to so prosecute, maintain,
conduct any interferences, re-examinations, reissues, oppositions or requests
for patent term extension or governmental equivalents thereto relating to such
an invention, Pharmacopeia shall have the right, in its sole discretion, to
undertake such activities at its own expense, and SPL shall give reasonable
cooperation in connection therewith, at Pharmacopeia's expense.
6.3.2 Collaboration Platform Technology. Before filing any patent
----------------------------------------
application claiming any invention within the Collaboration Platform Technology,
the Parties shall discuss whether and how to proceed with the filing,
prosecution, and maintenance of such patent, as well as the conduct of any
interferences, re-examinations, reissues, oppositions or requests for patent
term extension or governmental equivalents thereto. The Parties shall share
equally the costs of such activities, unless one Party notifies the other in
writing that is does not wish to pay for its share of such activities, in which
event the other Party shall have the right to proceed at its own expense, and
the Party declining to pay for such costs shall have no further license, on a
patent-by-patent and country-by-country basis, to practice the Collaboration
Platform Technology claimed in any issued, valid and enforceable patent for
which the Party did not pay such costs.
6.3.3 Schering Technology. SPL shall have the right to prepare,
--------------------------
file, prosecute and maintain in such countries as it deems appropriate in its
discretion, at its own expense, patent applications and patents, and to conduct
any interferences, re-examinations, reissues, oppositions or requests for patent
term extension or governmental equivalents thereto within the Schering
Technology
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<PAGE>
and Pharmacopeia shall give reasonable cooperation in connection therewith, at
SPL's request and expense.
6.3.4 Pharmacopeia Technology. Pharmacopeia shall have the right to
------------------------------
prepare, file, prosecute and maintain in such countries as it deems appropriate
in its discretion, at its own expense, patent applications and patents, and to
conduct any interferences, re-examinations, reissues, oppositions or requests
for patent term extension or governmental equivalents thereto within the
Pharmacopeia Technology, as well as any Pharmacopeia Enabling Technology, and
SPL shall give reasonable cooperation in connection therewith, at Pharmacopeia's
request and expense.
6.3.5 Pharmacopeia's Rights Regarding Patents Relating to Agreement
--------------------------------------------------------------------
Compounds. In the event that SPL does not file a patent application in Europe
- ---------
claiming an Agreement Compound (arising from an Optimization Library) as a
composition-of-matter, within two (2) years after the later of (1) the decoding
of the Active Compounds in such Optimization Library (after the entire
Optimization Library has been screened), or (2) the filing of a patent
application claiming one or more Schering Compounds, where such Agreement
Compounds, Active Compounds and Schering Compounds are all active against the
Target for which the relevant Optimization Library was prepared, it shall
promptly notify Pharmacopeia to that effect in writing, and Pharmacopeia shall
thereafter have the right to prepare, file, prosecute, maintain and defend such
patent applications, and any patents arising therefrom, in the Territory, all at
Pharmacopeia's expense. Schering shall use diligent efforts (i) to provide such
notice to Pharmacopeia in a timely manner, and (ii) not to take any actions
(including publication) with respect to such Agreement Compounds, that would
prejudice the patentability of such Agreement Compounds. Schering shall have no
rights or licenses under such patent applications and/or patents, which shall be
deemed to be Pharmacopeia Independent Technology. Schering shall grant back to
Pharmacopeia the licenses set forth in Section 4.11, with respect to any such
Agreement Compounds, and shall have no royalty obligations under Section
5.4.1(iv) with respect to sales of any SP Products in the Territory active
against the relevant Target. Notwithstanding the foregoing, the provisions of
this Section 6.3.5 shall not apply with respect to Agreement Compounds which the
parties agree are unpatentable under European Patent Laws.
6.4 Cooperation.
----------------
6.4.1 Cooperation. Upon request, and at the requesting Party's
------------------
expense, each of Pharmacopeia and SPL shall provide the other Party reasonable
assistance to prepare, file, prosecute and maintain patents and patent
applications covering any Collaboration Technology, SPL Improvements or
Pharmacopeia Improvements which the requesting Party has the right to file.
Reasonable assistance shall include, without limitation, providing the
requesting Party with necessary or useful data and information relating to the
Collaboration Technology, SPL Improvements or Pharmacopeia Improvements, as the
case may be, and reasonable access to the inventors of said inventions, as well
as causing the execution of required patent assignments and/or other documents.
With respect to all patent applications claiming Collaboration Technology or any
Active Compound or Derivative Compound, the filing Party shall give the non-
filing Party an opportunity to review the text of such patent applications
before filing, shall consult with the non-filing Party with respect thereto, and
shall supply the non-filing Party with a copy of the applications as filed,
together with notice of its filing date and serial number. SPL will identify to
Pharmacopeia any of SPL's proprietary information contained in such documents to
be provided to Pharmacopeia to ensure that Pharmacopeia will protect SPL's
proprietary information, including without limitation, information relating to
Targets. In addition, with respect to applications which do not include
Pharmacopeia inventors, SPL may redact or provide in coded form any information
contained in such documents to be provided to Pharmacopeia to the extent
necessary (in SPL's opinion) to protect SPL's proprietary information, including
without limitation, information relating to Targets. Pharmacopeia and SPL shall
each keep the other Party advised of the status of the actual and prospective
patents and patent applications within the Collaboration Patent Rights for which
it is responsible, and upon the written request of the other Party,
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<PAGE>
will provide advance copies of any substantive papers related to the filing,
prosecution and maintenance of such Collaboration Patent Rights.
6.5 Enforcement.
----------------
6.5.1 Notice. Each Party shall promptly notify the other of its
-------------
knowledge of any actual or potential infringement of the Collaboration
Technology by a Third Party.
6.5.2 Collaboration Technology. SPL shall have the initial right,
-------------------------------
but not the obligation, to take reasonable legal action to enforce against
infringements by Third Parties or defend any declaratory judgment action
relating to any patent within the Collaboration Technology (excluding any
Collaboration Platform Technology) at its sole cost and expense. If, within six
(6) months following receipt of notice of such infringement from Pharmacopeia
(or written notice of a declaratory judgment action alleging invalidity or
unenforceability of such Collaboration Technology), SPL does not take such
action against a commercially significant infringement, Pharmacopeia shall, in
its sole discretion, have the right, but not the obligation to take such action
at its sole expense.
6.5.3 Collaboration Platform Technology. In the event of an actual
----------------------------------------
or potential infringement of Collaboration Platform Technology by a Third Party,
SPL and Pharmacopeia shall discuss how to proceed in connection with such
infringement. Unless otherwise agreed by the Parties, the terms of Section
6.5.5 shall apply; provided, however, that the Parties may decide to jointly
-------- -------
proceed in enforcement against any such patent infringement by Third Parties, in
which case the Parties shall also agree on allocation of costs and damages.
6.5.4 Schering Technology and Pharmacopeia Technology. It is
------------------------------------------------------
understood and agreed that Pharmacopeia shall have the sole right, but not the
obligation, to initiate and conduct legal proceedings to enforce the
Pharmacopeia Technology and Pharmacopeia Enabling Technology against any actual
or threatened infringement or misappropriation or defend any declaratory
judgment action relating thereto, at its sole expense, and that SPL shall have
the sole right, but not the obligation, to initiate and conduct legal
proceedings to enforce the Schering Technology against any actual or threatened
infringement or misappropriation or defend any declaratory judgment action
relating thereto, at its sole expense.
6.5.5 Cooperation; Costs and Recoveries. Each Party agrees to render
----------------------------------------
such reasonable assistance as the enforcing Party may request, and at the
enforcing Party's expense. Costs of maintaining any such action shall be paid
by the Party bringing the action and any damages or settlements recovered
therefrom shall belong to such Party. To the extent that SPL recovers any lost
profits or other recovery based upon Third Party sales of infringing products,
Pharmacopeia shall receive an equitable share of such recovery, as determined
based upon the royalties Pharmacopeia would have been entitled to under this
Agreement on Net Sales by SPL, its Affiliates or Sublicensees of the relevant
Agreement Products and/or SP Products, as applicable, corresponding to such lost
profits. If SPL, in its sole discretion, agrees to settle any such infringement
action by granting a sublicense to the Third Party infringer, and such Third
Party, but for the grant of such sublicense, would be infringing a claim of an
issued patent in the Collaboration Technology, or a composition-of-matter claim
of an issued patent in the Schering Technology, SPL shall *
provided, however, that net
- -------- -------
sales of such Third Party products in the Territory on which *
for purposes of this Agreement, and further provided that, notwithstanding
anything herein to the contrary, SPL's *
in any calendar quarter shall not exceed * from such Third
Party for the same quarter.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
6.6 Infringement Claims. If the manufacture, sale or use of any Agreement
------------------------
Product pursuant to this Agreement because of the practice of the Pharmacopeia
Technology, Collaboration Technology, Pharmacopeia Enabling Technology or
Schering Technology, results in any claim, suit or proceeding alleging patent
infringement against Pharmacopeia or SPL (or their respective Affiliates or
Sublicensees), such Party shall promptly notify the other Party hereto in
writing setting forth the facts of such claim in reasonable detail. The Party
subject to such claim shall have the exclusive right and obligation to defend
and control the defense of any such claim, suit or proceeding, at its own
expense, using counsel of its own choice; provided, however, it shall not enter
into any settlement which admits or concedes that any aspect of (i) the Schering
Technology or Collaboration Technology in the case of Pharmacopeia, and (ii) the
Pharmacopeia Technology, Collaboration Technology, or Pharmacopeia Enabling
Technology in the case of SPL, is invalid or unenforceable without the prior
written consent of such other Party. The Party subject to the claim shall keep
the other Party hereto reasonably informed of all material developments in
connection with any such claim, suit or proceeding. Any claim, suit or
proceeding arising based upon SPL's manufacture, sale or use of any SP Product
shall be the sole responsibility of SPL.
6.7 Certification under Drug Price Competition and Patent Restoration Act.
--------------------------------------------------------------------------
Pharmacopeia and SPL each shall immediately give written notice to the other of
any certification of which they become aware filed pursuant to 21
U.S.C.(S)(S)355(b)(2)(A)(iv) and 355(j)(2)(A)(vii) claiming that Collaboration
Patent Rights do not cover the use or sale of any product(s) equivalent to an
existing Agreement Product(s) by a Third Party. SPL shall have the right to
bring an infringement action, in its sole discretion and at its own expense, in
its own name and/or in the name of Pharmacopeia, subject to Section 6.5 above.
The provisions of Section 6.5.5 shall apply to any such infringement action.
6.8 Patent Term Restoration. The Parties hereto shall give reasonable
----------------------------
cooperation to each other in obtaining patent term restoration or supplemental
protection certificates or their equivalents in any country in the Territory
where applicable to the Collaboration Technology.
ARTICLE VII
CONFIDENTIALITY
7.1 Confidential Information. Except as expressly provided herein, the
-----------------------------
Parties agree that, for the term of this Agreement and for five (5) years
thereafter, the receiving Party shall not disclose and except as expressly
provided in this Article 7, shall not use for any purpose any confidential
information ("Confidential Information") furnished to it by the disclosing Party
hereto pursuant to this Agreement except to the extent that it can be
established by the receiving Party by competent proof that such information:
(i) was already known to the receiving Party, other than under an
obligation of confidentiality, at the time of disclosure;
(ii) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving Party;
(iii) became generally available to the public or otherwise part of
the public domain after its disclosure and other than through any act or
omission of the receiving Party in breach of this Agreement;
(iv) was independently developed by the receiving Party as
demonstrated by documented evidence prepared contemporaneously with such
independent development; or
(v) was subsequently lawfully disclosed to the receiving Party,
other than under a duty of confidentiality, by a Third Party that had the right
to make such disclosure.
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<PAGE>
7.2 Permitted Use and Disclosures. Each Party hereto may use or disclose
----------------------------------
Confidential Information disclosed to it by the other Party to the extent such
information is included in the Pharmacopeia Technology, Schering Technology or
Collaboration Technology, as the case may be, and to the extent (i) such use or
disclosure is reasonably necessary and permitted in the exercise of the rights
granted hereunder in filing or prosecuting patent applications, prosecuting or
defending litigation, (ii) such disclosure is reasonably required to be made to
any institutional review board of any entity conducting clinical trials with
Agreement Compound(s) and/or Agreement Product(s), or to any governmental or
other regulatory agency, in order to gain approval to conduct clinical trials or
to market Agreement Compound(s) and/or Agreement Products, (iii) such disclosure
is required by law, regulation, rule, act or order of any governmental
authority, court, or agency, or is made in connection with submitting required
information to tax or other governmental authorities, or (iv) such disclosure or
use is reasonably required in conducting clinical trials, or making a permitted
sublicense or otherwise exercising license rights expressly granted to it by the
other Party pursuant to the terms of this Agreement; in each case, provided that
if a Party is required to make any such disclosure of another Party's
Confidential Information, other than pursuant to a confidentiality agreement, it
will give reasonable advance notice to the other Party of such disclosure and,
save to the extent inappropriate in the case of patent applications, will use
its reasonable diligent efforts to secure confidential treatment of such
Confidential Information in consultation with the other Party prior to its
disclosure (whether through protective orders or otherwise) and disclose only
the minimum necessary to comply with such requirements.
7.3 Return of Confidential Information. Following termination of this
---------------------------------------
Agreement, at any time upon request of the disclosing Party, the receiving Party
will return all documents, and copies thereof, containing the disclosing Party's
Confidential Information that are still in the receiving Party's possession or
control; however, the receiving Party may retain one copy of such documents in a
secure location solely for the purpose of determining its obligations hereunder,
to comply with any applicable regulatory requirements, or to defend against any
product liability claims.
7.4 Nondisclosure of Terms. Each of the Parties hereto agrees not to
---------------------------
disclose to any Third Party the existence or the terms of this Agreement without
the prior written consent of each other Party hereto, except to such Party's
attorneys, advisors, investors and others on a need to know basis under
circumstances that reasonably ensure the confidentiality thereof, or to the
extent required by law. Notwithstanding the foregoing, the Parties shall agree
upon a press release to announce the execution of this Agreement, together with
a corresponding Q&A outline for use in responding to inquiries about the
Agreement; thereafter, Pharmacopeia and SPL may each disclose to Third Parties
the information contained in such press release and Q&A without the need for
further approval by the other. In addition, Pharmacopeia may make public
statements regarding progress with respect to the development and
commercialization of Agreement Compounds and/or Agreement Products, including
announcement of the achievement of milestones, following consultation with SPL
and with the written consent of SPL. Nothing in this Section 7.4 shall prohibit
a Party from making such disclosures to the extent reasonably required under
applicable federal or state securities laws or any rule or regulation of any
nationally recognized securities exchange. In such event, however, the
disclosing Party shall use good faith efforts to notify and consult with the
other Party prior to such disclosure and, where applicable, shall diligently
seek confidential treatment to the extent available.
7.5 Publication. Any manuscript by SPL or Pharmacopeia or their
----------------
Affiliates describing Agreement Products shall be subject to the prior review of
the other Party at least ninety (90) days prior to submission. Further, to
avoid loss of patent rights as a result of premature public disclosure of
patentable information, the receiving Party shall notify the disclosing Party in
writing within thirty (30) days after receipt of a disclosure whether receiving
Party desires to file a patent application on any invention disclosed in such
scientific results. In the event that the receiving Party desires to file such
a patent application, the disclosing Party shall withhold publication or
disclosure of such scientific results until the earlier of (i) a patent
application is filed thereon, or (ii) the Parties determine after
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<PAGE>
consultation that no patentable invention exists, or (iii) one hundred and
eighty (180) days after receipt by the disclosing Party of the receiving Party's
written notice of the receiving Party's desire to file such patent application,
or such other period as is reasonable for seeking patent protection. Further,
if such scientific results contain the information of the receiving Party that
is subject to use and nondisclosure restrictions under this Article 7, the
disclosing Party agrees to remove such information from the proposed publication
or disclosure.
7.6 Pharmacopeia Employees. All Pharmacopeia employees assigned to work
---------------------------
exclusively on Collaboration research projects pursuant to Section 2.5, shall *.
Any Pharmacopeia employees assigned to work exclusively on Collaboration
research projects shall also be subject to non-compete obligations, as set forth
below, with respect to any Target with respect to which Collaboration research
efforts directed to such Target are performed at Pharmacopeia (including,
without limitation, the design and preparation of Optimization Libraries for
such Target and/or the synthesis of Derivative Compounds based on Active
Compounds contained in such Libraries). None of the individual Pharmacopeia
employees participating in Target specific Collaboration research, and who at
any time during or after the term of the Collaboration have actual knowledge of
the identity of such Target, shall perform or otherwise contribute to any
research or development work relating to such Target for or on behalf of
Pharmacopeia and/or its Third Party collaborators for a period of * after the
date on which the Collaboration ceases all such Target specific research
activities at Pharmacopeia with respect to such Target. Pharmacopeia shall be
liable for any breach of *
and/or these non-compete obligations by its employees. In the event that, in the
course of Pharmacopeia's work on a Collaboration research program or in
connection with a patent application relating thereto, SPL has disclosed the
identity of a Target (other than in coded form) which is the subject of such a
research program to Pharmacopeia's Chief Science and Technology Officer
responsible for performance of the Collaboration (or his successor), all
Pharmacopeia employees working on such research program will be deemed to have
actual knowledge of the identity of such Target. The further disclosure of the
identity of a Target within Pharmacopeia shall be limited to only those
Pharmacopeia employees necessary to ensure that Pharmacopeia and its employees
does not breach the provisions of this Section 7.6. In addition, during and
after the term of the Collaboration, Pharmacopeia shall use reasonably diligent
efforts to ensure that such individuals do not disclose or provide access to any
Collaboration Target-Specific Technology, Schering Technology, or the results of
any screening or other Target specific research performed at Pharmacopeia in the
Collaboration, to any Pharmacopeia employees not working on the Collaboration
(except to the extent reasonably necessary for Pharmacopeia to ensure its
compliance with its exclusivity obligations hereunder) or to any Third Parties.
ARTICLE VIII
REPRESENTATION, WARRANTIES AND COVENANTS
8.1 SPL. Schering-Plough Ltd. warrants, represents and covenants on
--------
behalf of itself and its Affiliates that: (i) it has the legal right and power
to extend the rights granted in this Agreement; (ii) it has the legal power,
authority and right to enter into this Agreement, and to perform all its
obligations hereunder, and (iii) it has not previously granted, and during the
term of this Agreement will not knowingly make any commitment or grant any
rights which in any material way conflict with the rights and licenses granted
herein.
8.2 Pharmacopeia. Pharmacopeia represents, warrants and covenants on
-----------------
behalf of itself and its Affiliates that: (i) it has the legal right and power
to extend the rights granted in this Agreement; (ii) it has the legal power,
authority and right to enter into this Agreement, and to perform all its
obligations hereunder; (iii) it has not previously granted, and during the term
of this Agreement will not knowingly make any commitment or grant any rights
which in any material way conflict with the rights and licenses granted herein;
(iv) to the best of its knowledge as of the Effective Date, there are
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
no existing or threatened actions, suits or claims pending against it with
respect to the Pharmacopeia Technology or the Pharmacopeia Enabling Technology;
(v) to the best of its knowledge as of the Effective Date, it is not aware of
any Existing Pharmacopeia Know-How which is not available for use for all
purposes contemplated by this Agreement; (vi) as of the Effective Date, the
Columbia License is in full force and effect, and to the best of its knowledge
there does not exist any event of default with respect to Pharmacopeia under the
Columbia License which would constitute a breach of the Columbia License; (vii)
during the term of this Agreement, Pharmacopeia will use its best efforts not to
materially breach the Columbia License and will not modify or amend the Columbia
License in any way which would materially adversely effect the rights of SPL
under this Agreement; (viii) to the best of its knowledge and as of the
Effective Date, it owns or controls all of the Pharmacopeia Technology and
Pharmacopeia Enabling Technology, and has the rights to grant the licenses or
sublicenses granted to SPL hereunder with respect thereto; and (ix) to the best
of Pharmacopeia's knowledge as of the Effective Date, the creation or synthesis
of encoded combinatorial libraries by Pharmacopeia does not infringe any valid
Third Party patent rights
8.3 Compliance with Agreement and Laws. Each Party shall comply in all
---------------------------------------
material respects with the terms of this Agreement and with all laws, rules and
regulations applicable to the discovery, development, manufacture, distribution,
import and export and sale of pharmaceutical products pursuant to this
Agreement.
8.4 Disclaimer. SPL and Pharmacopeia expressly disclaim any
---------------
representation, warranty or guaranty that the Collaboration will be successful.
EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, PHARMACOPEIA AND SPL
AND THEIR RESPECTIVE AFFILIATES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES
OR CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE
PHARMACOPEIA TECHNOLOGY, THE PHARMACOPEIA ENABLING TECHNOLOGY, THE SCHERING
TECHNOLOGY, THE COLLABORATION TECHNOLOGY, DISCOVERY LIBRARIES, OPTIMIZATION
LIBRARIES, LIBRARY COMPOUNDS, ACTIVE COMPOUNDS, DERIVATIVE COMPOUNDS, AGREEMENT
COMPOUNDS OR AGREEMENT PRODUCTS, OR INFORMATION DISCLOSED PURSUANT TO ARTICLE
VII, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, VALIDITY OF THE PHARMACOPEIA TECHNOLOGY, PHARMACOPEIA
ENABLING TECHNOLOGY, COLLABORATION TECHNOLOGY OR SCHERING TECHNOLOGY (IN EACH
CASE, WHETHER PATENTED OR UNPATENTED), OR NONINFRINGEMENT OF THE INTELLECTUAL
PROPERTY RIGHTS OF THIRD PARTIES.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by SPL. SPL shall indemnify, defend and hold harmless
---------------------------
Pharmacopeia and its Affiliates, and each of its and their respective employees,
officers, directors and agents (the "Pharmacopeia Indemnitees") from and against
any and all liability, loss, claims, damage, cost, and expense (including
reasonable attorneys' and professionals' fees and other expenses of litigation)
(collectively, a "Liability") arising out of or in connection with Third Party
claims relating to (i) the discovery, development, manufacture, use, testing,
marketing, sale or other disposition of Products by on behalf of SPL or its
Affiliates or Sublicensees, (ii) performance of the Collaboration by SPL, (iii)
any injury, illness or disease suffered by any SPL employees in connection with
the performance of the Collaboration, (iv) the use of any and all Targets with
respect to which research activities are conducted in the Collaboration,
including without limitation claims in connection with materials relating to
such Target, or (v) any breach by SPL of its representations and warranties made
under this Agreement, except, in each case, to the extent such Liabilities
result from the gross negligence or willful misconduct of Pharmacopeia, its
Affiliates, or any of their respective employees, officers, directors or agents.
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<PAGE>
9.2 Indemnification by Pharmacopeia. Pharmacopeia shall indemnify,
-------------------------------------
defend and hold harmless SPL and its Affiliates, and each of its and their
respective employees, officers, directors and agents (the "SPL Indemnitees")
from and against any Liability (as defined above) arising out of or in
connection with Third Party claims relating to (i) Pharmacopeia's encoding or
decoding of Libraries, pursuant to this Agreement, (ii) the performance of the
Collaboration by Pharmacopeia, except to the extent directly related to the use
of Targets, (iii) any injury, illness or disease suffered by any Pharmacopeia
employees in connection with the performance of the Collaboration, (iv) any
product based upon a Library Compound developed, manufactured, used, sold or
otherwise distributed by or on behalf of Pharmacopeia, its Affiliates or
Licensees, as permitted under this Agreement (including, without limitation,
product liability and patent infringement claims), (v) any breach of
Pharmacopeia's contractual obligations to Third Parties (including, without
limitation, those relating to Reserved Targets), or (vi) any breach by
Pharmacopeia of its representations and warranties made under this Agreement,
except, in each case, to the extent such Liabilities result from the gross
negligence or willful misconduct of SPL, its Affiliates, or any of their
respective employees, officers, directors or agents.
9.3 No Consequential Damages. Except with respect to Third Party claims
------------------------------
as provided for under Section 9.1 and 9.2, in no event shall any Party to this
Agreement have any claims against or liability to the other Party for any
special, consequential or incidental damages arising under this Agreement under
any theory of liability.
9.4 Procedure. In the event that any Indemnitee intends to claim
---------------
indemnification under this Article IX, it shall promptly notify the other Party
in writing of any such alleged Liability. The indemnifying Party shall have the
right to control the defense thereof with counsel of its choice; provided,
--------
however, that any Indemnitee shall have the right to retain its own counsel,
- -------
with the fees and expenses to be paid by the indemnifying Party, if
representation of such Indemnitee by the counsel retained by the indemnifying
Party would be inappropriate due to actual or potential differing interests
between such Indemnitee and any other Party represented by such counsel in such
proceeding. The affected Indemnitees shall cooperate reasonably with the
indemnifying Party and its legal representatives in the investigation and
defense of any action, claim or liability covered by this Article IX. Neither
Party may settle a claim or action related to a Liability for which it or the
other Party seeks indemnification hereunder without the consent of the other
Party, if such settlement would impose any monetary obligation on the other
Party or require the other Party to submit to an injunction or otherwise limit
the other Party's rights under this Agreement. Any payment made by a Party to
settle any such claim or action shall be at its own cost and expense.
9.5 Insurance. Each Party shall obtain and maintain throughout the term
---------------
of this Agreement statutory Workers' Compensation and Employer's Liability
insurance covering all employees engaged in the performance of work under this
Agreement. Each Party shall provide the other Party with evidence of such
insurance and/or self-insurance program, upon request.
ARTICLE X
TERM AND TERMINATION
10.1 Term and Expiration. This Agreement shall be effective as of the
-------------------------
Effective Date and unless terminated earlier as provided in this Article X or by
mutual written agreement of the Parties, the term of this Agreement shall
continue in full force and effect, on a country-by-country and Product-by-
Product basis, until SPL and its Affiliates and Sublicensees have no further
obligation to pay royalties under Article V hereof in a country, at which time
the Agreement shall expire in its entirety in such country and the Parties shall
have no further payment obligations or other financial obligations to each other
with respect to the continuing use in such country of Pharmacopeia Technology,
Schering Technology and/or Collaboration Technology, as the case may be, in the
manner licensed herein. As royalty payment obligations for a Product expire in
a country, even if the Agreement thereafter remains
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<PAGE>
in effect in such country, SPL, its Affiliates and Sublicensees, shall no longer
have any remaining payment obligations hereunder with respect to such a Product
in that country.
10.2 Termination for Cause. This Agreement may be terminated by written
---------------------------
notice by either Party at any time during the term of this Agreement if the
other Party (the "Breaching Party") is in material breach or default of any of
its material obligations hereunder (including, without limitation, any payment
obligations), as follows: (i) the terminating Party shall send written notice
of the breach or default to the Breaching Party; and (ii) if such default or
breach thereafter continues for sixty (60) days after written notice thereof was
provided to the Breaching Party, then the termination shall become effective at
the end of such sixty (60) day period, unless the Breaching Party (or any other
party on its behalf) has cured any such breach or default prior to the
expiration of the sixty (60) day period or has commenced activities reasonably
expected to cure such breach within such sixty (60) day period and thereafter
uses diligent efforts to complete the cure as soon as practicable.
10.3 Termination Upon Bankruptcy or Insolvency. This Agreement may be
-----------------------------------------------
terminated by Pharmacopeia giving written notice of termination to SPL upon the
filing of bankruptcy or insolvency of SPL or the appointment of a receiver for
the assets of SPL, or the making by SPL of an assignment for the benefit of
creditors, or the institution of any proceedings against Schering under any
bankruptcy law. Termination shall be effective upon the date specified in such
notice. The rights of SPL under this Agreement shall not terminate in the event
of a bankruptcy of Pharmacopeia, unless SPL elects to terminate this Agreement
in accordance with the following provisions of this Section 10.3. In the event
that (i) Pharmacopeia shall make an assignment for the benefit of creditors,
file a petition in bankruptcy, petition or apply to any tribunal for the
appointment of custodian, receiver or any trustee for it or a substantial part
of its assets, or shall commence any case or proceeding under any bankruptcy,
reorganization, arrangement, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction, whether now or hereafter in effect; or (ii)
if there shall have been filed any such bona fide petition or application, or
any such proceeding shall have been commenced against it, in which an order for
relief is entered or which remains undismissed for a period of sixty (60) days
or more; or (iii) if Pharmacopeia by any act or omission of act shall indicate
its consent to, approval of or acquiescence in any such bona fide petition,
application, or proceeding or order for relief or the appointment of a
custodian, receiver or trustee for it or any substantial part of its property,
or shall suffer any such custodianship, receivership or trusteeship to continue
undischarged for a period of sixty (60) days or more; (each such event a
"Pharmacopeia Bankruptcy Event"), then SPL shall have the following rights. SPL
shall have the right, in its sole discretion, to elect to terminate this
Agreement by giving written notice of such termination to Pharmacopeia. In the
event that SPL does not elect to terminate this Agreement, then notwithstanding
any rejection of this Agreement by Pharmacopeia (which, for purposes of this
Section 10.3, includes any debtor in possession, trustee or other entity that
may succeed Pharmacopeia) pursuant to 11 U.S.C. (S)365 (together with its
foreign equivalents, the "Insolvency Statute"), SPL shall retain all of its
rights, benefits, licenses, protections and privileges under this Agreement and
shall be entitled to all of the rights, benefits and protections of a licensee
under the Insolvency Statute (including, without limitation, 11 U.S.C. 365(n)).*
provided
that SPL's obligations to make payments to Pharmacopeia under this
Agreement shall automatically be reduced by the amount of all out-of-pocket
costs and expenses incurred by SPL in exercising such rights. In the event of
any Pharmacopeia Bankruptcy Event, Pharmacopeia shall, upon written request of
SPL, *
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
* solely to
the extent necessary for SPL to *
hereunder prior to the applicable
Pharmacopeia Bankruptcy Event, and for purposes of the Insolvency Statute;
provided, however, that * shall only be exercisable if Pharmacopeia fails to
- -------- -------
perform its obligations under this Agreement substantially as contemplated
herein, and further provided that * shall be limited to * of this sentence. The
Parties acknowledge and agree that all information, data and other intellectual
property referred to in this Section 10.3 (including, without limitation,
Pharmacopeia Technology, Pharmacopeia Enabling Technology, and Libraries) and
all Agreement Compounds, Agreement Products, Collaboration Technology and any
other intellectual property that is licensed, or is the subject of any other
right, benefit, protection or privilege that is granted, transferred or
otherwise afforded, to SPL hereunder is "intellectual property" within the
meaning of the Insolvency Statute. In the event of any Pharmacopeia Bankruptcy
Event and if any statute and/or regulation in any country in the Territory
requires that there be a specific grant or specific clause(s) in order for SPL
to obtain the rights and benefits as licenses under this Agreement which are
analogous to those rights under 11 U.S.C. (S)365(n), then this Agreement shall
be deemed to include any and all such required grant(s), clause(s) and/or
requirements. Notwithstanding the foregoing, the Parties acknowledge and agree
that to the extent Pharmacopeia is a U.S. based company, United States
bankruptcy laws will govern and all references to the Insolvency Statute shall
mean only 11 U.S.C (S)365.
10.4 Termination for Pharmacopeia Change in Control. In the event of any
----------------------------------------------------
Pharmacopeia Change in Control during the term of this Agreement, SPL shall have
the right to terminate the Agreement upon ninety (90) days written notice after
such Pharmacopeia Change in Control. In the event that such Pharmacopeia Change
in Control occurs during the term of the Collaboration, SPL may, in its
discretion, elect to terminate the Collaboration and not the Agreement as set
forth in Section 2.2.
10.5 Concurrent Termination with the US Agreement. In the event of any
--------------------------------------------------
termination of the US Agreement by Pharmacopeia or Schering Corporation under
the provisions of Sections 10.2, 10.3 or 10.4 thereof, as applicable, this
Agreement shall automatically terminate concurrently under the corresponding
Section 10.2, 10.3 or 10.4 of this Agreement.
10.6 Effect of Termination.
---------------------------
10.6.1 Accrued Obligations. Termination of this Agreement for any
---------------------------
reason shall not relieve the Parties from any liability which at the time of
such termination has already accrued to the other Party, or which is
attributable to a period prior to such termination, nor preclude either Party
from pursuing all rights and remedies it may have hereunder or at law or in
equity with respect to any breach of this Agreement.
10.6.2 Return of Materials. Upon any termination of this
----------------------------
Agreement, SPL and Pharmacopeia shall promptly return to the other Party all
Confidential Information (including without limitation all Existing Schering
Know-How or Existing Pharmacopeia Know-How, as the case may be) as set forth in
Section 7.3
_________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
10.6.3 Effect on Agreement Products. In the event that * or more
------------------------------------
Agreement Compounds and/or Agreement Products are being developed and/or
commercially exploited by SPL, its Affiliates or Sublicensees under this
Agreement and a breach entitling Pharmacopeia to terminate this Agreement occurs
which relates solely to a single Agreement Compound or Agreement Product, then
Pharmacopeia shall have the option to terminate this Agreement only with respect
to the applicable Agreement Compound or Agreement Product, and in which case all
of the terms of this Agreement shall remain in full force and effect with regard
to the other Agreement Compounds and/or Agreement Products being developed and
commercialized. In the event this Agreement is terminated with respect to a
given Agreement Product, SPL shall have the right to continue to sell its
remaining inventory of such Agreement Product for a period of up to * after the
date of termination, provided that SPL continues to pay royalties to
Pharmacopeia with respect to such sales.
10.6.4 Licenses.
----------------
(a) Termination by Pharmacopeia Pursuant to Section 10.2. In
--------------------------------------------------------
the event of termination by Pharmacopeia under Section 10.2, the licenses
granted hereunder relating to any Agreement Product, Discovery Library or
Optimization Library with respect to which there has been a material breach,
shall terminate, and the licenses granted to Pharmacopeia hereunder shall remain
in effect, subject to the terms and conditions of this Agreement; provided,
--------
however, a breach shall have no effect on SPL's licenses hereunder other than
- -------
with respect to the Library or Agreement Product to which the breach
specifically relates, and the remaining licenses granted hereunder shall remain
in effect, subject to the terms and conditions of this Agreement. In the event
that Pharmacopeia terminates the Agreement for a breach of SPL's payment
obligations regarding any SP Product as to which Pharmacopeia is entitled to
receive royalty payments hereunder, then the licenses granted to SPL hereunder
relating to Agreement Compounds active against the same Target as such SP
product shall terminate concurrently.
(b) Termination by SPL Pursuant to Sections 10.2 or 10.3. In
--------------------------------------------------------
the event of any termination by SPL pursuant to Section 10.2 or 10.3 above, any
licenses granted by SPL hereunder shall terminate concurrently, and any licenses
granted by Pharmacopeia shall remain in effect, subject to the terms and
conditions of this Agreement; provided, however, a breach shall have no effect
-------- -------
on the licenses granted to Pharmacopeia hereunder other than with respect to the
Agreement Product to which the breach specifically relates, and the remaining
licenses granted hereunder shall remain in effect, subject to the terms and
conditions of this Agreement.
(c) Termination by Pharmacopeia Pursuant to Section 10.3. In
--------------------------------------------------------
the event of any termination by Pharmacopeia pursuant to Section 10.3 above, any
licenses granted by Pharmacopeia hereunder shall terminate concurrently, and any
licenses granted by SPL shall remain in effect, subject to the terms and
conditions of this Agreement.
(d) Termination by SPL Pursuant to Section 10.4. In the event
-----------------------------------------------
of any termination by SPL pursuant to Section 10.4 above, any licenses granted
by Pharmacopeia to SPL, and by SPL to Pharmacopeia, shall remain in effect,
except for the licenses under Section 4.7, which shall terminate concurrently.
10.6.5 Surviving Provisions. Articles VI, VII, VIII, IX and XI of
-----------------------------
this Agreement, as well as Sections 2.9.2, 2.9.3, 2.12, 2.13, the last sentence
of 3.5, 4.1.2, 4.4, 4.5, 4.8, 4.9, 4.10, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 5.9 and
10.6 shall survive the expiration or termination of this Agreement for any
reason.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
-39-
<PAGE>
ARTICLE XI
MISCELLANEOUS
11.1 Assignment. This Agreement shall not be assigned, or assignable, by
----------------
either Party hereto to any Third Party without the prior written consent of the
other Party, and any such attempted assignment shall be void and without force
or effect; provided, however, that notwithstanding the foregoing, either Party
-------- -------
may, without such consent, assign this Agreement and its rights and obligations
hereunder to an Affiliate or in connection with the transfer or sale of all or
substantially all of its business or assets related to the subject matter to
which this Agreement pertains, or in the event of its merger, reorganization,
acquisition, sale, consolidation or change in control or similar transaction.
This Agreement shall be binding upon, and inure to the benefit of, each Party,
its Affiliates, and its permitted successors and assigns. Each Party shall be
responsible for the compliance by its Affiliates with the terms and conditions
of this Agreement
11.2 Governing Law. This Agreement and any dispute arising from the
-------------------
performance or breach hereof, shall be governed, interpreted and construed in
accordance with the laws of the State of New Jersey, without giving effect to
conflict of law principles. The Parties expressly exclude application of the
United Nations Convention for the International Sale of Goods.
11.3 Dispute Resolution. Except as set forth in Section 5.4.5(b), any
------------------------
dispute under this Agreement which is not settled by mutual consent shall be
finally settled by binding arbitration, conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association by three
arbitrators appointed in accordance with said rules. The arbitration shall be
held in New York, New York and at least one of the arbitrators shall be an
independent expert in pharmaceutical product development (including clinical
development and regulatory affairs). Any written evidence originally in a
language other than English shall be submitted in English translation
accompanied by the original or a true copy thereof. The costs of the
arbitration, including administrative and arbitrators' fees, shall be shared
equally by the Parties. Each Party shall bear its own costs and attorneys' and
witness' fees. A disputed performance or suspended performances pending the
resolution of the arbitration must be completed within thirty (30) days
following the final decision of the arbitrators or such other reasonable period
as the arbitrators determine in a written opinion. Any arbitration subject to
this Section 11.3 shall be completed within one (1) year from the filing of
notice of a request for such arbitration.
11.4 No Implied Licenses. Only the licenses granted pursuant to the
-------------------------
express terms of this Agreement shall be of any legal force or effect. No
license rights shall be created by implication, estoppel or otherwise.
11.5 Representation by Legal Counsel. Each Party hereto represents that
-------------------------------------
it has been represented by legal counsel in connection with this Agreement and
acknowledges that it has participated in the drafting hereof. In interpreting
and applying the terms and provisions of this Agreement, the Parties agree that
no presumption shall exist or be implied against the Party which drafted such
terms and provisions.
11.6 Waiver. Any delay or failure in enforcing a Party's rights under
------------
this Agreement or any waiver as to a particular default or other matter shall
not constitute a waiver of such Party's rights to the future enforcement of its
rights under this Agreement, nor operate to bar the exercise or enforcement
thereof at any time or times thereafter, excepting only as to an express written
and signed waiver as to a particular matter for a stated duration.
11.7 Independent Contractors. The relationship of the Parties hereto is
-----------------------------
that of independent contractors. Nothing herein contained shall be deemed to
create an employment, agency, joint venture or partnership relationship between
the Parties hereto or any of their agents or employees. Neither
-40-
<PAGE>
Party shall have any power to enter into any contracts or commitments or to
incur any liabilities in the name of, or on behalf of, the other Party, or to
bind the other Party in any respect whatsoever.
11.8 Solicitation of Employees. SPL and Pharmacopeia both agree that,
--------------------------------
during the Collaboration Term and for one (1) year thereafter, without the
express prior written consent of the other Party, they will not knowingly induce
or attempt to induce, directly or indirectly, any scientific or technical
personnel then employed by the other Party to accept employment or affiliation
with the inducing Party or its Affiliates.
11.9 Compliance with Laws. In exercising their rights under this
---------------------------
license, the Parties shall fully comply with the requirements of any and all
applicable laws, regulations, rules and orders of any governmental body having
jurisdiction over the exercise of rights under this license.
11.10 Export Control. This Agreement and the obligations of both Parties
---------------------
hereunder are made subject to, and limited by, all applicable restrictions
concerning the export of products or technical information from the United
States of America which may be imposed upon or related to Pharmacopeia or SPL
from time to time by the government of the United States of America.
Furthermore, SPL agrees that it will not export, directly or indirectly, any
technical information acquired from Pharmacopeia under this Agreement or any
products using such technical information to any country for which the United
States government or any agency thereof at the time of export requires an export
license or other governmental approval, without first obtaining the written
consent to do so from the Department of Commerce or other agency of the United
States government when required by an applicable statute or regulation.
11.11 Patent Marking. SPL agrees to mark and have its Affiliates and
---------------------
Sublicensees mark all Agreement Products sold pursuant to this Agreement in
accordance with the applicable statute or regulations relating to patent marking
in the country or countries of manufacture and sale thereof.
11.12 Notices. Any notice required or permitted to be given or sent under
--------------
this Agreement shall be in writing and shall be hand delivered or sent by
express delivery service or certified or registered mail, postage prepaid, or by
facsimile transmission (with written confirmation copy by registered first-class
mail) to the Parties at the addresses and facsimile numbers indicated below.
If to Pharmacopeia, to:
Pharmacopeia, Inc.
3000 East Park Boulevard
Cranbury, New Jersey 08512
Attn: Chief Executive Officer
Fax No.: (609) 452-3672
If to SPL, to:
Schering-Plough Ltd.
Toepferstrasse 5
CH 6004 Lucerne, Switzerland
Attention: President
Facsimile No.: (011) 41 41 418 1630
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<PAGE>
with copies to:
Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attention: Vice President, Business Development
Facsimile No.: (908) 298-5379
Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attention: Law Department, Staff Vice President Licensing
Facsimile No.: (908) 298-2739
Any such notice shall be deemed to have been given when received. Either
Party may change its address or its facsimile number by giving the other Party
written notice, delivered in accordance with this Section.
11.13 Force Majeure. Failure of any Party to perform its obligations
--------------------
under this Agreement (except the obligation to make payments when properly due)
shall not subject such Party to any liability or place them in breach of any
term or condition of this Agreement to the other Party to the extent (and only
to the extent) that such failure is due to fire, explosion, flood, drought, war,
riot, sabotage, embargo, strikes or other labor trouble, failure of suppliers, a
national health emergency, compliance with any order or regulation of any
government entity acting with color of right, or any other cause beyond the
reasonable control of such non-performing Party and not caused by the
negligence, intentional conduct or misconduct of the non-performing Party (such
event or cause referred to as "force majeure"). The Party affected shall
promptly notify the other Party of the condition constituting force majeure as
defined herein and shall exert reasonable efforts to eliminate, cure or overcome
any such event of force majeure and to resume performance of its obligations
with all possible speed. If a condition constituting force majeure as defined
herein exists for more than ninety (90) consecutive days, the Parties shall meet
to negotiate a mutually satisfactory resolution to the problem, if practicable.
The foregoing notwithstanding, nothing herein shall require any Party to settle
on terms unsatisfactory to such Party any strike, lock-out or other labor
difficulty, any investigation or proceeding by any public authority or any
litigation by any Third Party.
11.14 Severability. If any provision of this Agreement becomes or is
-------------------
declared by a court of competent jurisdiction to be illegal, invalid or
unenforceable or void, it is mutually agreed that this Agreement shall remain in
full force and effect without such provision, and the Parties will, in good
faith, renegotiate the terms and conditions of this Agreement so as to lawfully
include the substance of such provision (to the extent possible) in order to as
fully as possible realize the intent of the Parties and their commercial
bargain.
11.15 Counterparts. This Agreement shall become binding when any one or
-------------------
more counterparts hereof, individually or taken together, shall bear the
signatures of each of the Parties hereto. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against either
Party whose signature appears thereon, but all of which taken together shall
constitute but one and the same instrument.
11.16 Captions. The captions of this Agreement are solely for the
---------------
convenience of reference and shall not affect its meaning or interpretation.
11.17 Complete Agreement.
-------------------------
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<PAGE>
11.17.1 Final Agreement and Amendments. This Agreement with its
---------------------------------------
Exhibits, together with the US Agreement entered by the Parties of even date
herewith, constitutes the entire agreement, both written and oral, between the
Parties with respect to the subject matter hereof, and all prior agreements
respecting the subject matter hereof, either written or oral, expressed or
implied, shall be abrogated, canceled, and are null and void and of no effect;
provided, however that nothing herein shall effect the rights and obligations of
- -------- -------
the Parties under the certain Collaboration Agreement and the certain Random
Library Agreement between Pharmacopeia, Schering Corporation and Schering-Plough
Ltd. effective as of December 22, 1994, as amended. No amendment or change
hereof or addition hereto shall be effective or binding on either of the Parties
hereto unless reduced to writing and executed by the respective duly authorized
representatives of Pharmacopeia and SPL.
11.17.2 Relationship to US Agreement; Controlling Provisions. The
-------------------------------------------------------------
parties acknowledge and agree that this Agreement together with the US Agreement
are intended to operate together as a single worldwide agreement governing the
rights and obligations of Pharmacopeia, SPL and Schering Corporation. For
purposes of clarity and avoidance of doubt, the parties agree that Article II,
Article III and Section 4.9 of this Agreement shall be subject to and governed
by the corresponding provisions of the US Agreement. The parties further agree
that SPL's rights and obligations with respect to the filing, prosecution,
maintenance and enforcement of patents and patent applications under Article VI
of this Agreement shall be exercised and performed by the employees and/or
agents of Schering Corporation having responsibility for Schering Corporation's
rights and obligations under Article VI of the US Agreement, and that all such
activities will be performed in a coordinated manner.
11.18 Recording. Each Party shall have the right, at any time, to record,
----------------
register, or otherwise notify this Agreement in appropriate governmental or
regulatory offices anywhere in the world, and each Party shall provide
reasonable assistance to the other in effecting such recording, registering or
notifying. The Parties acknowledge that this Agreement may be notified by
either Party to the European Community for compliance with applicable laws.
11.19 Further Actions. Each Party agrees to execute, acknowledge and
----------------------
deliver such further instruments, and to do all other acts, as may be necessary
or appropriate in order to carry out the purposes and intent of this Agreement
including, without limitation, any filings with any antitrust agency which may
be required.
IN WITNESS WHEREOF, this Agreement has been executed by the duly authorized
representatives of the Parties as of the date set forth below.
------------
LEGAL REVIEW
/s/
------------
PHARMACOPEIA, INC. SCHERING-PLOUGH LTD.
By: /s/ Richard Walsh By: /s/ David Poorvin
------------------------------- --------------------------------
Title: Sr. Vice President Title: Prokvrist
---------------------------- -----------------------------
Date: October 29, 1998 Date: 29 October 1998
----------------------------- -----------------------------
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<PAGE>
EXHIBIT A
CURRENCY CONVERSION
*
__________________
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 1.28
-------------
Elements of Fully Absorbed Manufacturing Costs
----------------------------------------------
The following expenses are included in manufacturing costs:
1. Direct Materials
----------------
Materials used in the manufacturing process that are traced directly to the
completed product, such as:
. Inert raw materials or excipients
. Active substances/ingredients
. Packaging components such as bottles, caps, labels,
etc.
2. Direct Labor
------------
The cost of employees engaged in production activities that are directly
identifiable with product costs. Excludes supervision, which is included in
indirect labor, and production support activities such as inspection, plant and
equipment maintenance labor, and material handling personnel. Direct Labor cost
includes:
. Base pay, overtime, vacation and holidays, illness, personal time with
pay, and shift differential.
. Cost of employee fringe benefits such as health and life insurance,
payroll taxes, welfare, pension, profit sharing and bonuses.
3. Indirect Manufacturing Costs
----------------------------
Costs which are ultimately allocated to product based on an appropriate
method such as standard direct labor hours, tank hours, grams, vials, etc., of
the operating departments. These costs include:
i
<PAGE>
. Indirect Production Labor - salaries of employees engaged in production
-------------------------
activities who are not classified as direct labor, including supervision,
clerical, etc.
. Costs of Direct Labor - employees not utilized for the manufacturing of
---------------------
product such as training, downtime and general duties.
. Indirect Materials - supplies and chemicals which are used in the
------------------
manufacturing process and are not assigned to specific products but are
included in manufacturing overhead costs. Includes supplies for which
direct assignment to products is not practical.
. Utilities - expenses incurred for fuel, electricity and water in providing
---------
power for production and other plant equipment.
. Maintenance and Repairs - amount of expense incurred in-house or purchased
-----------------------
to provide services for plant maintenance and repairs of facilities
and equipment.
. Other Services - purchased outside services and rentals such as the cost of
--------------
security, ground maintenance, etc.
. Depreciation - of plant and equipment utilizing the straight-line method of
------------
calculation.
. Insurance - cost of inventory insurance, comprehensive insurance and other
---------
insurance necessary for the safeguard of manufacturing plant and
equipment.
. Taxes - expense incurred for taxes on real and personal property
-----
(manufacturing site, buildings and the fixed assets of equipment, furniture
and fixtures, etc.). If manufacturing site includes other operations
(marketing, R&D, etc.), taxes are allocated to manufacturing on the basis
of total real and personal property.
. Cost of manufacturing, service departments - such as:
------------------------------------------
(where applicable)
ii
<PAGE>
. Packaging Engineering
. Manufacturing Maintenance
. Industrial Engineering
. Receiving and Warehousing
. Purchasing and Accounting
. Production Scheduling
. Inventory Management
. Plant Materials Management
. Central Weigh
. Manufacturing Administration
. Regulatory Affairs direct support to manufacturing (not to exceed
$80,000 per year for a three(3) year period)
. Allocated costs of services provided to manufacturing including:
(where applicable)
. Cafeteria
. Personnel Operations
. Health and Safety Services
. Division Engineering and Operations Services
. Plant Services (housekeeping)
. Manufacturing Information Systems
. Plant Power
. Office of V.P. Manufacturing
Various bases are used for allocating these costs to
manufacturing operating departments including headcount, square feet,
metered utilities use, estimated services rendered, EDP computer
hours, etc.
4. Quality Assurance Costs
-----------------------
Direct labor and indirect costs for Quality Assurance departments by
testing and approving materials used in manufacturing and completed
manufacturing batches and finished products. This includes all manufacturing
in-process testing and testing of finished
iii
<PAGE>
materials. Excluded from product costs are QA costs related to research and
development, stability testing, etc.
The following expenses are not included in manufacturing costs:
a) Inventory Carrying Costs
b) Regulatory Affairs Costs (except as set forth above)
c) Pilot plant costs, research batches and other similar costs prior to
turnover to manufacturing. These are handled as development costs and
expensed to R&D. This excludes commercial goods produced by a
research facility.
d) Costs incurred by Manufacturing for special projects, or for Schering-
Plough Research Institute requests, to establish and certify new
production processes, batch sizes and product line improvements, and
new vendor certification of equipment and primary materials
components. These costs are expensed to R&D.
e) Manufacturing start-up costs and initial one-time extraordinary
manufacturing costs incurred prior to plant operation and achievement
of a normal production activity level. Includes costs of training,
testing, qualification/validation of new equipment and facilities and
initial trial batches. These costs are deferred and then amortized to
Other Production Costs over five years.
f) Significant idle capacity is eliminated from factory overhead and
product cost. Idle or excess capacity costs are culled out of the
Manufacturing Budget and expensed as a period cost to Other Production
Costs.
g) Finished goods warehousing, shipping and other distribution costs.
These are included in distribution costs which are part of marketing
expenses.
h) Product liability and/or business interruption insurance expenses.
iv
<PAGE>
Exhibit 10.44
COLLABORATION AND LICENSE AGREEMENT
By and Among
PHARMACOPEIA, INC.
and
SCHERING CORPORATION
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Table of Contents
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ARTICLE I - DEFINITIONS 1
1.1 ACCEPTANCE 1
1.2 ACTIVE COMPOUND 1
1.3 AFFILIATE 1
1.4 AGREEMENT COMPOUND 2
1.5 AGREEMENT PRODUCT 2
1.6 COLLABORATION 2
1.7 COLLABORATION COMMITTEE 2
1.8 COLLABORATION RESEARCH PLAN 2
1.9 COLLABORATION PLATFORM TECHNOLOGY 2
1.10 COLLABORATION TARGET-SPECIFIC TECHNOLOGY 2
1.11 COLLABORATION TECHNOLOGY 2
1.11.1 Collaboration Patent Rights 2
1.11.2 Collaboration Know-How 3
1.12 COLUMBIA LICENSE 3
1.13 COMBINATION PRODUCT 3
1.14 DERIVATIVE COMPOUND 3
1.15 DEVELOPMENT CANDIDATE 3
1.16 DISCOVERY LIBRARY 3
1.16.1 Collaboration Discovery Library 3
1.16.2 SP Discovery Library 3
1.17 EXCLUSIVITY PERIOD 3
1.18 FDA 4
1.19 FIRST COMMERCIAL SALE 4
1.20 FTE 4
1.21 HRD 4
1.22 IND 4
1.23 INTERNATIONAL AGREEMENT 4
1.24 LEAD COMPOUND 4
1.25 LIBRARY 4
1.26 LIBRARY COMPOUND 4
1.27 MAJOR MARKET 4
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1.28 NDA 4
1.29 NET SALES 4
1.30 OPTIMIZATION LIBRARY 5
1.31 PHARMACOPEIA CHANGE IN CONTROL 5
1.32 PHARMACOPEIA ENABLING TECHNOLOGY 5
1.33 PHARMACOPEIA TECHNOLOGY 6
1.33.1 Existing Pharmacopeia Patent Rights 6
1.33.2 Existing Pharmacopeia Know-How 6
1.33.3 Pharmacopeia Improvements 6
1.34 PHASE III 6
1.35 PRODUCT 6
1.36 REGULATORY APPROVAL 6
1.37 SCHERING COMPOUND 6
1.38 SCHERING TECHNOLOGY 7
1.38.1 Schering Patent Rights 7
1.38.2 Schering Know-How 7
1.38.3 Schering Improvements 7
1.39 SP PRODUCT 7
1.40 SUBLICENSEE 7
1.41 TARGET 7
1.42 TERRITORY 8
1.43 THIRD PARTY 8
ARTICLE II - COLLABORATION 8
2.0 COLLABORATION EFFECTIVE DATE 8
2.1 COLLABORATION RESEARCH PLAN 8
2.2 COLLABORATION TERM 8
2.2.1 Extension of Collaboration Term 8
2.2.2 Termination of Collaboration Upon Pharmacopeia
Change in Control 8
2.3 PHARMACOPEIA RESPONSIBILITIES 9
2.4 SCHERING RESPONSIBILITIES 9
2.5 COLLABORATION STAFFING 9
2.5.1 Pharmacopeia FTE Commitments 9
2.5.2 Schering FTE Commitments 10
2.6 ADDITIONAL COLLABORATION EXPENSES 10
2.6.1 Capital Expenditures 10
2.6.2 Third Party Licenses re Pharmacopeia Enabling Technology 11
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2.6.3 Other Third Party Licenses 11
2.7 RESERVED TARGETS 11
2.8 RECORD KEEPING AND INSPECTION OF RECORDS 12
2.9 LIBRARIES 12
2.9.0 Discovery Libraries 12
2.9.1 Classification; Limit on SP Discovery Libraries 13
2.9.2 Identification of Targets 13
2.9.3 Coded Targets 13
2.9.4 Targets for Optimization Libraries 13
2.10 COMPOUND IDENTIFICATION 13
2.11 COPIES OF LIBRARIES 13
2.12 ACTIVE COMPOUNDS 14
2.13 RETAINED RIGHTS 14
2.14 PHARMACOPEIA INDEPENDENT RESEARCH ACTIVITIES 14
2.14.1 Activities Outside the Collaboration 14
2.14.2 Restrictions on Use of Collaboration Technology 14
ARTICLE III - COLLABORATION MANAGEMENT 15
3.1 COLLABORATION COMMITTEE 15
3.2 DESIGN OF LIBRARIES; FRESH LIBRARIES 15
3.3 COLLABORATION COMMITTEE MEETINGS 15
3.4 COLLABORATION COMMITTEE DECISIONS 15
3.5 DEVELOPMENT STATUS; NOTICE OF SALE OF PRODUCTS 16
3.6 DILIGENCE 16
ARTICLE IV - LICENSES AND EXCLUSIVITY 18
4.1 LICENSE TO SCHERING 18
4.1.1 Compounds and Products 18
4.1.2 Collaboration Target-Specific Technology 18
4.2 SUBLICENSES 18
4.3 DIRECT AFFILIATE LICENSES 18
4.4 COLLABORATION PLATFORM TECHNOLOGY 18
4.5 THIRD PARTY RIGHTS 19
4.5.1 Pharmacopeia Third Party Activities 19
4.5.2 No Liability 19
4.5.3 Pharmacopeia Reports to Schering On Third Party Rights 19
4.6 COLUMBIA SUBLICENSE 19
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4.7 COLLABORATION RESEARCH ACTIVITIES 20
4.8 PHARMACOPEIA'S USE OF LIBRARYS COMPOUNDS FOR QUALITY CONTROL 20
4.9 LIBRARY EXCLUSIVITY 20
4.9.1 Optimization Libraries 20
4.9.2 SP Discovery Libraries 20
4.9.3 Collaboration Discovery Libraries 20
4.9.4 Extension of Exclusivity for Collaboration
Discovery Libraries 21
4.9.5 Co-Exclusive Collaboration Discovery Libraries 21
4.10 NO OTHER PRODUCTS 22
4.11 LICENSE GRANT BACK FOR ABANDONED AGREEMENT COMPOUNDS 22
ARTICLE V - PAYMENTS 22
5.1 PAYMENTS BY SCHERING 22
5.2 COLLABORATION FUNDING 22
5.2.1 Funding During Year One 22
5.2.2 Funding During Subsequent Years 23
5.2.3 Increased FTE Requirements 23
5.2.4 Wind-Down in Final Year 23
5.2.5 Annual FTE Rate Adjustments 23
5.2.6 Quarterly Adjustment 23
5.2.7 Manner of Payment 23
5.3 MILESTONE PAYMENTS 24
5.3.1 Events and Amounts 24
(a) Discovery Library Milestones 24
(b) Optimization Library Milestones 24
5.3.2 Lead Compound 25
5.3.3 Development Candidate 25
5.3.4 Manner of Payment 25
5.3.5 Announcement of Milestones 25
5.4 ROYALTIES 25
5.4.1 Base Royalty 25
5.4.2 Royalty Term for Agreement Products 26
5.4.3 Royalty Terms for SP Products 26
5.4.4 Single Royalty; Non-Royalty Sales 27
5.4.5 Third Party Royalties 27
(a) Schering Responsibilities 27
(b) * 27
5.4.6 Compulsory Royalty Reductions 28
5.4.7 Royalty Overpayment 28
5.5 REPORTS; PAYMENT OF ROYALTY; PAYMENT EXCHANGE RATE
AND CURRENCY CONVERSIONS 28
5.5.1 Royalty Reports and Payments 28
5.5.2 Payment Method 28
5.5.3 Place of Royalty Payment and Currency Conversions 28
_______________
* CONFIDENTIAL TREATMENT REQUESTED
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5.6 MAINTENANCE OF RECORDS; AUDITS 28
5.6.1 Records; Inspection 28
5.7 COORDINATION WITH PAYMENTS UNDER INTERNATIONAL AGREEMENT 29
5.8 TAX MATTERS 29
5.8.1 Withholding Taxes 29
5.8.2 Sales Taxes 30
5.9 PRODUCT DEVELOPMENT COSTS 30
ARTICLE VI - PATENTS AND INVENTIONS 30
6.1 OWNERSHIP OF SCHERING TECHNOLOGY AND PHARMACOPEIA TECHNOLOGY 30
6.2 OWNERSHIP OF COLLABORATION TECHNOLOGY 30
6.3 FILING, PROSECUTION AND MAINTENANCE OF PATENTS 30
6.3.1 Collaboration Technology 30
6.3.2 Collaboration Platform Technology 31
6.3.3 Schering Technology 31
6.3.4 Pharmacopeia Technology 31
6.3.5 Pharmacopeia's Rights Regarding Patents Relating
to Agreement Compounds 31
6.4 Cooperation 31
6.4.1 Cooperation 31
6.5 ENFORCEMENT 32
6.5.1 Notice 32
6.5.2 Collaboration Technology 32
6.5.3 Collaboration Platform Technology 32
6.5.4 Schering Technology and Pharmacopeia Technology 32
6.5.5 Cooperation; Costs and Recoveries 33
6.6 INFRINGEMENT CLAIMS 33
6.7 CERTIFICATION UNDER DRUG PRICE COMPETITION AND PATENT
RESTORATION ACT 33
6.8 PATENT TERM RESTORATION 33
ARTICLE VII - CONFIDENTIALITY 34
7.1 CONFIDENTIAL INFORMATION 34
7.2 PERMITTED USE AND DISCLOSURES 34
7.3 RETURN OF CONFIDENTIAL INFORMATION 34
7.4 NONDISCLOSURE OF TERMS 35
7.5 PUBLICATION 35
7.6 PHARMACOPEIA EMPLOYEES 35
ARTICLE VIII - REPRESENTATION, WARRANTIES AND COVENANTS 36
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8.1 SCHERING 36
8.2 PHARMACOPEIA 36
8.3 COMPLIANCE WITH AGREEMENT AND LAWS 36
8.4 DISCLAIMER 36
ARTICLE IX - INDEMNIFICATION 37
9.1 INDEMNIFICATION BY SCHERING 37
9.2 INDEMNIFICATION BY PHARMACOPEIA 37
9.3 NO CONSEQUENTIAL DAMAGES 37
9.4 PROCEDURE 38
9.5 INSURANCE 38
ARTICLE X - TERM AND TERMINATION 38
10.1 TERM AND EXPIRATION 38
10.2 TERMINATION FOR CAUSE 38
10.3 TERMINATION UPON BANKRUPTCY OR INSOLVENCY 38
10.4 TERMINATION FOR PHARMACOPEIA CHANGE IN CONTROL 40
10.5 CONCURRENT TERMINATION WITH THE INTERNATIONAL AGREEMENT 40
10.6 EFFECT OF TERMINATION 40
10.6.1 Accrued Obligations 40
10.6.2 Return of Materials 40
10.6.3 Effect on Agreement Products 40
10.6.4 Licenses 41
(a) Termination by Pharmacopeia Pursuant to Section 10.2 41
(b) Termination by Schering Pursuant to Sections 10.2 or 10.3 41
(c) Termination by Pharmacopeia Pursuant to Section 10.3 41
(d) Termination by Schering Pursuant to Section 10.4 41
10.6.5 Surviving Provisions 41
ARTICLE XI - MISCELLANEOUS 41
11.1 ASSIGNMENT 41
11.2 GOVERNING LAW 42
11.3 DISPUTE RESOLUTION 42
11.4 NO IMPLIED LICENSES 42
11.5 REPRESENTATION BY LEGAL COUNSEL 42
11.6 WAIVER 42
11.7 INDEPENDENT CONTRACTORS 42
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11.8 SOLICITATION OF EMPLOYEES 42
11.9 COMPLIANCE WITH LAWS 42
11.10 EXPORT CONTROL 43
11.11 PATENT MARKING 43
11.12 NOTICES 43
11.13 FORCE MAJEURE 44
11.14 SEVERABILITY 44
11.15 COUNTERPARTS 44
11.16 CAPTIONS 45
11.17 COMPLETE AGREEMENT 45
11.18 RECORDING 45
11.19 Further Actio1ns 45
EXHIBIT A - CURRENCY CONVERSION
SCHEDULE 1.28 - Elements Of Fully Absorbed Manufacturing Costs
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COLLABORATION AND LICENSE AGREEMENT
This COLLABORATION AND LICENSE AGREEMENT (the "Agreement"), effective as of
October 29, 1998 (the "Effective Date"), is made by and among: Pharmacopeia,
Inc., a Delaware corporation having its principal place of business at 3000 East
Park Boulevard, Cranbury, New Jersey 08512, (hereinafter referred to as
"Pharmacopeia"); and Schering Corporation, a New Jersey corporation having its
principal place of business at 2000 Galloping Hill Road, Kenilworth, New Jersey
07033, U.S.A., (hereinafter referred to as "Schering"). Pharmacopeia and
Schering are sometimes referred to herein individually as a Party and
collectively as the Parties. References to "Schering" and "Pharmacopeia" shall
include their respective Affiliates (as hereinafter defined).
WHEREAS, Pharmacopeia has developed proprietary technologies relating to
the design and preparation of encoded compound libraries based upon
combinatorial chemistry; and
WHEREAS, Schering and Pharmacopeia desire to collaborate to design, prepare
and screen compound libraries against Schering's biological targets; and
WHEREAS, Pharmacopeia and Schering's Affiliate Schering-Plough Ltd. have
entered into a collaboration and license agreement relating to countries and
territories outside of the United States of even date herewith;
NOW, THEREFORE, in consideration of the covenants, conditions, and
undertakings herein contained, Schering and Pharmacopeia hereby agree as
follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following capitalized terms, whether used in
the singular or plural, shall have the respective meanings set forth below:
1.1 "Acceptance" shall mean, with respect to an IND, NDA or HRD submitted
----------
by or on behalf of Schering or its Affiliate or Sublicensee, notice by the FDA
(or an analogous regulatory authority in another country) that the IND, NDA or
HRD has been accepted for review by the FDA (or analogous regulatory authority).
In the event that the FDA (or analogous regulatory authority) is not required to
provide such a notice of acceptance of an IND, NDA or HRD, then "Acceptance"
shall be deemed to occur: (i) in the case of an IND, thirty (30) days following
the date of submission, or if previously rejected any resubmission, of such IND;
or (ii) in the case of an NDA or HRD, sixty (60) days following the date of
submission, or if previously rejected any resubmission, of such NDA or HRD,
unless in each case Schering or its Affiliates or Sublicensee receives notice
from the FDA (or analogous regulatory authority), during the applicable thirty
(30) or sixty (60) day period, that the NDA or HRD is not acceptable for review.
1.2 "Active Compound" shall mean, except as otherwise provided in Section
---------------
2.12, a Library Compound that demonstrates activity against a specific Target,
which Library Compound (i) was found to have such activity at a concentration
set forth in the applicable Collaboration Research Plan during screening of one
or more Libraries by Pharmacopeia in the conduct of the Collaboration or (ii)
was found to have such activity during screening by or on behalf of Schering.
1.3 "Affiliate" shall mean any individual or entity directly or indirectly
---------
controlling, controlled by or under common control with, a Party to this
Agreement. For purposes of this Agreement, the direct or indirect ownership of
fifty percent (50%) or more of the outstanding voting
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securities of an entity, or the right to receive fifty percent (50%) or more of
the profits or earnings of an entity shall be deemed to constitute control, or
if not meeting the preceding requirements, any company owned or controlled by or
owning or controlling Pharmacopeia or Schering at the maximum control or
ownership right permitted in a country where such company exists. Such other
relationship as in fact results in actual control over the management, business
and affairs of an entity shall also be deemed to constitute control.
1.4 "Agreement Compound" shall mean any Active Compound or Derivative
------------------
Compound as well as any compositions-of-matter claimed in patent applications
filed or patents issued under Article VI which claim an Active Compound or
Derivative Compound.
1.5 "Agreement Product" shall mean any product containing an Agreement
-----------------
Compound, including, without limitation, products for the therapeutic or
prophylactic treatment or prevention of diseases and conditions in human beings
or animals.
1.6 "Collaboration" shall mean the research and drug discovery programs
-------------
to be performed at Pharmacopeia's facilities by Schering or Pharmacopeia under
this Agreement to discover Agreement Compounds for further development by
Schering.
1.7 "Collaboration Committee" shall have the meaning set forth in Section
-----------------------
3.1.
1.8 "Collaboration Research Plan" shall have the meaning set forth in
----------------------
Section 2.1.
1.9 "Collaboration Platform Technology" shall mean Collaboration
---------------------------------
Technology relating to assays, compound screening methods and biological
research tools, in each case which are demonstrated to be broadly applicable
(i.e., can be readily applied and used in research directed to a variety of
pharmacologically distinct Targets); provided, however, that Collaboration
-------- -------
Platform Technology shall not include any rights in or to (1) any of Schering's
Targets, (2) any Library Compounds, or (3) any Agreement Compounds.
1.10 "Collaboration Target-Specific Technology" shall mean Collaboration
----------------------------------------
Technology relating to assays, compound screening methods and biological
research tools, in each case which are discovered and developed through
Collaboration research directed to a specific Target, or a small number of
closely related Targets (e.g. a family of biological receptor subtypes), and are
not readily applicable to other types of Targets; provided, however, that
-------- -------
Collaboration Target-Specific Technology shall not include any rights in or to
(1) any of Schering's Targets, (2) any Library Compounds, or (3) any Agreement
Compounds.
1.11 "Collaboration Technology" shall mean Collaboration Patent Rights and
------------------------
Collaboration Know-How.
1.11.1 "Collaboration Patent Rights" shall mean: (i) all patents and
---------------------------
patent applications claiming any invention or discovery made by or on behalf of
Pharmacopeia in performance of the Collaboration (including, without limitation,
the synthesis and composition of matter of any Agreement Compound, or method of
use thereof); and (ii) any divisions, continuations, continuations-in-part,
reissues, reexaminations, extensions or other governmental actions which extend
any of the subject matter of the patent applications or patents in (i) above,
and any substitutions, confirmations, registrations, revalidations, or additions
of any of the foregoing, in each case, which is owned or controlled, in whole or
part, by license, assignment or otherwise by Pharmacopeia during the term of
this Agreement; provided, however, that Collaboration Patent Rights shall not
-------- -------
include any patents or patent applications which are Schering Technology,
Pharmacopeia Technology or Pharmacopeia Enabling Technology.
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1.11.2 "Collaboration Know-How" shall mean all proprietary ideas,
----------------------
inventions, data, know-how, instructions, processes, formulas, materials, expert
opinion and information (including, without limitation, (i) biological,
chemical, physical and analytical data and information relating to Agreement
Compounds, and (ii) any structure-function data obtained from Library Compounds)
discovered and/or developed in performance of the Collaboration by or on behalf
of Pharmacopeia, in each case, to the extent Pharmacopeia has the right to
license or sublicense the same, and subject to any limitations and prohibitions
of such license or sublicense; provided, however, that Collaboration Know-How
-------- -------
shall not include Collaboration Patent Rights, Schering Technology, Pharmacopeia
Technology or Pharmacopeia Enabling Technology.
1.12 "Columbia License" shall mean that certain License Agreement
----------------
effective as of July 16, 1993, as amended and restated as of October 6, 1995,
entered by and between Pharmacopeia, Inc., the Trustees of Columbia University
in the City of New York and the Cold Spring Harbor Laboratory.
1.13 "Combination Product" shall mean a Product which comprises two (2) or
-------------------
more active therapeutic ingredients at least one (1) of which is an Agreement
Compound or a Schering Compound.
1.14 "Derivative Compound" shall mean any compound, other than a Library
-------------------
Compound, derived (a) by or on behalf of Schering, or (b) in the performance of
the Collaboration by Pharmacopeia, in each case from an Active Compound, and
having activity against the same Target as such Active Compound. As used
herein, a compound shall be deemed to have been "derived from" an Active
Compound if it *
1.15 "Development Candidate" shall mean a Lead Compound or derivative
---------------------
thereof which possesses the desirable properties of a therapeutic agent for the
prevention or treatment of a clinical condition, in the absence of required
safety trials necessary to begin human testing.
1.16 "Discovery Library" shall mean a Library transferred to Schering
-----------------
pursuant to this Agreement for screening against one or more Targets and which
is not an Optimization Library.
1.16.1 "Collaboration Discovery Library" shall mean a Discovery
-------------------------------
Library that is not an SP Discovery Library.
1.16.2 "SP Discovery Library" shall mean a Discovery Library based
--------------------
on one or more specific Schering proprietary core structures which core
structures are (i) discovered, designed or developed by or on behalf of Schering
without assistance or information from Pharmacopeia or any Pharmacopeia
employee, or (ii) designed or developed by Pharmacopeia based on proprietary
Schering structures or structure-function data.
1.17 "Exclusivity Period" shall mean, with respect to any Collaboration
------------------
Discovery Library and for all Library Compounds contained in such Library, that
period commencing on the date Pharmacopeia first provides Schering notice that
such Collaboration Discovery Library is available to be shipped to Schering or
Schering-Plough Ltd. (the "Notice Date"), and continuing until the *
or such later date as may be established under Section 4.9.4 below.
In the event that Schering is unable to accept delivery of any Collaboration
Discovery Library at the time of the applicable Notice Date, Schering may, upon
written notice to Pharmacopeia, delay delivery of such Collaboration Discovery
Library, in which case the Notice Date with respect to such Collaboration
Discovery Library shall be deemed to be the earlier of (i) the date that
Schering notifies
_________________
* CONFIDENTIAL TREATMENT REQUESTED
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Pharmacopeia that Schering is ready to accept delivery of the first plates from
such Collaboration Discovery Library or (ii) the date three (3) months after the
original Notice Date.
1.18 "FDA" shall mean the United States Food and Drug Administration or
---
any corresponding foreign registration or regulatory authority.
1.19 "First Commercial Sale" shall mean, with respect to any Product, the
---------------------
first sale for end use of such Product in the Territory after receipt of the
requisite Regulatory Approval.
1.20 "FTE" shall mean a full-time employee dedicated to the conduct of the
---
Collaboration or, in the case of less than full-time dedication, a full-time
equivalent person-year, based on a total of forty-six and one-fourth (46.25)
weeks or one thousand eight hundred fifty (1,850) hours per year, of work on or
directly related to the Collaboration.
1.21 "HRD" shall mean a health registration dossier or its equivalent
---
covering an Agreement Product filed in any country outside the United States and
which is analogous to an NDA and including, where applicable, applications for
pricing, pricing reimbursement approval, labeling and Regulatory Approval.
1.22 "IND" shall mean an Investigational New Drug application, as defined
---
in the U.S. Food, Drug and Cosmetic Act and the regulations promulgated
thereunder for initiating clinical trials in the United States, or any
corresponding foreign application, registration or certification.
1.23 "International Agreement" shall mean that certain Collaboration and
-----------------------
License Agreement entered into by and between Pharmacopeia and Schering-Plough,
Ltd. of even date herewith.
1.24 "Lead Compound" shall mean any Active Compound or Derivative Compound
-------------
with respect to which Schering or its Affiliates initiates a program of
medicinal chemistry to identify a Development Candidate based upon the structure
of such Active Compound or Derivative Compound.
1.25 "Library" shall mean any chemical compound library prepared by
-------
Pharmacopeia employees working on the Collaboration, and/or Schering employees
working at Pharmacopeia's facilities on the Collaboration, under the terms of
this Agreement using (i) combinatorial chemistry techniques or (ii) such other
techniques as may, from time to time, be agreed by the Parties.
1.26 "Library Compound" shall mean any compound which is contained in a
----------------
Discovery Library or Optimization Library hereunder.
1.27 "Major Market" shall mean Japan or any three (3) of the following
------------
countries; France, Germany, Italy, Spain or the United Kingdom.
1.28 "NDA" shall mean a New Drug Application, Product License Application,
---
or Biologic License Application, as defined in the U.S. Food Drug and Cosmetics
Act and regulations promulgated thereunder, or the equivalent filed with the FDA
seeking approval to market and sell a Product in the United States.
1.29 "Net Sales" shall mean, with respect to each country in the
---------
Territory, the invoice price billed by Schering or its Affiliates, or their
respective Sublicensees, to Third Parties (whether an end-user, a distributor or
otherwise) for the sale of Products, and exclusive of intercompany transfers or
sales among Schering, its Affiliates and/or Sublicensees in the Territory, less
the reasonable and customary deductions from such gross amounts including: (i)
normal and customary trade, cash and quantity discounts, allowances and credits;
(ii) credits or allowances actually granted for damaged
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goods, returns or rejections of Product and retroactive price reductions; (iii)
sales or similar taxes (including duties or other governmental charges levied
on, absorbed or otherwise imposed on the sale of Product including, without
limitation, value added taxes or other governmental charges otherwise measured
by the billing amount, when included in billing); (iv) freight, postage,
shipping, customs duties and insurance charges, when included in billing; (v)
charge back payments and rebates granted to managed health care organizations or
their agencies, and purchasers and reimbursers or to trade customers, including
but not limited to, wholesalers and chain and pharmacy buying groups; (vi)
commissions paid to Third Parties other than sales personnel and sale
representatives or sales agents; and (vii) rebates (or equivalents thereof)
granted to or charged by national, state or local governmental authorities in a
country in the Territory. In determining Net Sales of a Product any of the
above discounts shall be accounted for and apportioned based on the list price
of each such Product.
In the event that a Product is sold in the form of a Combination Product,
Net Sales for such Combination Product will be calculated by multiplying actual
Net Sales of such Combination Product by the fraction A/(A+B) where: A is the
invoice price of the Agreement Product and/or Schering Compound contained in the
Combination Product if sold separately by Schering, an Affiliate or Sublicensee;
and B is the invoice price of any other active therapeutic ingredients in the
Combination Product if sold separately by Schering, an Affiliate or Sublicensee.
In the event that the Product is sold in the form of a Combination Product
containing one or more active therapeutic ingredients other than an Agreement
Product and/or Schering Compound and one or more such active therapeutic
ingredients of the Combination Product are not sold separately, then the above
formula shall be modified such that A shall be the fully allocated manufacturing
cost to Schering, its Affiliates or Sublicensee of the Agreement Product and/or
Schering Compound and B shall be the fully allocated manufacturing cost to
Schering, its Affiliate or Sublicensee of any other active therapeutic
ingredients in the combination, in each case, determined in accordance with the
schedule of fully allocated manufacturing costs set forth in Schedule 1.29.
1.30 "Optimization Library" shall mean a Library based upon one or more
--------------------
Active Compound or Schering Compound structures, and which is designed to
optimize such structures with respect to activity against one or more specific
Targets.
1.31 "Pharmacopeia Change in Control" shall mean any of the following:
------------------------------
(i) a reorganization, merger or consolidation of Pharmacopeia with a Major
Pharmaceutical Company if the shareholders of Pharmacopeia (determined
immediately prior to the reorganization, merger or consolidation taking effect)
hold, directly or indirectly, less than fifty percent (50%) of the surviving
corporation (determined immediately after such reorganization, merger or
consolidation takes effect); (ii) an acquisition by a Major Pharmaceutical
Company of direct or indirect beneficial ownership of voting stock of
Pharmacopeia representing more than fifty percent (50%) of the total current
voting power of Pharmacopeia then issued and outstanding; (iii) a sale of all or
substantially all the assets of Pharmacopeia to a Major Pharmaceutical Company;
or (iv) a liquidation or dissolution of Pharmacopeia. As used in this Section
1.31, the term "Major Pharmaceutical Company" shall mean any entity (including
any corporation, joint venture, partnership or unincorporated entity) having
annual sales of pharmaceutical products of at least five hundred million dollars
($500,000,000), as well as any Affiliates or division(s) of such entity, that is
engaged in the research, development, manufacturing, registration and/or
marketing of drug products that are approved under NDAs, HRDs, ANDAs or
Biologics License Applications.
1.32 "Pharmacopeia Enabling Technology" shall mean the Columbia License
--------------------------------
and any other proprietary technology owned or controlled by Pharmacopeia with
the right to grant sublicenses which is necessary or useful for the design,
preparation and use of Libraries.
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1.33 "Pharmacopeia Technology" shall mean Existing Pharmacopeia Patent
-----------------------
Rights, Existing Pharmacopeia Know-How, and Pharmacopeia Improvements (except
for Pharmacopeia Improvements which are Pharmacopeia Enabling Technology).
1.33.1 "Existing Pharmacopeia Patent Rights" shall mean (i) all
-----------------------------------
patents and patent applications existing as of the Effective Date that claim the
synthesis or composition of matter of an Active Compound, or the method of use
thereof, and (ii) any divisions, continuations, continuations-in-part, reissues,
reexaminations, extensions or other governmental actions which extend any of the
subject matter of the patent applications or patents in (i) above, and any
substitutions, confirmations, registrations, revalidations, or additions of any
of the foregoing, in each case, which is owned or controlled, in whole or part,
by license, assignment or otherwise by Pharmacopeia during the term of this
Agreement, and subject to any limitations and prohibitions of such license or
sublicense; provided, however, it is understood that Existing Pharmacopeia
-------- -------
Technology shall not include any Pharmacopeia Enabling Technology.
1.33.2 "Existing Pharmacopeia Know-How" shall mean all ideas,
------------------------------
inventions, data, know-how, instructions, processes, formulas, expert opinion
and information, including, without limitation, biological, chemical, physical
and analytical data and information, existing as of the Effective Date, owned or
controlled in whole or part by Pharmacopeia by license, assignment or otherwise,
which is necessary for the discovery, development, manufacture or use of
Agreement Compounds and/or the discovery, development, manufacture, use, sale or
commercialization of Agreement Products, in each case, to the extent
Pharmacopeia has the right to license or sublicense the same, and subject to any
limitations and prohibitions of such license or sublicense; provided, however,
-------- -------
that Existing Pharmacopeia Know-How shall not include Existing Pharmacopeia
Patent Rights or Pharmacopeia Enabling Technology.
1.33.3 "Pharmacopeia Improvements" shall mean all patentable
-------------------------
inventions conceived and reduced to practice, solely or jointly, by Pharmacopeia
or Schering in the conduct of the Collaboration that are within the scope of a
claim of an issued patent within the Existing Pharmacopeia Patent Rights or
Pharmacopeia Enabling Technology (i) which patent issued prior to the Effective
Date or (ii) which claim has an effective filing date prior to the Effective
Date; provided, however, that Pharmacopeia Improvements shall not include
-------- -------
Pharmacopeia Independent Technology (as defined in Section 2.14).
1.34 "Phase III" shall mean Phase III clinical trials as prescribed by
---------
applicable FDA regulations, regardless of whether such trials are conducted in
the United States or elsewhere.
1.35 "Product" means any Agreement Product or SP Product.
-------
1.36 "Regulatory Approval" shall mean any applications or approvals,
-------------------
including any INDs, NDAs, supplements, amendments, pre- and post-approvals,
marketing authorizations based upon such approvals (including any prerequisite
manufacturing approvals or authorizations related thereto) and labeling
approval(s), technical, medical and scientific licenses, registrations or
authorizations of any national, regional, state or local regulatory agency,
department, bureau, commission, council or other governmental entity, necessary
for the manufacture, distribution, use, import, export or sale of Product(s) in
the Territory.
1.37 "Schering Compound" shall mean a compound which is independently
-----------------
discovered by or on behalf of Schering, without the use of Collaboration
Technology or Pharmacopeia Technology as demonstrated by documented evidence
created at the time of such discovery, and which is active against a specific
Target.
-6-
<PAGE>
1.38 "Schering Technology" shall mean Schering Patent Rights, Schering
-------------------
Know-How and Schering Improvements.
1.38.1 "Schering Patent Rights" shall mean (i) all existing patents
----------------------
and patent applications owned or controlled in whole or in part by Schering or
its Affiliates as of the Effective Date (including, without limitation, those
which claim the synthesis or composition of matter of an Active Compound, or the
method of use thereof, or which relate to any Target or any assay provided by
Schering for use in the Collaboration or the corresponding Targets for such
assays), (ii) all patents and patent applications claiming any invention or
discovery made by or behalf of Schering or its Affiliates, other than in
performance of the Collaboration, in connection with the discovery and/or
development of any Agreement Compounds and/or Schering Compounds, and/or the
development and commercialization of any Product, and (iii) any divisions,
continuations, continuations-in-part, reissues, reexaminations, extensions or
other governmental actions which extend any of the subject matter of the patent
applications or patents in (i) or (ii) above, and any substitutions,
confirmations, registrations, revalidations, or additions of any of the
foregoing.
1.38.2 "Schering Know-How" shall mean all ideas, inventions, data,
-----------------
know-how, instructions, processes, formulas, materials, expert opinion and
information, including, without limitation, biological, chemical,
pharmacological, toxicological, pharmaceutical, physical and analytical,
clinical, safety, manufacturing and quality control data and information (except
for any of the above arising in performance of the Collaboration) owned or
controlled in whole or part by Schering by license, assignment or otherwise,
which is necessary for the discovery, development, manufacture, use, sale or
commercialization of Products, in each case, to the extent Schering has the
right to license or sublicense the same, and subject to any limitations and
prohibitions of such license or sublicense; provided, however, that Schering
-------- -------
Know-How does not include Schering Patent Rights.
1.38.3 "Schering Improvements" shall mean all patentable inventions
---------------------
conceived and reduced to practice solely or jointly by Schering or Pharmacopeia
in the conduct of the Collaboration that are within the scope of the claims of
any issued patent within the Schering Patent Rights (i) which patent issued
prior to the Effective Date or (ii) which claim has an effective filing date
prior to the Effective Date.
1.39 "SP Product" shall mean any product for the therapeutic or
----------
prophylactic treatment or prevention of diseases and conditions in human beings
containing a Schering Compound, provided such SP Product is not a Combination
Product containing both a Schering Compound and an Agreement Compound.
1.40 "Sublicensee" shall mean with respect to a particular Product, a
-----------
Third Party to whom Schering has granted a sublicense under the applicable
Pharmacopeia Technology, Schering Technology or Collaboration Technology to
make, use and/or sell such Product. As used in this Agreement, it is understood
that "Sublicensee" shall also include a Third Party or Third Parties to whom
Schering has granted the right to distribute such Product, provided that such
Third Party or parties has (have) the primary responsibility for marketing and
promotion at its (their) expense of such Product within the field or territory
for which such distribution rights are granted, which marketing and promotional
activities are not subsidized directly or indirectly by Schering.
1.41 "Target" shall mean a biomolecular entity (including, without
------
limitation, receptors, enzymes, nucleic acids and proteins, and/or fragments
thereof) that a small molecule is screened against in order to determine whether
the small molecule demonstrates a specific biochemical or pharmaceutical effect.
-7-
<PAGE>
1.42 "Territory" shall mean the United States and its territories,
---------
possessions and commonwealths.
1.43 "Third Party" shall mean any Party other than Pharmacopeia and its
-----------
Affiliates, Schering Corporation and its Affiliates, Schering-Plough, Ltd. and
its Affiliates, and their permitted assigns.
ARTICLE II
COLLABORATION
2.0 Collaboration Effective Date. The Parties wish Pharmacopeia to begin
----------------------------------
performance of the Collaboration effective as of October 1, 1998 (the
"Collaboration Effective Date") and agree that upon execution of this Agreement
on the Effective Date the Parties' respective obligations relating to
performance of the Collaboration hereunder shall be deemed to be effective as of
the Collaboration Effective Date. Notwithstanding the foregoing, the
effectiveness of this Agreement is expressly conditioned upon the Board of
Directors of Schering-Plough Corporation approving this Agreement and the
execution of this Agreement by the Parties on the Effective Date.
2.1 Collaboration Research Plan. Within thirty (30) days of the
---------------------------------
Effective Date, the Collaboration Committee shall agree upon a written overall
plan for the research and drug discovery activities to be conducted by the
Parties (the "Collaboration Research Plan"). The Collaboration Research Plan
shall be periodically revised and updated (at least annually) by the
Collaboration Committee during the term of the Collaboration. The Collaboration
Research Plan shall set forth the responsibilities of each of the Parties with
respect to performance of the Collaboration. The Collaboration Committee shall
have responsibility for monitoring the performance of Collaboration research
programs. Notwithstanding the foregoing, the Parties acknowledge and agree that,
subject to Section 2.7 below, Schering, in its sole discretion, shall have
primary responsibility and decision making authority with respect to the
selection of the Targets and specific research programs to be conducted during
the Collaboration.
2.2 Collaboration Term. The term of the Collaboration shall be for a
------------------------
period of five (5) years, unless extended pursuant to Section 2.2.1, or earlier
terminated pursuant to Section 2.2.2 or Article X.
2.2.1 Extension of Collaboration Term. Schering shall have the
---------------------------------------
right, in its sole discretion, to extend the Collaboration for an additional *
period by providing written notice to Pharmacopeia on or before the * of the
Collaboration Effective Date. If Schering does not provide such notice, the
Collaboration shall expire on the fifth anniversary of the Collaboration
Effective Date.
2.2.2 Termination of Collaboration Upon Pharmacopeia Change in
---------------------------------------------------------------
Control. In the event of a Pharmacopeia Change in Control during the term of
- -------
the Collaboration, Schering shall have the right, in its discretion, (i) to
terminate the Agreement pursuant to Section 10.4, below, or (ii) to terminate
the Collaboration and not the Agreement upon ninety (90) days written notice to
Pharmacopeia after such Change in Control expressly stating its intention to
terminate the Collaboration. In the event that Schering elects to terminate the
Collaboration and not the Agreement, then (a) Schering will not be obligated to
make the payments set forth in Section 5.2 for the period after the effective
date of such termination, (b) subject to Sections 2.10 and 2.11, Pharmacopeia
shall not be obligated to conduct any Collaboration research activities after
the effective date of such termination, and (c) the remaining terms and
conditions of this Agreement, including without limitation the licenses and
royalty obligations set forth herein, shall remain in full force and effect
until the Agreement expires or is terminated as set forth in Article X, below.
_____________________
* CONFIDENTIAL TREATMENT REQUESTED
-8-
<PAGE>
2.3 Pharmacopeia Responsibilities. Pharmacopeia shall use commercially
-----------------------------------
reasonable efforts to provide:
(i) the number of scientist FTEs agreed to by the Parties, as set
forth in Section 2.5, and such additional scientists as may be mutually agreed
to in writing by the Parties and paid for by Schering, for performance of the
Collaboration during each year of the Collaboration (it being understood and
agreed that FTEs provided by Pharmacopeia for the Collaboration under the
International Agreement shall also be deemed to be provided to this
Collaboration for purposes of determining the number of FTEs provided by
Pharmacopeia hereunder);
(ii) research facilities, laboratories and equipment sufficient to
enable the Collaboration scientists (including Pharmacopeia employees and one
(1) Schering employee to be provided pursuant to Section 2.4(i)) to perform the
Collaboration in a fashion similar to the operation of Pharmacopeia's own
operations, and which shall be located in dedicated laboratories at
Pharmacopeia's research facilities in Monmouth Junction, New Jersey;
(iii) access to Pharmacopeia Enabling Technology by the Pharmacopeia
scientists working on the Collaboration and by Schering scientists, if any,
working on the Collaboration at Pharmacopeia's facilities as set forth in
Section 2.4, as Pharmacopeia, in its discretion, deems is reasonably necessary
and useful for the optimal performance of the Collaboration;
(iv) administrative services necessary to conduct the business of
the Collaboration in a manner comparable to that of Pharmacopeia's own business
activities; and
(v) during the term of the Collaboration, on an as needed basis,
up to an additional * miscellaneous FTEs, at Phamacopeia's expense, to assist
with Schering's requests for Library plate production and/or Library Compound
decodes pursuant to Sections 2.10 and 2.11, which additional FTEs shall not be
dedicated FTEs assigned to the Collaboration and shall not be included in the
FTE allocations set forth in Section 2.5.
It is understood and agreed that, except as may be mutually agreed by the
Parties, Pharmacopeia shall not be obligated hereunder to conduct research or
development activities in the Collaboration which are outside the scope of the
Collaboration Research Plan.
2.4 Schering Responsibilities. Schering shall provide research funding
-------------------------------
for the Collaboration as set forth in Section 5.1 and shall use commercially
reasonable efforts to provide:
(i) one scientific director provided by Schering Corporation, in
combination with Schering-Plough, Ltd., to work full-time at Pharmacopeia during
the term of the Collaboration managing the day-to-day operations of the
Collaboration (the "Collaboration Director"); and
(ii) additional support for Collaboration research projects,
including, without limitation, scientists, facilities and materials to perform
biological research to identify Targets, assay development, Library screening,
medicinal chemical research and analytical support services.
2.5 Collaboration Staffing.
----------------------------
2.5.1 Pharmacopeia FTE Commitments. Pharmacopeia will provide *
------------------------------------
FTEs at the start of the first year of the Collaboration consisting of *
chemists and * biologists (each of which shall be a * and *
miscellaneous FTEs to handle Library production, engineering, decoding, quality
control, etc. for the Collaboration (which miscellaneous FTEs *
__________________
* CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE>
*. During the first quarter of the 1999 calendar year, Pharmacopeia will add
an additional * FTEs to the Collaboration from personnel currently assigned to
work on research projects under the December 22, 1994 Collaboration Agreement
between Pharmacopeia, Schering Corporation and Schering-Plough Ltd. The total
number of Collaboration FTEs shall be increased to *, consisting of * chemists,
* biologists and * miscellaneous FTEs, by
the start of the second year of the Collaboration. Subject to the wind-down
provisions set forth in Section 5.2.4, Pharmacopeia shall continue to provide *
FTEs to the Collaboration during each subsequent year of the Collaboration, or
such other number as the Parties shall agree upon in writing. With the exception
of the * FTEs responsible for support activities for the Collaboration (such as
Library production, engineering, decoding, quality control, etc.), all of the
Pharmacopeia FTEs assigned to work on the Collaboration *.
In the event that Schering determines that it will be unable to
screen the number of Discovery Libraries anticipated to be delivered in year *
of the Collaboration *,
Schering may, upon written notice to Pharmacopeia at least six (6) months prior
to the beginning of such year, reduce the number of chemistry FTEs to be
provided to the Collaboration by Pharmacopeia in such year; provided, however,
that such reduction shall be in whole FTE increments, and Schering shall not so
reduce the number of chemistry FTEs to be provided by Pharmacopeia to less than
eighty percent (80%) of the number of Pharmacopeia chemistry FTEs assigned to
the Collaboration at the time of such notice. On or before the Effective Date
Pharmacopeia will provide to Schering a list individually identifying those
Pharmacopeia FTEs assigned to the Collaboration, which list shall be updated
from time to time during the term of the Collaboration as FTEs assigned to work
exclusively for the Collaboration are added, removed and/or replaced. It is
understood that, in the aggregate, the education, training and experience levels
of Pharmacopeia FTEs assigned to the Collaboration will be reasonably
representative of Pharmacopeia employees working on Pharmacopeia's internal
research programs. Within fifteen (15) business days after the Effective Date,
Pharmacopeia will provide Schering with: (i) a copy of the*
Collaboration; and (ii) Pharmacopeia's written representation and warranty
that*.
2.5.2 Schering FTE Commitments. During the term of the
--------------------------------
Collaboration Schering shall, in combination with Schering-Plough Ltd. under the
International Agreement, provide a single scientific director as set forth in
Section 2.4(i). Such director shall be subject to Pharmacopeia's confidentiality
restrictions such as limited access to laboratories and access only to data that
specifically relate to the Collaboration. It is understood that the scientific
director shall remain an employee of Schering Corporation, and that Schering
shall remain responsible for, and indemnify Pharmacopeia for any claims arising
from or relating to, the conduct, activities, salary and benefits of such
director, except to the extent caused by the gross negligence or willful
misconduct of Pharmacopeia. In addition, Schering shall provide such additional
FTEs located at Schering's research facilities as Schering determines, in its
sole discretion, are reasonably necessary to support the ongoing research
programs of the Collaboration, including, without limitation, assay development,
screening, medicinal chemistry, analytical services and animal testing services.
2.6 Additional Collaboration Expenses.
---------------------------------------
2.6.1 Capital Expenditures. In the event that the Parties
----------------------------
determine that one or more Collaboration research projects to be performed at
Pharmacopeia, as identified in the Collaboration Research Plan, will require
Pharmacopeia to incur unanticipated reasonable out-of-pocket expenses in
connection with such research project(s) for capital expenditures on specialized
equipment, the Parties shall agree on the additional monies to be paid by
Schering to Pharmacopeia therefor. It is understood
____________________
* CONFIDENTIAL TREATMENT REQUESTED
-10-
<PAGE>
and agreed that Pharmacopeia shall not be obligated hereunder to pay any such
unanticipated capital expenditures without its express consent, and that the
failure of Pharmacopeia to conduct research activities that cannot be performed
without such expenditures shall not constitute a breach of this Agreement. It
is further understood and agreed that Schering may, by providing written notice,
prohibit Pharmacopeia from using specialized equipment acquired pursuant to this
Section 2.6.1, and for which Schering has paid and/or reimbursed Pharmacopeia
for all of the acquisition costs and major operating costs, for activities
outside of the Collaboration. The Parties acknowledge and agree that, at
Schering's option, Schering may elect to provide on loan to Pharmacopeia any
such specialized equipment required for performance of the Collaboration, which
equipment shall be returned to Schering upon termination of the Collaboration.
2.6.2 Third Party Licenses re Pharmacopeia Enabling Technology. In
----------------------------------------------------------------
the event that the Parties agree that it is necessary for Pharmacopeia to obtain
any license from a Third Party to Pharmacopeia Enabling Technology (existing as
of the Effective Date) for the performance of Library encoding and/or decoding
in connection with one or more Collaboration research projects, Schering shall
pay to Pharmacopeia Schering's equitable share of any amounts paid by
Pharmacopeia pursuant to such license. Pharmacopeia shall provide Schering
notice of such payment obligations and invoice Schering for such costs and
Schering shall pay the invoice within * days. Schering's share, which may be
subject to adjustment periodically, shall be determined by ascertaining the
independent value the licensed technology has to Pharmacopeia and Third Parties
collaborating with Pharmacopeia, as reasonably determined by Pharmacopeia, and
apportioning the license costs between Pharmacopeia, Schering and such Third
Parties in an equitable manner; provided, however, that Schering may reduce any
-------- -------
royalty otherwise due Pharmacopeia hereunder to reimburse it for any royalties
actually paid to Pharmacopeia pursuant to this Section 2.6.2, as set forth
below. The amount of the reduction shall be equal to * of the royalty paid to
Pharmacopeia pursuant to this Section 2.6.2, but in no event shall the royalty
due Pharmacopeia for any calendar quarter, with respect to any Product, be
thereby reduced to less than * of the royalty due Pharmacopeia under Section
5.4.1 with respect to Net Sales of such Product. In the event that Pharmacopeia
enters into a royalty-bearing license or agreement during the term of this
Agreement with respect to Pharmacopeia Enabling Technology, and Schering does
not approve and agree to pay for its equitable share of such license or
agreement within * days after a request by Pharmacopeia, the subject matter
covered by such license or agreement shall not be within this Agreement for any
purpose
2.6.3 Other Third Party Licenses. In the event that the Parties
----------------------------------
agree that it is necessary for Pharmacopeia to obtain a license (except for any
licenses relating to Pharmacopeia Enabling Technology obtained pursuant to
Section 2.6.2) from a Third Party in order to perform one or more Collaboration
research projects selected by Schering, the Parties shall agree on the
respective amounts to be paid by Schering and Pharmacopeia to obtain any such
license. Each Party's share of such license costs shall be determined by
ascertaining the independent value the licensed technology has to Schering (as
reasonably determined by Schering), and to Pharmacopeia and any Third Parties
collaborating with Pharmacopeia (as reasonably determined by Pharmacopeia) and
apportioning the license costs between Pharmacopeia, Schering and such Third
Parties in an equitable manner. It is understood and agreed that Pharmacopeia
shall not be obligated hereunder to pay for any such license without its express
consent, and that the failure of Pharmacopeia to conduct research activities
that cannot be performed without such license shall not constitute a breach of
this Agreement. It is further understood and agreed that, in the event that no
Third Parties have shared in the costs and Schering has paid and/or reimbursed
Pharmacopeia for all of the costs of such licenses, Schering shall have the
right, by providing written notice, to prohibit Pharmacopeia from using licensed
technology, or other license rights, acquired pursuant to this Section 2.6.3 for
activities outside of the Collaboration.
2.7 Reserved Targets. The Parties acknowledge that , as of the Effective
----------------------
Date, there are certain Targets with respect to which Pharmacopeia may have
obligations under its existing agreements
__________________
* CONFIDENTIAL TREATMENT REQUESTED
-11-
<PAGE>
with Third Parties, and that Pharmacopeia will not conduct certain research
activities with respect to such Targets in connection with the Collaboration
(each such Target a "Reserved Target"). Schering shall not knowingly request
Pharmacopeia to develop assays with respect to, or screen any Libraries against,
such Reserved Targets. * In the event that during the term of the Collaboration
Pharmacopeia's Third Party obligations with respect to a given Reserved Target
expire, or such Reserved Target otherwise becomes available for unrestricted use
in the Collaboration, Pharmacopeia shall promptly notify Schering and such
Target shall thereafter cease to be a Reserved Target. It is further understood
and agreed that, notwithstanding any other provision of this Agreement,
Pharmacopeia shall not be obligated to conduct any activities in performance of
the Collaboration that would constitute a breach of any of its obligations to
any Third Party.
2.8 Record Keeping and Inspection of Records. Each of Schering and
----------------------------------------------
Pharmacopeia, and their respective Affiliates, shall maintain records of its
Collaboration activities (or cause such records to be maintained) in sufficient
detail and in good scientific manner appropriate for patent and regulatory
purposes as will properly reflect all work performed and the results achieved in
performance of the Collaboration. Schering shall also maintain analogous
records of its development activities with respect to Agreement Compounds and
Agreement Products. Such records may include books, records, reports, research
notes, charts, graphs, comments, computations, analyses, recordings,
photographs, computer programs and documentation thereof, computer information
storage media, samples of materials and other graphic or written data generated
in connection with the Collaboration, including any data required to be
maintained pursuant to all requirements of applicable laws, rules and
regulations, or as directed by the Collaboration Committee. Pharmacopeia's
records shall also document by name which individuals assigned to the
Collaboration pursuant to Section 2.5.1 are working on each specific
Collaboration research project (identifying the Target(s) involved, to the
extent known by Pharmacopeia at the time of the research). During the
Collaboration and for * years thereafter, each of Schering and Pharmacopeia
shall have the right, upon at least five (5) business days' prior notice, to
inspect all such records of the other Party (or legible copies thereof) during
normal business hours. Each Party's rights under this Section 2.8 shall be
limited to one (1) inspection in any calendar year. In each case, the Party
conducting the inspection shall maintain such records and the information
disclosed therein in confidence in accordance with Section 7.1, and shall use
such information solely for purposes of this Agreement. Upon request and tender
of payment for the actual cost in providing copies, Pharmacopeia and/or
Schering, as appropriate, shall provide to the requesting Party copies of such
records.
2.9 Libraries.
---------------
2.9.0 Discovery Libraries. A Discovery Library is generally a
---------------------------
large collection of compounds (typically containing anywhere from 10,000 to
100,000 compounds, but more typically around 30,000 to 50,000 compounds)
prepared by combinatorial chemistry techniques based on one or more core
structures such that the compounds in the library represent a number of
structurally diverse classes of compounds useful for screening against a variety
of Targets. The selection of core structures and the design of Discovery
Libraries based thereon are generally handled such that the compounds contained
in the Discovery Library are novel compounds (i.e, are not generally known and
have not been included in compound libraries previously prepared by
Pharmacopeia). The Parties acknowledge and agree (i) that the Discovery Library
descriptions set forth in this Section 2.9.0 represent general guidelines for
the size and composition of Discovery Libraries, (ii) that Schering and
Pharmacopeia will generally be cooperating in the design of Discovery Libraries,
and that Discovery Libraries prepared for the Collaboration may therefore vary
from the general guidelines set forth herein, and (iii) that nothing in the
Section 2.9.0 shall be construed as a commitment or representation by
Pharmacopeia that any given Discovery Library prepared for the Collaboration
will conform to such guidelines.
___________________
* CONFIDENTIAL TREATMENT REQUESTED
-12-
<PAGE>
2.9.1 Classification; Limit on SP Discovery Libraries. At the time
-------------------------------------------------------
Schering and Pharmacopeia agree that Pharmacopeia will prepare and provide to
Schering any given Library, Schering and Pharmacopeia shall agree upon the
appropriate classification of such Library as a Collaboration Discovery Library,
SP Discovery Library, or Optimization Library. It is understood and agreed that
the number of SP Discovery Libraries provided to Schering in a given year during
the term of the Collaboration *
in such year without the prior written consent of Pharmacopeia. It is
further understood and agreed that if the *,
for all purposes of this Agreement, unless otherwise agreed in writing by the
Parties. In determining the number of SP Discovery Libraries and total number of
all Discovery Libraries for purposes of this Section, *.
2.9.2 Identification of Targets. At the time that Schering
---------------------------------
notifies Pharmacopeia of an Active Compound from any Library pursuant to Section
2.12, Schering shall also notify Pharmacopeia of the applicable Target(s) (in
coded form only) and the general therapeutic area relevant to such Target.
2.9.3 Coded Targets. To the extent that Schering identifies
-------------
Targets to Pharmacopeia in coded form pursuant to Section 2.9.2, Schering shall
use a unique code for each Target, and shall not use more than one code to
identify the same Target unless Schering tells Pharmacopeia that more than one
code identifies the same Target and specifies the applicable codes. Schering
shall have no obligation to disclose to Pharmacopeia the identity of any Targets
on a non-coded basis prior to the publication of a patent application disclosing
both (i) the structure of an Active Compound having activity against the Target
and (ii) the identity of the Target. If, at any time, Schering has identified a
Target to Pharmacopeia on a non-coded basis, Schering shall identify the codes,
if any, that Schering had used to identify such Target, and shall thereafter
only identify such Target on a non-coded basis.
2.9.4 Targets for Optimization Libraries. At the time that
------------------------------------------
Schering and Pharmacopeia initiate the design and preparation of an Optimization
Library, Schering shall identify the Target (in coded form only) and the
relevant general therapeutic area for which the Optimization Library is being
prepared.
2.10 Compound Identification. Following Schering's screening of the
-----------------------------
Discovery Libraries and/or Optimization Libraries, at Schering's request, during
the term of this Agreement (for so long as Pharmacopeia's business operations
include preparing and providing libraries and related services), Pharmacopeia
shall decode and identify to Schering any Library Compound in such Libraries
that demonstrates activity in Schering's screening assays; provided, however,
-------- -------
Pharmacopeia shall have no obligation (i) to decode more Library Compounds than
can reasonably be accomplished by * Pharmacopeia FTEs, in conjunction with their
other assigned tasks in the Collaboration. * If Schering requests the decoding
of additional Library Compounds during the Collaboration, or requests any
decoding after the end of the Collaboration, then Pharmacopeia shall decode such
compounds and invoice Schering for the actual direct labor and material costs
associated with, and other allocated costs directly required for, such decoding,
and Schering shall pay such invoice within * days of receipt.
2.11 Copies of Libraries. Until the exhaustion of all copies of a
-------------------------
particular Library, Schering may provide Pharmacopeia notice that Schering
wishes to obtain sets of plates from such Library
__________________
* CONFIDENTIAL TREATMENT REQUESTED
-13-
<PAGE>
containing sufficient quantities of compounds to perform an agreed number of
assays, and Pharmacopeia will deliver such plates to Schering as soon as
practicable; provided, however, that during the term of the Collaboration,
Pharmacopeia shall have no obligation to prepare more such Library plates than
can reasonably be accomplished by * Pharmacopeia FTEs, in conjunction with
their other assigned tasks in the Collaboration. *
If Schering requests the preparation of additional
Library plates during the Collaboration, or requests any preparation of such
Library plates after the end of the Collaboration, then Pharmacopeia shall
prepare such plates and invoice Schering for the actual direct labor and
material costs associated with, and other allocated costs directly required for,
such preparation, and Schering shall pay such invoice within * days of receipt.
Following the exhaustion of all copies of a Library, Schering may request a
further set of plates for any such Library, and the Parties shall negotiate in
good faith the terms on which such plates may be provided.
2.12 Active Compounds. Any Library Compound identified as meeting the
----------------------
definition of an Active Compound through (i) screening of one or more Libraries
by Pharmacopeia and/or Schering in the conduct of the Collaboration, or (ii)
screening of one or more Libraries by Schering after the term of the
Collaboration, shall be an Active Compound. It is understood that no grant of
any licenses by Pharmacopeia to Schering, its Affiliates or Sublicensees under
Section 4.1 with respect to any Library Compound shall become effective unless
and until Pharmacopeia has received notice that such Library Compound is an
Active Compound. Pharmacopeia shall be deemed to have received such notice
effective upon receipt of a request by Schering to decode a Library Compound.
In the event that Schering or its Affiliates or Sublicensees identifies, without
decoding by Pharmacopeia pursuant to Section 2.10, a particular Library Compound
with activity against a Target, Schering shall give Pharmacopeia notice
identifying such Library Compound as an Active Compound, which notice shall be
effective upon receipt by Pharmacopeia. Notwithstanding the foregoing, any
Active Compound that is subject to a license by Pharmacopeia to a Third Party
(as set forth in Section 4.5 or 4.9.5) granted prior to the time the Library
Compound is decoded as set forth in Section 2.10 above or, with respect to a
Library Compound which is not decoded, the time that Pharmacopeia receives
actual notice from Schering as set forth in this Section 2.12, shall not be
deemed to be licensed to Schering under Section 4.1.
2.13 Retained Rights. Subject to the rights and licenses granted to
---------------------
Schering hereunder, and the limitations expressly set forth in Section 4.6,
Pharmacopeia shall retain ownership of the tangible property embodied in the
encoded Discovery Libraries and Optimization Libraries.
2.14 Pharmacopeia Independent Research Activities.
--------------------------------------------------
2.14.1 Activities Outside the Collaboration. The Parties
--------------------------------------------
acknowledge that during and after the term of the Collaboration Pharmacopeia may
(either alone or in collaboration with one or more Third Parties) perform
independent research and development activities with respect to Targets,
including, without limitation, to identify, develop and commercialize products,
which activities are not within the scope of this Agreement ("Pharmacopeia
Independent Technology"). The Parties further acknowledge that Pharmacopeia
Independent Technology may include technology independently acquired, discovered
or developed by Pharmacopeia (as demonstrated by documented evidence created at
the time of such acquisition, discovery or development) and which coincidentally
is substantially the same as technology within the scope of Collaboration
Technology and/or Schering Technology. Schering shall have no rights or licenses
whatsoever to any Pharmacopeia Independent Technology.
2.14.2 Restrictions on Use of Collaboration Technology. To the
-------------------------------------------------------
extent that Pharmacopeia is entitled to use Collaboration Technology under this
Agreement for purposes outside
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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the Collaboration, Pharmacopeia will not knowingly use such Collaboration
Technology to jeopardize the commercial value of Agreement Products.
ARTICLE III
COLLABORATION MANAGEMENT
3.1 Collaboration Committee. The Parties shall establish a Collaboration
-----------------------------
Committee to oversee, review and coordinate the conduct of the Collaboration.
The Collaboration Committee shall be comprised of two (2) representatives from
each of Schering and Pharmacopeia, or such other equal number of representatives
as the Parties may agree, each Party's members selected by that Party. Each of
Pharmacopeia and Schering may replace its Collaboration Committee
representatives at any time upon written notice to the other Party. The
Collaboration Committee shall be chaired by the Collaboration Director appointed
by Schering, unless otherwise agreed by the Parties. From time to time the
Collaboration Committee may establish various subcommittees, constituted as
agreed by the Collaboration Committee, to oversee particular projects or
activities within the Collaboration.
3.2 Design of Libraries; Fresh Libraries. At Schering's discretion,
------------------------------------------
Schering's representatives on the Collaboration Committee may contribute to the
development of the design of one or more Discovery Libraries or Optimization
Libraries, or contribute particular starting materials for use in synthesis of
the Discovery Libraries or Optimization Libraries. Except as set forth in
Section 4.9.5, or as the Parties may otherwise agree in writing, the Libraries
made available to Schering under this Agreement shall not have been provided to
Third Parties, or screened by Pharmacopeia for itself or for Third Parties.
Notwithstanding any other provision of this Agreement, Pharmacopeia shall not be
obligated to prepare or deliver to Schering any Library containing one or more
compounds previously delivered by Pharmacopeia to any Third Party.
3.3 Collaboration Committee Meetings. During the term of the
--------------------------------------
Collaboration, as it may be extended, the Collaboration Committee shall meet six
(6) times per year, or more often as agreed by the Parties, at such locations as
the Parties shall agree. At such meetings the Collaboration Committee will
formulate and review the Collaboration objectives with respect to each
Collaboration research project (including, without limitation, review and
approval of the design of Libraries), monitor the progress of the Collaboration
toward those objectives, and take such other actions as may be specified under
this Agreement or which the Parties deem appropriate. The Collaboration
Committee may designate a patent committee comprised of employees or
representatives of the Parties to oversee the patent prosecution and/or
enforcement activities described in Article VI, and to facilitate communication
and agreement between the Parties regarding inventorship of inventions made in
the Collaboration and the classification of such inventions (e.g., as Schering
Improvements, Pharmacopeia Improvements, Collaboration Platform Technology,
Collaboration Target-Specific Technology, etc.). Additional non-voting
representatives or consultants from either Party may from time to time be
invited by Schering or Pharmacopeia to attend and participate in Collaboration
Committee meetings (e.g., to evaluate and advise on business or scientific
issues) subject to compliance with the confidentiality provisions of Section
7.1. Each Party shall be responsible for its own expenses in connection with
the Collaboration Committee.
3.4 Collaboration Committee Decisions. Decisions of the Collaboration
---------------------------------------
Committee shall be based upon the consensus of all the members. In the event
that the Collaboration Committee cannot or does not, after good faith efforts,
reach agreement on an issue, such issue shall be referred to the respective
Presidents of Schering's Affiliate, the Schering-Plough Research Institute
("SPRI"), and Pharmacopeia for resolution. In the event that the Presidents of
SPRI and Pharmacopeia are unable to resolve the issue within fifteen (15)
business days after submission of the issue to them, then the unresolved issue
may be submitted by either Party to binding arbitration pursuant to Section 11.3
of this Agreement, except that the decision shall be made by one (1) arbitrator
with expertise in
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pharmaceutical product development, and the decision of the arbitrator shall be
rendered within six (6) months of initiation of the arbitration. During the
pendency of any such arbitration proceedings, the Parties shall proceed with
performance of the Collaboration following the course of conduct determined by
Schering; provided, however, that notwithstanding the foregoing, Pharmacopeia
-------- -------
shall not be obligated to (i) take any action that would violate its obligations
to any Third Party, (ii) spend or forego receiving any amounts of money (except
as necessary in connection with the fulfillment of Pharmacopeia's
responsibilities under Section 2.3), (iii) conduct any of the activities
referred to in Section 2.7 with respect to Reserved Targets, or (iv) knowingly
prepare or deliver to Schering any Library containing one or more compounds
previously provided to any Third Party. Notwithstanding the foregoing,
Schering, in its sole discretion, shall have complete and final control over
Schering's research, development and commercialization of Schering Compounds,
Agreement Compounds and/or Product(s) in accordance with the terms and
conditions of this Agreement.
3.5 Development Status; Notice of Sale of Products. During the term of
----------------------------------------------------
this Agreement, Schering shall provide Pharmacopeia written semi-annual reports
within thirty (30) days after the end of each six (6) month period, providing:
(i) a brief report summarizing the development status of each Lead Compound
and/or Development Candidate under development at Schering; (ii) the status of
all patent applications claiming any Library Compounds or Derivative Compounds,
and (iii) copies of all such patent applications which have published during
such six (6) month period and were not previously provided to Pharmacopeia.
Such reports shall contain information sufficient to allow Pharmacopeia to
monitor the status of Schering's efforts with respect to the accomplishment of
the milestones set forth in Section 5.3; provided, however, that nothing
-------- -------
hereunder shall be construed as requiring Schering to provide Pharmacopeia with
any specific research data or results, including, without limitation,
information relating to Targets or data obtained from screening programs being
conducted at Schering. Until the First Commercial Sale of each Agreement
Product by or on behalf of Schering hereunder, Schering shall keep Pharmacopeia
reasonably informed as to the status of the pre-clinical, clinical and
commercial development of such Agreement Product by providing Pharmacopeia with
semi-annual written reports summarizing such activities with respect to each
potential Agreement Product under development during the term of this Agreement.
Within thirty (30) days of the First Commercial Sale of any Agreement Product,
or any SP Product as to which Pharmacopeia is entitled to receive royalty
payments hereunder, Schering shall give Pharmacopeia written notice thereof,
which notice shall describe the relevant Product, identify the active
ingredients in such Product, and identify the specific Target(s) which led to
the development of such Product, it being understood that Schering shall
identify such Target(s) on a non-coded basis, and shall identify the code(s), if
any, used by Schering under this Agreement to identify such Target; provided,
--------
however, that nothing herein shall require Schering to disclose to Pharmacopeia
- -------
any of Schering's proprietary information which has not been previously publicly
disclosed, beyond that which is necessary to satisfy Schering's reporting
requirements under this Section 3.5.
3.6 Diligence. The Parties acknowledge and agree that all business
---------------
decisions regarding research, development and commercialization of Agreement
Products including, without limitation, decisions relating to the development
and manufacture of Agreement Compounds, or to the design, development,
manufacture, sale, price, distribution, marketing and promotion of Agreement
Products under this Agreement, and the decision whether to develop a particular
Agreement Compound, or to develop and commercialize a particular Agreement
Product, shall be within the sole discretion of Schering. Schering shall use
reasonable good faith efforts to discover and develop Agreement Compounds, and
to discover, develop and commercialize Agreement Products; provided, however,
-------- -------
that Schering shall have no quotas or other minimum diligence obligations with
regard to number of Agreement Compounds and Agreement Products to be developed
and commercialized hereunder. Schering's diligence obligations hereunder are
expressly conditioned upon the continuing absence of any adverse condition or
event which warrants a delay in commercialization of an Agreement Product
including, but not limited to, an adverse condition or event relating to the
safety or efficacy of the
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<PAGE>
Agreement Product or unfavorable pricing, pricing reimbursement, labeling or
lack of Regulatory Approval, and Schering shall have no obligation to develop or
market any such Agreement Product so long as in Schering's opinion any such
condition or event exists. Schering shall use commercially reasonable efforts
to overcome any unfavorable pricing or pricing reimbursement. The Parties
acknowledge and agree that none of the diligence obligations in this Section 3.6
shall apply to any Schering Compounds or SP Products, the discovery, development
and commercialization of which are the sole and exclusive responsibility of
Schering.
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ARTICLE IV
LICENSES AND EXCLUSIVITY
4.1 License to Schering.
------------------------
4.1.1 Compounds and Products. Pharmacopeia agrees to grant, and
-----------------------------
hereby grants to Schering an exclusive license under the Pharmacopeia Technology
and Pharmacopeia's interest in the Collaboration Technology (exclusive even as
to Pharmacopeia and its Affiliates), to make, have made, use, sell, offer to
sell, import and export Agreement Products in the Territory. It is understood
that such licenses shall include the right to conduct drug research and
development, and the exclusive right to discover, develop, make, have made and
use Agreement Compounds, during the term of this Agreement.
4.1.2 Collaboration Target-Specific Technology. Pharmacopeia agrees
-----------------------------------------------
to grant, and hereby grants, to Schering an exclusive license (exclusive even as
to Pharmacopeia and its Affiliates), under all of Pharmacopeia's interest in the
Collaboration Target-Specific Technology for any and all purposes in the
Territory, including the right to grant sublicenses.
4.2 Sublicenses. Schering shall have the right to sublicense the rights
----------------
granted in Section 4.1 above; provided, however, that Schering and its
-------- -------
Affiliates shall not provide any Discovery Library or Optimization Library to
any Third Party without the prior written consent of Pharmacopeia, except that
such consent shall not be required if the Third Party is a contractor or
academic collaborator conducting Library screening on behalf of Schering and is
not granted, and will not be granted or otherwise acquire, any rights to
Agreement Compounds or Agreement Products. Each such sublicense shall be
consistent with all the terms and conditions of this Agreement. It is further
understood that Schering's Sublicensees shall have no rights under the
sublicense granted in Section 4.6 herein, but may make, have made, use, sell,
offer to sell, import and export Agreement Products. Schering shall remain
responsible to Pharmacopeia for all of each such Sublicensee's applicable
financial and other obligations due under this Agreement. Such Sublicensee
shall not have the right to grant further sublicenses, and such sublicenses may
not be assigned or transferred to any Third Party without the prior written
consent of Pharmacopeia. Each sublicense shall provide for its continuation
following early termination of the license rights of Schering hereunder and its
assignment to Pharmacopeia. Promptly following the execution of each sublicense
requiring Pharmacopeia's consent hereunder, Schering shall give Pharmacopeia
written notice of the existence and identity of each Sublicensee and identify
the Agreement Product(s) sublicensed to such Sublicensee.
4.3 Direct Affiliate Licenses. Whenever Schering shall reasonably
------------------------------
demonstrate to Pharmacopeia that, in order to facilitate direct royalty payments
by an Affiliate, it is desirable that a separate license agreement be entered
into between Pharmacopeia and such Affiliate, Pharmacopeia will grant such
licenses directly to such Affiliate by means of an agreement which shall be
consistent with all of the provisions hereof and Schering shall guarantee the
Affiliate's obligations thereunder and otherwise provide to Pharmacopeia
assurances of performance satisfactory to Pharmacopeia. Schering shall
reimburse Pharmacopeia for its reasonable attorneys' fees and costs incurred in
connection with any such separate license agreement.
4.4 Collaboration Platform Technology. Upon conclusion of the
--------------------------------------
Collaboration Term, Pharmacopeia and Schering each agree to grant, and hereby
grant, to the other a co-exclusive license under their respective interests in
the Collaboration Platform Technology in the Territory, as follows: (i)
Schering and Pharmacopeia may each use such Collaboration Platform Technology
for any and all internal uses, including without limitation, in collaboration
with Third Parties for drug discovery, and
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(ii) neither Pharmacopeia nor Schering may license, sublicense or otherwise
transfer the Collaboration Platform Technology to any Third Party.
4.5 Third Party Rights.
-----------------------
4.5.1 Pharmacopeia Third Party Activities. It is understood that
Pharmacopeia is in the business of providing combinatorial libraries to Third
Parties, and that Pharmacopeia will grant such Third Parties rights after the
Effective Date to acquire licenses for compounds derived from such libraries
similar to Schering's rights under this Article IV. Notwithstanding the
licenses granted to Schering under Section 4.1 above, it is possible that a
Third Party may acquire rights from Pharmacopeia with respect to one or more
compounds of which Pharmacopeia is a sole or joint owner, which compounds were
made and designed independently of Pharmacopeia's activities in the
Collaboration; accordingly, Pharmacopeia's grant of rights under Section 4.1 is
limited to the extent that (i) a Third Party (either alone or jointly with
Pharmacopeia) has filed a patent application with respect to such a compound
prior to the filing by Schering (either alone or jointly with Pharmacopeia) of a
patent application with respect to such a compound, or (ii) Pharmacopeia has
previously granted a Third Party a license, an option to acquire a license, a
right of first negotiation, field exclusivity, or a non-competition covenant
with respect to such a compound, and is subject to any such grant of rights to a
Third Party.
4.5.2 No Liability. It is understood and agreed that, even if
-------------------
Pharmacopeia complies with its obligations under this Agreement, compounds
provided to Third Parties in the course of Pharmacopeia's other business
activities may result in Third Party patent applications and patents, including
patent applications and patents owned by such Third Parties, or owned jointly by
Pharmacopeia and such Third Parties, which could conflict with patent
applications and patents owned by Schering, or jointly owned by Schering and
Pharmacopeia hereunder. Pharmacopeia shall use reasonable efforts to avoid such
conflict, which efforts shall be comparable to those used by Pharmacopeia in
performing similar obligations under its agreements with Third Parties. It is
understood that, unless Schering is damaged as a proximate result of a material
breach by Pharmacopeia of Section 4.9, or of any of the representations and
warranties in Article VIII, then Pharmacopeia shall have no liability under this
Agreement with respect to any such conflict.
4.5.3 Pharmacopeia Reports to Schering On Third Party Rights. During
-------------------------------------------------------------
the period from the Effective Date until the First Commercial Sale of an
Agreement Product, within thirty (30) days of a written demand by Schering
concerning a Pharmacopeia license to a Third Party of a patent application owned
or co-owned by Pharmacopeia, Pharmacopeia shall, to the extent it may do so
without breaching any contractual or other legal obligation, provide Schering
with a statement explaining why the invention(s) claimed in the patent
application or technology licensed to such Third Party is independent of
Pharmacopeia's activities in the Collaboration. Such statement shall be
supported by written records kept in the ordinary course of business consistent
with pharmaceutical industry standards, provided that such records need not be
provided to Schering at the time of providing such statement, but may have to be
provided pursuant to Section 11.3. Such information shall be deemed
Confidential Information of Pharmacopeia pursuant to this Agreement.
4.6 Columbia Sublicense. Pharmacopeia agrees to grant, and hereby grants,
------------------------
to Schering a non-exclusive sublicense, without the right to sublicense, under
the Columbia License, to make, have made, use, offer to sell, sell, import and
export Agreement Products in the Territory, (including, without limitation, the
right to decode Library Compounds). It is understood and agreed that such
sublicenses do not include the right to create, make or have made encoded
combinatorial libraries or use methods or processes relating to the preceding,
except as expressly provided in this Agreement. It is further understood and
agreed that Schering's right to decode Library Compounds, as granted hereunder,
shall only be exercisable in the event that Pharmacopeia is unable or unwilling
to provide
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<PAGE>
decoding services to Schering, in which event Pharmacopeia shall promptly
provide to Schering the technology and know-how necessary to perform such
decoding.
4.7 Collaboration Research Activities. Schering agrees to grant, and
--------------------------------------
hereby grants, to Pharmacopeia a royalty-free, non-exclusive license under (i)
Schering's interest in the Collaboration Technology, and (ii) any Schering
Technology which Schering, in its sole discretion, reasonably determines is
necessary or useful for Pharmacopeia's performance of the Collaboration, in each
case to use during the term of the Collaboration and solely in performance of
the Collaboration such intellectual property of Schering (including, without
limitation, research materials and reagents, as are reasonably necessary or
useful to assay compounds in certain Optimization Libraries, to be selected by
Schering, for activity against the applicable Target). Pharmacopeia will not be
required to pay any fees to use such intellectual property, but will as a
condition precedent to such use execute any consents or sublicenses required by
any Schering licensor. Pharmacopeia shall not be required to execute any
unreasonable consents or licenses and will not be in breach of this Agreement
for failure to do so.
4.8 Pharmacopeia's Use of Library Compounds for Quality Control.
----------------------------------------------------------------
Notwithstanding Section 4.1 above or Section 4.9 below, and subject to the other
applicable provisions of this Agreement, Pharmacopeia shall retain the right
under the Collaboration Technology to make, have made and use Library Compounds
solely for Pharmacopeia's internal quality control purposes, provided that such
--------------
rights shall not include the right to conduct any research other than quality
control research on any individual Library Compounds. Pharmacopeia agrees to
use reasonable efforts not to conduct quality control research pursuant to this
Section 4.8 which would adversely affect Schering's ability to commercialize
Agreement Products or which would jeopardize the commercial or research value of
the Collaboration Technology.
4.9 Library Exclusivity.
------------------------
4.9.1 Optimization Libraries. Schering shall have exclusivity with
-----------------------------
respect to all Optimization Libraries, as follows: Pharmacopeia shall not * for
any purpose, * for any purpose. Solely to ensure such exclusivity Pharmacopeia
agrees to *. This Section 4.9.1 shall survive the termination or expiration of
this Agreement.
4.9.2 SP Discovery Libraries. Schering shall have exclusivity with
-----------------------------
respect to all SP Discovery Libraries, as follows: Pharmacopeia shall not * for
any purpose, * for any purpose. Solely to ensure such exclusivity, Pharmacopeia
agrees to *. This Section 4.9.2 shall survive the termination or expiration of
this Agreement.
4.9.3 Collaboration Discovery Libraries. To provide Schering a
----------------------------------------
period of exclusivity for screening of the Collaboration Discovery Libraries
provided to Schering hereunder, Pharmacopeia agrees that until the termination
of the Exclusivity Period for a Collaboration Discovery Library, including as
such period may be extended, Pharmacopeia shall not * for any purpose, *
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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* for any purpose. The
undertakings in this Section 4.9.3 shall be in addition to and not in derogation
of any undertakings of Pharmacopeia expressly set forth in the other terms of
this Agreement with respect to Collaboration Discovery Libraries, Agreement
Compounds and Agreement Products. Solely to ensure such exclusivity,
Pharmacopeia agrees to *. Upon expiration of the applicable Exclusivity Period
with respect to a Collaboration Discovery Library, including as it may be
extended pursuant to Section 4.9.4, below, the *; provided, however, that
Pharmacopeia's rights shall be subject to Schering's rights to Active Compounds
and to the provisions of Section 4.9.5 below.
4.9.4 Extension of Exclusivity for Collaboration Discovery Libraries.
---------------------------------------------------------------------
Schering shall have the right, in its sole discretion, to extend the Exclusivity
Period with respect to any particular Collaboration Discovery Library for
successive * year periods by notifying Pharmacopeia no later than sixty (60)
days prior to the date on which such Exclusivity Period will expire, and
concurrently paying to Pharmacopeia a maintenance fee of*
for each such Collaboration Discovery Library. In the event that
Schering has paid to Pharmacopeia milestone payments totaling * with respect to
Library Compounds contained in any given Collaboration Discovery Library and/or
Derivative Compounds derived from such Library Compounds, Schering's exclusivity
with respect to such Collaboration Discovery Library shall become perpetual and
irrevocable; provided, however, that if the Exclusivity Period for such
-------- -------
Collaboration Discovery Library has lapsed prior to the payment of such
milestone payments totaling *, then such exclusivity shall be subject to and
limited by (i) applicable rights, if any, granted to Third Parties during any
period of co-exclusive rights as set forth in Section 4.9.5, and (ii)
Pharmacopeia's rights regarding the Library Compounds identified before such
time in an "Outlicensing Notice" as set forth in Section 4.9.5.
4.9.5 Co-Exclusive Collaboration Discovery Libraries. Following the
-----------------------------------------------------
expiration of the Exclusivity Period (including any extensions thereof) for any
given Collaboration Discovery Library, Pharmacopeia shall have the right to *;
provided, however, that Pharmacopeia shall not *. If after the expiration of the
- -------- -------
applicable Exclusivity Period, Pharmacopeia *
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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*
4.10 No Other Products. With the exception of (i) any Schering Compounds
-----------------------
which are the same as a Library Compound and with respect to which Schering
notifies Pharmacopeia in writing prior to finalization by the Collaboration
Committee of the design the relevant Library, or (ii) as otherwise agreed or
specifically provided in the terms of this Agreement, neither Schering nor its
Affiliates or Sublicensees shall commercialize any Library Compound, Active
Compound, Derivative Compound, or other composition-of-matter claimed in patent
applications filed, or patents issued, under Article VI which claim an Active
Compound or Derivative Compound, other than as an Agreement Product in
accordance with this Agreement.
4.11 License Grant Back for Abandoned Agreement Compounds. In the event
----------------------------------------------------------
that Pharmacopeia acquires rights to patent applications and/or patents claiming
any Agreement Compounds pursuant to Section 6.3.5, Schering agrees to grant and
hereby grants to Pharmacopeia an exclusive license to make, have made, use,
sell, offer for sale, import and export products containing such Agreement
Compounds, in the Territory; provided, however, that such license shall be
-------- -------
limited to the general therapeutic area identified for the relevant Optimization
Library in accordance with Section 2.9.4. Schering will retain the rights to
such Agreement Compounds for all other therapeutic uses.
ARTICLE V
PAYMENTS
5.1 Payments By Schering. In partial consideration for Pharmacopeia's
--------------------------
conducting research activities in the Collaboration and the rights and licenses
granted Schering herein, Schering agrees to pay to Pharmacopeia the amounts set
forth in Sections 5.2, 5.3 and 5.4.
5.2 Collaboration Funding.
---------------------------
5.2.1 Funding During Year One. Schering shall pay to Pharmacopeia
------------------------------
research funding for the Collaboration at a rate of *
per FTE during the first year of the Collaboration based upon the actual number
of Pharmacopeia FTEs
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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assigned to the Collaboration as set forth in Section 2.5.1, plus any additional
FTEs agreed upon by the Parties under Section 5.2.3.
5.2.2 Funding During Subsequent Years. Schering shall pay to
--------------------------------------
Pharmacopeia research funding for the Collaboration at a rate of *,
plus any adjustment pursuant to Section 5.2.5, per FTE during each subsequent
year of the Collaboration, other than the final year of the Collaboration, based
upon the actual number of Pharmacopeia FTEs assigned to the Collaboration as set
forth in Section 2.5.1, plus any additional FTEs agreed upon by the Parties
under Section 5.2.3.
5.2.3 Increased FTE Requirements. In the event that the Parties
---------------------------------
agree that additional FTEs are necessary to meet unanticipated increases in
workload under the Collaboration, the Parties may agree to add additional
Pharmacopeia FTEs, which shall be provided at the then current FTE rate.
5.2.4 Wind-Down in Final Year. In the final year of the
------------------------------
Collaboration (i.e., year five if the Collaboration is not extended),
Pharmacopeia shall have the right, starting at the end of the second quarter of
the final year, to remove FTEs from the Collaboration during the remainder of
the term of the Collaboration. The foregoing notwithstanding, the Parties agree
that the minimum number of Pharmacopeia FTEs assigned to the Collaboration at
the end of the third and fourth quarters of the fifth year of the Collaboration
shall be * and *, respectively. It is understood and agreed that, except as the
Parties may otherwise agree, Schering shall pay Pharmacopeia for * FTEs (at the
then-current FTE rate, as adjusted) for the first three quarters of the final
year, and for * FTEs during the fourth quarter of the final year. In the event
that Schering requests additional Pharmacopeia manpower be available to the
Collaboration during the final year of the Collaboration (i.e., in excess of the
numbers set forth in the second sentence of this Section 5.2.4), Schering shall,
in addition to payment for such FTEs (at the then-current rate) during the
Collaboration, pay an additional wind-down fee per additional FTE at * of
the then-current FTE rate, which shall be payable in two equal payments due on
the first day of each of the first and second quarter of the year following the
end of the Collaboration.
5.2.5 Annual FTE Rate Adjustments. Starting on January 1, 2000, and
----------------------------------
annually thereafter during the term of the Collaboration, the FTE rate to be
paid by Schering shall be adjusted to account for increases in salaries and
other costs. The annual FTE rate adjustment shall be determined based upon: *
of the percentage increase in the SIRS Salary Survey (Biotech Sector)
over the previous one (1) year period; and * of the percentage
increase in the Consumer Price Index over the previous one (1) year
period; provided, however, that the first adjustment shall account for such
-------- -------
increases over a two (2) year period.
5.2.6 Quarterly Adjustment. At the conclusion of each quarter,
---------------------------
Pharmacopeia will calculate the actual number of FTEs provided by Pharmacopeia
during that quarter and calculate any difference between the actual number of
FTEs provided by Pharmacopeia and the number prepaid by Schering. Any
overpayment or underpayment shall be reflected as a credit or additional charge,
as the case may be, in the next quarterly invoice as per Section 5.2.7 below,
and in the event that no further quarterly payments are due under this Section
5.2, then (i) any underpayment shall be paid by Schering to Pharmacopeia within
* business days of receiving notice and invoice therefor, or (ii) Pharmacopeia
shall within * days reimburse Schering for any overpayment.
5.2.7 Manner of Payment. Funding for the Collaboration under this
------------------------
Section 5.2 shall be payable quarterly in advance on the first day of each
calendar quarter, except that payment for the calendar quarter beginning on the
Collaboration Effective Date shall be due within * business days of the
Effective Date. Pharmacopeia shall send an invoice therefor to Schering *
business days prior to the end of the preceding quarter, and Schering shall pay
such invoiced amounts.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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The invoice will indicate the number of Pharmacopeia FTEs to be assigned to the
Collaboration for such quarter and any adjustment from the prior quarter as
determined in accordance with Section 5.2.6. The Collaboration funding payment
for the first quarter of 1999 shall be due within * business days of January 1,
1999. Schering will use commercially reasonable efforts during each calendar
year during the term of the Collaboration to pay its first calendar quarter
Collaboration funding payments to Pharmacopeia on or before the * day of
January; provided, however, that in the event Schering is unable to complete
-------- -------
such payment, payment by Schering on or before the * day of January in such
calendar year shall not constitute a breach or default by Schering.
5.3 Milestone Payments.
-----------------------
5.3.1 Events and Amounts.
-------------------------
(a) Discovery Library Milestones. Schering agrees to pay to
---------------------------------
Pharmacopeia the following amounts upon attainment, by or on behalf of Schering,
its Affiliates or Sublicensees, of the indicated milestones with respect to
Agreement Products arising from a Discovery Library where no Optimization
Library was prepared:
(i) identification of a Lead Compound *;
(ii) * upon nomination of a Development Candidate;
(iii) * upon the filing and Acceptance of an IND or its
equivalent;
(iv) * upon initiation of treatment of the first patient
in a Phase III clinical study;
(v) * upon filing and Acceptance of an NDA with the FDA; and
(vi) * upon Regulatory Approval in the Territory.
(b) Optimization Library Milestones. Schering agrees to pay to
-----------------------------------
Pharmacopeia the following amounts upon attainment, by or on behalf of Schering,
its Affiliates or Sublicensees, of the indicated milestones with respect to
Agreement Products arising from an Optimization Library or from a Discovery
Library where an Optimization Library was prepared:
(i) identification of a Lead Compound *;
(ii) * upon nomination of a Development Candidate;
(iii) * upon the filing and Acceptance of an IND or its equivalent;
(iv) * upon initiation of treatment of the first patient in a Phase
III clinical study;
(v) * upon filing and Acceptance of an NDA with the FDA; and
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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(vi) * upon Regulatory Approval in the Territory.
It is understood and agreed that all amounts payable under this Section 5.3.1
are in addition to any milestone payments that may be due to Pharmacopeia under
the terms of the International Agreement.
5.3.2 Lead Compound. A "Lead Compound" shall be deemed to have been
--------------------
identified at such time as Schering, its Affiliates or Sublicensees initiates a
program of medicinal chemistry optimization with respect to an Agreement
Compound. Within thirty (30) days after the initiation of such a program,
Schering shall notify Pharmacopeia thereof, which notification will include
identification of the applicable Target(s) (in coded form only) and the general
therapeutic area relevant to such Target.
5.3.3 Development Candidate. A Development Candidate shall have been
----------------------------
deemed to have been nominated upon the earlier of the date (i) the Schering-
Plough Research Institute Project Assessment Committee or its successor approves
proceeding with full development of such compound, or (ii) Schering (or its
Affiliate) initiates in vivo toxicology trials necessary, and meeting U.S. FDA
-------
(or corresponding European or Japanese) standards, for obtaining approval for
use of such Agreement Compound in human clinical trials. Within thirty (30)
days after the nomination of a Development Candidate, Schering shall notify
Pharmacopeia thereof, which notification will include identification of the
applicable Target(s) (in coded form only) and the general therapeutic area
relevant to such Target.
5.3.4 Manner of Payment. All payments made to Pharmacopeia by
------------------------
Schering pursuant to Section 5.3.1(a) or (b) shall be due within * days after
the achievement of the corresponding milestone and shall be nonrefundable and
not creditable against other amounts due to Pharmacopeia. The payments provided
for under this Section 5.3 shall only be payable once upon the first achievement
of the indicated milestone with respect to an Agreement Compound and/or
Agreement Product developed against a particular Target and no additional
payments shall be due on subsequent or repeated achievement of the same
milestone for another Agreement Compound and/or Agreement Product developed
against the same Target. No milestones shall be payable under this Section 5.3
with respect to any compounds or products other than Agreement Compounds and
Agreement Products.
5.3.5 Announcement of Milestones. The Parties acknowledge and agree
---------------------------------
that the achievement of a milestone under Section 5.3.1(a) or 5.3.1(b) may, at
Pharmacopeia's discretion, be the subject of a press announcement, in accordance
with the terms of Section 7.4 of this Agreement, and irrespective of the
payment, if any, associated therewith.
5.4 Royalties. In partial consideration for the Library exclusivity,
---------
know-how licenses, patent licenses and other rights granted to Schering
hereunder, Schering shall pay royalties to Pharmacopeia based upon the sales of
Products in the Territory. The parties acknowledge and agree that, except as
expressly set forth herein, Schering's obligation to pay such royalties is not
conditioned upon the existence of patent protection for the Products.
5.4.1 Base Royalty. Schering shall pay to Pharmacopeia running
------------------
royalties on Net Sales of Products by Schering, its Affiliates and Sublicensees,
as follows:
(i) * of Net Sales of Agreement Products where the Agreement
Compound in such Agreement Product (A) was contained in an
Optimization Library based upon an Active Compound that was
contained in a Discovery Library or (B) is a Derivative
Compound derived from an Active Compound in such Optimization
Library.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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(ii) * of Net Sales of Agreement Products where the Agreement
Compound in such Agreement Product (A) was contained in an
Optimization Library based on a compound, other than a Library
Compound, identified by Schering in an internal Schering
research program or obtained from a Third Party source or (B)
is a Derivative Compound derived from an Active Compound in
such Optimization Library.
(iii) * of Net Sales of Agreement Products where the Agreement
Compound in such Agreement Product (A) was contained in a
Discovery Library; (B) is a Derivative Compound, made by
Schering, derived from an Active Compound in a Discovery
Library, and no Optimization Library was made based on such
Active Compound; (C) was contained in an Optimization Library
and identified through Schering's screening of such
Optimization Library against a Target other than the specific
Target(s) for which the Optimization Library was prepared; or
(D) is a Derivative Compound derived from an Active Compound
identified through Schering's screening of an Optimization
Library against a Target other than the specific Target(s) for
which the Optimization Library was prepared.
(iv) * of Net Sales of SP Products containing a Schering Compound
active against any Target for which the Collaboration prepared
an Optimization Library leading to the discovery of an
Agreement Compound claimed in a patent or patent application
owned or controlled by Schering.
5.4.2 Royalty Term for Agreement Products. Schering's obligation to
------------------------------------------
pay royalties to Pharmacopeia under Sections 5.4.1(i), 5.4.1(ii) and 5.4.1(iii)
shall continue for each Agreement Product until the date which is the later of
(i) * years after the first commercial sale of such Product in the Territory by
Schering, its Affiliates or Sublicensees or (ii) the expiration of the last to
expire issued patent within the Pharmacopeia Technology or Collaboration
Technology containing any claim which would be infringed by making, using or
selling the applicable Agreement Product in the Territory in the absence of the
license grants in this Agreement and provided that the claims of such patent
which would be so infringed are not declared invalid or unenforceable in a final
decision by a court of competent jurisdiction from which no appeal can be or is
taken.
5.4.3 Royalty Terms for SP Products. Schering's obligation to pay
------------------------------------
royalties to Pharmacopeia under Section 5.4.1(iv) shall continue for each SP
Product until the expiration of the last to expire issued patent in the
Territory within the Pharmacopeia Technology, Schering Technology or
Collaboration Technology containing a composition-of-matter claim which would be
infringed by making, using or selling one or more Agreement Compounds active
against the same Target as such SP Product and which were discovered based upon
an Optimization Library prepared against such Target, and provided that the
claims of such patent are not declared invalid or unenforceable in a final
decision by a court of competent jurisdiction from which no appeal can be or is
taken. Notwithstanding the foregoing, in the event that Schering abandons or
ceases to maintain such patent (or the relevant patent application) on or after
the date on which Phase III clinical trials with the SP Product are initiated by
or on behalf of Schering, its Affiliates of Sublicensees, then Schering shall be
obligated to pay royalties to Pharmacopeia under Section 5.4.1(iv) with respect
to such SP Product at a * rate of * , which obligation shall continue until the
date which is * years after the first commercial sale of
such SP Product in the Territory by Schering, its Affiliates or Sublicensees;
provided, however that Schering shall have no such royalty payment obligation
- -------- -------
with respect to any such patent which was declared invalid or unenforceable in a
final decision by a court of competent jurisdiction from which no appeal can be
or is taken, or in the case of
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
a patent application which was the subject of a final and unappealable
determination of unpatentability by the relevant governmental authority in the
Territory.
5.4.4 Single Royalty; Non-Royalty Sales. No royalty shall be
----------------------------------------
payable under Section 5.4.1 above with respect to sales of Products among
Schering, its Affiliates and Sublicensees for resale; however, a royalty shall
be payable upon such resale by Schering's Affiliates and Sublicensees. In no
event shall more than one royalty be due hereunder with respect to any Product
unit even if covered by more than one patent included in the Pharmacopeia
Technology or Collaboration Technology. It is understood and agreed that if a
Product is manufactured outside the Territory and sold in the Territory, a
royalty shall be due hereunder on Net Sales of such Product in the Territory.
No royalties shall accrue on the disposition of any Product in reasonable
quantities by Schering, its Affiliates or its Sublicenses as samples
(promotional or otherwise) or as donations (for example, to non-profit
institutions or government agencies for a non-commercial purpose) or for
clinical studies.
5.4.5 Third Party Royalties.
----------------------------
(a) Schering Responsibilities. Schering shall be responsible
-------------------------
for the payment of any royalties due to licenses obtained from Third Parties
relating to the manufacture, use, marketing, sale or distribution of Products by
Schering, its Affiliates or Sublicensees under the Collaboration Technology,
Pharmacopeia Technology or Schering Technology (except for any payments due to
Columbia University pursuant to the Columbia License, which shall be the
responsibility of Pharmacopeia).
(b) *. Notwithstanding Section 5.4.5(a) above,
-------
if a Third Party alleges that the manufacture, use or sale of a Product
infringes its patents, based solely on the practice of the Pharmacopeia Enabling
Technology used by Pharmacopeia in connection with the encoding or decoding by
Pharmacopeia of Libraries pursuant to the performance of this Agreement, * Any
settlement of any infringement claim or action that would
require the payment of any royalty to a Third Party shall require the
mutual agreement of Schering and Pharmacopeia, except that if the Parties cannot
promptly reach agreement they shall appoint an independent patent counsel
reasonably acceptable to each of them to give an opinion, which will be binding
as between the Parties, as to whether the Third Party patent is valid and if so
whether it is infringed, and the parties shall have no further recourse to
dispute such opinion (including , without limitation, the provisions of Section
11.3, which shall not apply). If it is the independent patent counsel's opinion
that the patent is valid and infringed by the sale of such Agreement Product,
solely due to Pharmacopeia's practice of the Pharmacopeia Enabling Technology in
connection with the encoding or decoding of Libraries pursuant to the
performance of this Agreement, Schering may settle the matter in its sole
discretion on such terms as it deems appropriate, provided that such settlement
does not contain an admission or acknowledgment of infringement or invalidity.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
5.4.6 Compulsory Royalty Reductions. If the royalties set forth
-----------------------------------
herein are higher than the maximum royalties permitted by the law or regulation
in any country or territory or possession thereof in the world, the royalty
payable for sales in such country, territory or possession shall be equal to the
maximum permitted royalty under such law or regulations.
5.4.7 Royalty Overpayment. In the event Schering pays Pharmacopeia
--------------------------
royalties in excess of the amounts due under Section 5.4.1 herein, Schering
shall promptly notify Pharmacopeia providing a written explanation of the amount
of overpayment. Any such overpayment shall be fully creditable against
royalties subsequently due hereunder.
5.5 Reports; Payment of Royalty; Payment Exchange Rate and Currency
--------------------------------------------------------------------
Conversions.
- -----------
5.5.1 Royalty Reports and Payments. After the First Commercial Sale
-----------------------------------
of an Agreement Product or SP Product on which royalties are payable by
Schering, its Affiliate or Sublicensees hereunder, Schering shall make quarterly
written reports to Pharmacopeia within * days after the end of each calendar
quarter, stating in each such report separately for Schering and each of its
Affiliates and Sublicensees the number, description, and aggregate Net Sales by
country of each Product sold during the calendar quarter upon which a royalty is
payable under Section 5.4 above. Subject to any reductions permitted pursuant to
the express terms of this Agreement, concurrently with the making of such
reports, Schering shall pay to Pharmacopeia royalties at the rates specified in
Section 5.4.1.
5.5.2 Payment Method. All payments due under this Agreement shall be
---------------------
made by bank wire transfer in immediately available funds to an account
designated by Pharmacopeia. All payments hereunder shall be made in U.S.
dollars. Any payments that are not paid on the date such payments are due under
this Agreement shall bear interest, calculated on the number of days such
payment is delinquent, at the lesser of: (i) the prime rate as reported by the
Chase Manhattan Bank, New York, New York, on the date such payment is due, plus
an additional *, or (ii) the maximum rate permitted by applicable law.
5.5.3 Place of Royalty Payment and Currency Conversions. Royalties
--------------------------------------------------------
shall be deemed payable by the entity making the Net Sales from the country in
which earned in local currency and subject to foreign exchange regulations then
prevailing. Royalty payments shall be made in United States dollars to the
extent that free conversion to United States dollars is permitted. The rate of
exchange to be used in any such conversion from the currency in the country
where such Net Sales occurs shall be in accordance with the policy set forth in
Exhibit A hereto. If, due to restrictions or prohibitions imposed by national
or international authority, payments cannot be made as aforesaid, the Parties
shall consult with a view to finding a prompt and acceptable solution, and
Schering or its designated Affiliates will, from time to time, deal with such
monies as Pharmacopeia may lawfully direct at no additional out-of-pocket
expense to Schering. Notwithstanding the foregoing, if royalties in any country
cannot be remitted to Pharmacopeia for any reason within six (6) months after
the end of the calendar quarter during which they are earned, then Schering
shall be obligated to deposit the royalties in a bank account in such country in
the name of Pharmacopeia.
5.6 Maintenance of Records; Audits.
-----------------------------------
5.6.1 Records; Inspection. Schering and its Affiliates shall keep
--------------------------
complete, true and accurate books of account and records for the purpose of
determining the royalty amounts payable under this Agreement, which books and
records shall be maintained in accordance with Schering's records retention
policies. Upon prior written notice from Pharmacopeia, Schering shall, within a
period not to exceed forty-five (45) days, permit an independent certified
public accounting firm of nationally recognized standing selected by
Pharmacopeia and reasonably acceptable to Schering, at
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
Pharmacopeia's expense, to have access during normal business hours to examine
pertinent books and records of Schering and/or its Affiliates as may be
reasonably necessary to verify the accuracy of the royalty reports hereunder.
The examination shall be limited to pertinent books and records for any calendar
year ending not more than * months prior to the date of such request. Such
inspections may be made no more than once each calendar year. In the event that
the accounting firm correctly concludes that a variation or error has occurred
resulting in an underpayment of royalties by Schering of * or more of the amount
actually due for the period covered by the inspection, Schering shall pay to
Pharmacopeia such additional amounts, as well as the costs relating to the
inspection, within * days of receipt of an invoice for such amounts. Any
overpayment of royalties by Schering discovered through such audit shall be
fully creditable against royalties subsequently due hereunder. Schering may
designate competitively sensitive information which such auditor may not
disclose to Pharmacopeia; provided, however, that such designation shall not
-------- -------
encompass the auditor's conclusions. The accounting firm shall disclose to
Pharmacopeia only whether the royalty reports are correct or incorrect and the
specific details concerning any discrepancies. No other information shall be
provided to Pharmacopeia. The accounting firm employees shall sign
confidentiality agreements acceptable to Schering as a condition precedent to
their inspection. Schering shall include in each sublicense granted by it
pursuant to this Agreement a provision requiring the Sublicensee to make reports
to Schering, to keep and maintain records of sales made pursuant to such
sublicense and to grant access to such records by Pharmacopeia's independent
accountant to the same extent required of Schering under this Agreement. Upon
expiration of the * month period immediately following the receipt by
Pharmacopeia of Schering's fourth quarter royalty report for a given calendar
year in accordance with Section 5.5.1, the calculation of royalties payable with
respect to such year shall be binding and conclusive upon Pharmacopeia, and
Schering, its Affiliates and its Sublicensees shall be released from any
liability or accountability with respect to royalties for such year, except for
instances of fraud or other intentional misconduct by Schering.
5.7 Coordination With Payments under International Agreement. The
-------------------------------------------------------------
milestones and royalties payable by Schering under Sections 5.3 and 5.4 are in
consideration for the rights and licenses granted to Schering under this
Agreement and are in addition to any amounts payable to Pharmacopeia under the
International Agreement. It is understood and agreed that, with respect to the
specific milestones payable under Sections 5.3.1(a)(ii)-(iv) and 5.3.1(b)(ii)-
(iv), the occurrence of the same milestone event will result in milestone
payment obligations under both this Agreement and the corresponding provisions
of the International Agreement.
5.8 Tax Matters.
----------------
5.8.1 Withholding Taxes. All royalty amounts required to be paid to
------------------------
Pharmacopeia pursuant to this Agreement shall be paid with deduction for
withholding for or on account of any taxes (other than taxes imposed on or
measured by net income) or similar governmental charge imposed by a jurisdiction
other than the United States ("Withholding Taxes") to the extent Pharmacopeia
and/or its Affiliates or their successors has the lawful rights to utilize the
Withholding Taxes paid by Schering as a credit against Pharmacopeia's and/or its
Affiliates regular U.S. tax liability. Schering shall provide Pharmacopeia
documentation evidencing payment of any Withholding Taxes hereunder in a manner
that is satisfactory for purposes of the U.S. Internal Revenue Service. Any
Withholding Taxes paid when due hereunder shall be for the account of
Pharmacopeia and shall not be included in the calculation of Net Sales.
Payments of Withholding Taxes made by Schering pursuant to this Section 5.8.1
shall be made based upon financial information provided to Schering by
Pharmacopeia, and to the extent that such information is incorrect Pharmacopeia
shall be liable for any deficiency, and any fine, assessment or penalty imposed
by any taxing authority in the Territory for any deficiency in the amount of any
such Withholding Taxes, or the failure to make payment of Withholding Taxes,
based upon such incorrect information. If Schering is required to pay any such
deficiency, or any fine,
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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<PAGE>
assessment or penalty for any such deficiency based upon such incorrect
information (except to the extent caused by Schering's gross negligence or
willful misconduct), Pharmacopeia shall promptly reimburse Schering for such
payments, which shall not be included in the calculation of Net Sales.
5.8.2 Sales Taxes. Any sales taxes, use taxes, transfer taxes or
------------------
similar governmental charges required to be paid in connection with the transfer
of the Discovery Libraries and Optimization Libraries shall be the sole
responsibility of Schering. In the event that Pharmacopeia is required to pay
any such amounts, Schering shall promptly remit payment to Pharmacopeia of such
amounts.
5.9 Product Development Costs. Schering shall, at Schering's expense, be
------------------------------
responsible for conducting all development of Agreement Compounds, Agreement
Products, Schering Compounds and SP Products, and all commercialization of
Products.
ARTICLE VI
PATENTS AND INVENTIONS
6.1 Ownership of Schering Technology and Pharmacopeia Technology. It is
-----------------------------------------------------------------
understood and agreed that (i) Schering shall own all Schering Technology
including, without limitation, Schering Improvements, and (ii) Pharmacopeia
shall own all Pharmacopeia Technology including, without limitation,
Pharmacopeia Improvements, and all Pharmacopeia Enabling Technology.
6.2 Ownership of Collaboration Technology. The Parties anticipate that
------------------------------------------
the Collaboration may result in new inventions, discoveries and innovations, as
well as improvements to existing technologies, whether patentable or not, within
the Collaboration Technology. Ownership of Collaboration Technology shall be
determined based upon U.S. Patent Laws and the following guidelines; provided,
--------
however, that ownership rights to all Collaboration Technology shall be subject
- -------
to the applicable licenses and other rights granted under Article IV of this
Agreement.
(a) Inventions by Schering Employees. Title to all
-------------------------------------
Collaboration Technology invented solely by employees of Schering working on the
Collaboration at Pharmacopeia shall be deemed to be owned by Schering.
(b) Inventions by Pharmacopeia Employees. Title to all
-----------------------------------------
Collaboration Technology invented solely by employees of Pharmacopeia shall be
deemed to be owned by Pharmacopeia.
(c) Joint Inventions. Title to all Collaboration Technology
---------------------
invented jointly by one or more employees of Schering working on the
Collaboration at Pharmacopeia, and one or more employees of Pharmacopeia shall
be deemed to be jointly owned by Schering and Pharmacopeia.
6.3 Filing, Prosecution and Maintenance of Patents.
---------------------------------------------------
6.3.1 Collaboration Technology. Schering shall have the right to
-------------------------------
prepare, file, prosecute and maintain in such countries as it deems appropriate
in its discretion, at its own expense and upon appropriate consultation with
Pharmacopeia, patent applications and patents, and to conduct any interferences,
re-examinations, reissues, oppositions or requests for patent term extension or
governmental equivalents thereto within the Collaboration Technology (excluding
Collaboration Platform Technology), and Pharmacopeia shall give reasonable
cooperation in connection therewith, at Schering's request and expense. In the
event that Schering does not file a patent or patent application claiming an
invention within such Collaboration Technology, or if it ceases to so prosecute,
maintain, conduct any interferences, re-examinations, reissues, oppositions or
requests for patent term extension or governmental equivalents thereto relating
to such an invention, Pharmacopeia shall have the right, in
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<PAGE>
its sole discretion, to undertake such activities at its own expense, and
Schering shall give reasonable cooperation in connection therewith, at
Pharmacopeia's expense.
6.3.2 Collaboration Platform Technology. Before filing any patent
----------------------------------------
application claiming any invention within the Collaboration Platform Technology,
the Parties shall discuss whether and how to proceed with the filing,
prosecution, and maintenance of such patent, as well as the conduct of any
interferences, re-examinations, reissues, oppositions or requests for patent
term extension or governmental equivalents thereto. The Parties shall share
equally the costs of such activities, unless one Party notifies the other in
writing that is does not wish to pay for its share of such activities, in which
event the other Party shall have the right to proceed at its own expense, and
the Party declining to pay for such costs shall have no further license, on a
patent-by-patent and country-by-country basis, to practice the Collaboration
Platform Technology claimed in any issued, valid and enforceable patent for
which the Party did not pay such costs.
6.3.3 Schering Technology. Schering shall have the right to prepare,
--------------------------
file, prosecute and maintain in such countries as it deems appropriate in its
discretion, at its own expense, patent applications and patents, and to conduct
any interferences, re-examinations, reissues, oppositions or requests for patent
term extension or governmental equivalents thereto within the Schering
Technology and Pharmacopeia shall give reasonable cooperation in connection
therewith, at Schering's request and expense.
6.3.4 Pharmacopeia Technology. Pharmacopeia shall have the right to
------------------------------
prepare, file, prosecute and maintain in such countries as it deems appropriate
in its discretion, at its own expense, patent applications and patents, and to
conduct any interferences, re-examinations, reissues, oppositions or requests
for patent term extension or governmental equivalents thereto within the
Pharmacopeia Technology, as well as any Pharmacopeia Enabling Technology, and
Schering shall give reasonable cooperation in connection therewith, at
Pharmacopeia's request and expense.
6.3.5 Pharmacopeia's Rights Regarding Patents Relating to Agreement
--------------------------------------------------------------------
Compounds. In the event that Schering does not file a patent application in the
- ---------
Territory claiming an Agreement Compound (arising from an Optimization Library)
as a composition-of-matter, within two (2) years after the later of (1) the
decoding of the first Active Compounds in such Optimization Library (after the
entire Optimization Library has been screened), or (2) the filing of a patent
application claiming one or more Schering Compounds, where such Agreement
Compounds, Active Compounds and Schering Compounds are all active against the
Target for which the relevant Optimization Library was prepared, it shall
promptly notify Pharmacopeia to that effect in writing, and Pharmacopeia shall
thereafter have the right to prepare, file, prosecute, maintain and defend such
patent applications, and any patents arising therefrom, in the Territory, all at
Pharmacopeia's expense. Schering shall use diligent efforts (i) to provide such
notice to Pharmacopeia in a timely manner, and (ii) not to take any actions
(including publication) with respect to such Agreement Compounds, that would
prejudice the patentability of such Agreement Compounds. Schering shall have no
rights or licenses under such patent applications and/or patents, which shall be
deemed to be Pharmacopeia Independent Technology. Schering shall grant back to
Pharmacopeia the licenses set forth in Section 4.11, with respect to any such
Agreement Compounds, and shall have no royalty obligations under Section
5.4.1(iv) with respect to sales of any SP Products in the Territory active
against the relevant Target. Notwithstanding the foregoing, the provisions of
this Section 6.3.5 shall not apply with respect to any Agreement Compounds which
the parties agree are unpatentable under U.S. Patent Laws.
6.4 Cooperation.
----------------
6.4.1 Cooperation. Upon request, and at the requesting Party's
------------------
expense, each of Pharmacopeia and Schering shall provide the other Party
reasonable assistance to prepare, file,
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<PAGE>
prosecute and maintain patents and patent applications covering any
Collaboration Technology, Schering Improvements or Pharmacopeia Improvements
which the requesting Party has the right to file. Reasonable assistance shall
include, without limitation, providing the requesting Party with necessary or
useful data and information relating to the Collaboration Technology, Schering
Improvements or Pharmacopeia Improvements, as the case may be, and reasonable
access to the inventors of said inventions, as well as causing the execution of
required patent assignments and/or other documents. With respect to all patent
applications claiming Collaboration Technology or any Active Compound or
Derivative Compound, the filing Party shall give the non-filing Party an
opportunity to review the text of such patent applications before filing, shall
consult with the non-filing Party with respect thereto, and shall supply the
non-filing Party with a copy of the applications as filed, together with notice
of its filing date and serial number. Schering will identify to Pharmacopeia
any of Schering's proprietary information contained in such documents to be
provided to Pharmacopeia to ensure that Pharmacopeia will protect Schering's
proprietary information, including without limitation, information relating to
Targets. In addition, with respect to applications which do not include
Pharmacopeia inventors, Schering may redact or provide in coded form any
information contained in such documents to be provided to Pharmacopeia to the
extent necessary (in Schering's opinion) to protect Schering's proprietary
information, including without limitation, information relating to Targets.
Pharmacopeia and Schering shall each keep the other Party advised of the status
of the actual and prospective patents and patent applications within the
Collaboration Patent Rights for which it is responsible, and upon the written
request of the other Party, will provide advance copies of any substantive
papers related to the filing, prosecution and maintenance of such Collaboration
Patent Rights.
6.5 Enforcement.
----------------
6.5.1 Notice. Each Party shall promptly notify the other of its
-------------
knowledge of any actual or potential infringement of the Collaboration
Technology by a Third Party.
6.5.2 Collaboration Technology. Schering shall have the initial
-------------------------------
right, but not the obligation, to take reasonable legal action to enforce
against infringements by Third Parties or defend any declaratory judgment action
relating to any patent within the Collaboration Technology (excluding any
Collaboration Platform Technology) at its sole cost and expense. If, within six
(6) months following receipt of notice of such infringement from Pharmacopeia
(or written notice of a declaratory judgment action alleging invalidity or
unenforceability of such Collaboration Technology), Schering does not take such
action against a commercially significant infringement, Pharmacopeia shall, in
its sole discretion, have the right, but not the obligation to take such action
at its sole expense.
6.5.3 Collaboration Platform Technology. In the event of an actual
----------------------------------------
or potential infringement of Collaboration Platform Technology by a Third Party,
Schering and Pharmacopeia shall discuss how to proceed in connection with such
infringement. Unless otherwise agreed by the Parties, the terms of Section
6.5.5 shall apply; provided, however, that the Parties may decide to jointly
-------- -------
proceed in enforcement against any such patent infringement by Third Parties, in
which case the Parties shall also agree on allocation of costs and damages.
6.5.4 Schering Technology and Pharmacopeia Technology. It is
------------------------------------------------------
understood and agreed that Pharmacopeia shall have the sole right, but not the
obligation, to initiate and conduct legal proceedings to enforce the
Pharmacopeia Technology and Pharmacopeia Enabling Technology against any actual
or threatened infringement or misappropriation or defend any declaratory
judgment action relating thereto, at its sole expense, and that Schering shall
have the sole right, but not the obligation, to initiate and conduct legal
proceedings to enforce the Schering Technology against any actual or threatened
infringement or misappropriation or defend any declaratory judgment action
relating thereto, at its sole expense.
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<PAGE>
6.5.5 Cooperation; Costs and Recoveries. Each Party agrees to render
----------------------------------------
such reasonable assistance as the enforcing Party may request, and at the
enforcing Party's expense. Costs of maintaining any such action shall be paid
by the Party bringing the action and any damages or settlements recovered
therefrom shall belong to such Party. To the extent that Schering recovers any
lost profits or other recovery based upon Third Party sales of infringing
products, Pharmacopeia shall receive an equitable share of such recovery, as
determined based upon the royalties Pharmacopeia would have been entitled to
under this Agreement on Net Sales by Schering, its Affiliates or Sublicensees of
the relevant Agreement Products and/or SP Products, as applicable, corresponding
to such lost profits. If Schering, in its sole discretion, agrees to settle any
such infringement action by granting a sublicense to the Third Party infringer,
and such Third Party, but for the grant of such sublicense, would be infringing
a claim of an issued patent in the Collaboration Technology, or a composition-
of-matter claim of an issued patent in the Schering Technology, Schering shall*;
provided, however,
- -----------------
that net sales of such Third Party products in the Territory on which*
for purposes of this Agreement, and further provided that, notwithstanding
anything herein to the contrary, Schering's *
in any calendar quarter shall not exceed * of the royalties received by Schering
from such Third Party for the same quarter.
6.6 Infringement Claims. If the manufacture, sale or use of any Agreement
------------------------
Product pursuant to this Agreement because of the practice of the Pharmacopeia
Technology, Collaboration Technology, Pharmacopeia Enabling Technology or
Schering Technology, results in any claim, suit or proceeding alleging patent
infringement against Pharmacopeia or Schering (or their respective Affiliates or
Sublicensees), such Party shall promptly notify the other Party hereto in
writing setting forth the facts of such claim in reasonable detail. The Party
subject to such claim shall have the exclusive right and obligation to defend
and control the defense of any such claim, suit or proceeding, at its own
expense, using counsel of its own choice; provided, however, it shall not enter
-------- -------
into any settlement which admits or concedes that any aspect of (i) the Schering
Technology or Collaboration Technology in the case of Pharmacopeia, and (ii) the
Pharmacopeia Technology, Collaboration Technology, or Pharmacopeia Enabling
Technology in the case of Schering, is invalid or unenforceable without the
prior written consent of such other Party. The Party subject to the claim shall
keep the other Party hereto reasonably informed of all material developments in
connection with any such claim, suit or proceeding. Any claim, suit or
proceeding arising based upon Schering's manufacture, sale or use of any SP
Product shall be the sole responsibility of Schering.
6.7 Certification under Drug Price Competition and Patent Restoration Act.
--------------------------------------------------------------------------
Pharmacopeia and Schering each shall immediately give written notice to the
other of any certification of which they become aware filed pursuant to 21
U.S.C.(S)(S)355(b)(2)(A)(iv) and 355(j)(2)(A)(vii) claiming that Collaboration
Patent Rights do not cover the use or sale of any product(s) equivalent to an
existing Agreement Product(s) by a Third Party. Schering shall have the right
to bring an infringement action, in its sole discretion and at its own expense,
in its own name and/or in the name of Pharmacopeia, subject to Section 6.5
above. The provisions of Section 6.5.5 shall apply to any such infringement
action.
6.8 Patent Term Restoration. The Parties hereto shall give reasonable
----------------------------
cooperation to each other in obtaining patent term restoration or supplemental
protection certificates or their equivalents in any country in the Territory
where applicable to the Collaboration Technology.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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ARTICLE VII
CONFIDENTIALITY
7.1 Confidential Information. Except as expressly provided herein, the
-----------------------------
Parties agree that, for the term of this Agreement and for five (5) years
thereafter, the receiving Party shall not disclose and except as expressly
provided in this Article 7, shall not use for any purpose any confidential
information ("Confidential Information") furnished to it by the disclosing Party
hereto pursuant to this Agreement except to the extent that it can be
established by the receiving Party by competent proof that such information:
(i) was already known to the receiving Party, other than under an
obligation of confidentiality, at the time of disclosure;
(ii) was generally available to the public or otherwise part of the
public domain at the time of its disclosure to the receiving Party;
(iii) became generally available to the public or otherwise part of
the public domain after its disclosure and other than through any act or
omission of the receiving Party in breach of this Agreement;
(iv) was independently developed by the receiving Party as
demonstrated by documented evidence prepared contemporaneously with such
independent development; or
(v) was subsequently lawfully disclosed to the receiving Party,
other than under a duty of confidentiality, by a Third Party that had the right
to make such disclosure.
7.2 Permitted Use and Disclosures. Each Party hereto may use or disclose
----------------------------------
Confidential Information disclosed to it by the other Party to the extent such
information is included in the Pharmacopeia Technology, Schering Technology or
Collaboration Technology, as the case may be, and to the extent (i) such use or
disclosure is reasonably necessary and permitted in the exercise of the rights
granted hereunder in filing or prosecuting patent applications, prosecuting or
defending litigation, (ii) such disclosure is reasonably required to be made to
any institutional review board of any entity conducting clinical trials with
Agreement Compound(s) and/or Agreement Product(s), or to any governmental or
other regulatory agency, in order to gain approval to conduct clinical trials or
to market Agreement Compound(s) and/or Agreement Products, (iii) such disclosure
is required by law, regulation, rule, act or order of any governmental
authority, court, or agency, or is made in connection with submitting required
information to tax or other governmental authorities, or (iv) such disclosure or
use is reasonably required in conducting clinical trials, or making a permitted
sublicense or otherwise exercising license rights expressly granted to it by the
other Party pursuant to the terms of this Agreement; in each case, provided that
if a Party is required to make any such disclosure of another Party's
Confidential Information, other than pursuant to a confidentiality agreement, it
will give reasonable advance notice to the other Party of such disclosure and,
save to the extent inappropriate in the case of patent applications, will use
its reasonable diligent efforts to secure confidential treatment of such
Confidential Information in consultation with the other Party prior to its
disclosure (whether through protective orders or otherwise) and disclose only
the minimum necessary to comply with such requirements.
7.3 Return of Confidential Information. Following termination of this
---------------------------------------
Agreement, at any time upon request of the disclosing Party, the receiving Party
will return all documents, and copies thereof, containing the disclosing Party's
Confidential Information that are still in the receiving Party's possession or
control; however, the receiving Party may retain one copy of such documents in a
secure
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location solely for the purpose of determining its obligations hereunder, to
comply with any applicable regulatory requirements, or to defend against any
product liability claims.
7.4 Nondisclosure of Terms. Each of the Parties hereto agrees not to
---------------------------
disclose to any Third Party the existence or the terms of this Agreement without
the prior written consent of each other Party hereto, except to such Party's
attorneys, advisors, investors and others on a need to know basis under
circumstances that reasonably ensure the confidentiality thereof, or to the
extent required by law. Notwithstanding the foregoing, the Parties shall agree
upon a press release to announce the execution of this Agreement, together with
a corresponding Q&A outline for use in responding to inquiries about the
Agreement; thereafter, Pharmacopeia and Schering may each disclose to Third
Parties the information contained in such press release and Q&A without the need
for further approval by the other. In addition, Pharmacopeia may make public
statements regarding progress with respect to the development and
commercialization of Agreement Compounds and/or Agreement Products, including
announcement of the achievement of milestones, following consultation with
Schering and with the written consent of Schering. Nothing in this Section 7.4
shall prohibit a Party from making such disclosures to the extent reasonably
required under applicable federal or state securities laws or any rule or
regulation of any nationally recognized securities exchange. In such event,
however, the disclosing Party shall use good faith efforts to notify and consult
with the other Party prior to such disclosure and, where applicable, shall
diligently seek confidential treatment to the extent available.
7.5 Publication. Any manuscript by Schering or Pharmacopeia or their
----------------
Affiliates describing Agreement Products shall be subject to the prior review of
the other Party at least ninety (90) days prior to submission. Further, to
avoid loss of patent rights as a result of premature public disclosure of
patentable information, the receiving Party shall notify the disclosing Party in
writing within thirty (30) days after receipt of a disclosure whether receiving
Party desires to file a patent application on any invention disclosed in such
scientific results. In the event that the receiving Party desires to file such
a patent application, the disclosing Party shall withhold publication or
disclosure of such scientific results until the earlier of (i) a patent
application is filed thereon, or (ii) the Parties determine after consultation
that no patentable invention exists, or (iii) one hundred and eighty (180) days
after receipt by the disclosing Party of the receiving Party's written notice of
the receiving Party's desire to file such patent application, or such other
period as is reasonable for seeking patent protection. Further, if such
scientific results contain the information of the receiving Party that is
subject to use and nondisclosure restrictions under this Article 7, the
disclosing Party agrees to remove such information from the proposed publication
or disclosure.
7.6 Pharmacopeia Employees. All Pharmacopeia employees assigned to work
---------------------------
exclusively on Collaboration research projects pursuant to Section 2.5, shall *.
Any Pharmacopeia employees assigned to
work exclusively on Collaboration research projects shall also be subject
to non-compete obligations, as set forth below, with respect to any Target with
respect to which Collaboration research efforts directed to such Target are
performed at Pharmacopeia (including, without limitation, the design and
preparation of Optimization Libraries for such Target and/or the synthesis of
Derivative Compounds based on Active Compounds contained in such Libraries).
None of the individual Pharmacopeia employees participating in Target specific
Collaboration research, and who at any time during or after the term of the
Collaboration have actual knowledge of the identity of such Target, shall
perform or otherwise contribute to any research or development work relating to
such Target for or on behalf of Pharmacopeia and/or its Third Party
collaborators for a period of * after the date on which the Collaboration ceases
all such Target specific research activities at Pharmacopeia with respect to
such Target. Pharmacopeia shall be liable for any breach of *
and/or these non-compete obligations by its employees. In the event that,
in the course of Pharmacopeia's work on a Collaboration research program or in
connection with a patent application relating thereto, Schering has disclosed
the identity of a Target (other than in coded form) which is the
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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subject of such a research program to Pharmacopeia's Chief Science and
Technology Officer responsible for performance of the Collaboration (or his
successor), all Pharmacopeia employees working on such research program will be
deemed to have actual knowledge of the identity of such Target. The further
disclosure of the identity of a Target within Pharmacopeia shall be limited to
only those Pharmacopeia employees necessary to ensure that Pharmacopeia and its
employees does not breach the provisions of this Section 7.6. In addition,
during and after the term of the Collaboration, Pharmacopeia shall use
reasonably diligent efforts to ensure that such individuals do not disclose or
provide access to any Collaboration Target-Specific Technology, Schering
Technology, or the results of any screening or other Target specific research
performed at Pharmacopeia in the Collaboration, to any Pharmacopeia employees
not working on the Collaboration (except to the extent reasonably necessary for
Pharmacopeia to ensure its compliance with its exclusivity obligations
hereunder) or to any Third Parties.
ARTICLE VIII
REPRESENTATION, WARRANTIES AND COVENANTS
8.1 Schering. Schering Corporation warrants, represents and covenants on
-------------
behalf of itself and its Affiliates that: (i) it has the legal right and power
to extend the rights granted in this Agreement; (ii) it has the legal power,
authority and right to enter into this Agreement, and to perform all its
obligations hereunder, and (iii) it has not previously granted, and during the
term of this Agreement will not knowingly make any commitment or grant any
rights which in any material way conflict with the rights and licenses granted
herein.
8.2 Pharmacopeia. Pharmacopeia represents, warrants and covenants on
-----------------
behalf of itself and its Affiliates that: (i) it has the legal right and power
to extend the rights granted in this Agreement; (ii) it has the legal power,
authority and right to enter into this Agreement, and to perform all its
obligations hereunder; (iii) it has not previously granted, and during the term
of this Agreement will not knowingly make any commitment or grant any rights
which in any material way conflict with the rights and licenses granted herein;
(iv) to the best of its knowledge as of the Effective Date, there are no
existing or threatened actions, suits or claims pending against it with respect
to the Pharmacopeia Technology or the Pharmacopeia Enabling Technology; (v) to
the best of its knowledge as of the Effective Date, it is not aware of any
Existing Pharmacopeia Know-How which is not available for use for all purposes
contemplated by this Agreement; (vi) as of the Effective Date, the Columbia
License is in full force and effect, and to the best of its knowledge there does
not exist any event of default with respect to Pharmacopeia under the Columbia
License which would constitute a breach of the Columbia License; (vii) during
the term of this Agreement, Pharmacopeia will use its best efforts not to
materially breach the Columbia License and will not modify or amend the Columbia
License in any way which would materially adversely effect the rights of
Schering under this Agreement; (viii) to the best of its knowledge and as of the
Effective Date, it owns or controls all of the Pharmacopeia Technology and
Pharmacopeia Enabling Technology, and has the rights to grant the licenses or
sublicenses granted to Schering hereunder with respect thereto; and (ix) to the
best of Pharmacopeia's knowledge as of the Effective Date, the creation or
synthesis of encoded combinatorial libraries by Pharmacopeia does not infringe
any valid Third Party patent rights.
8.3 Compliance with Agreement and Laws. Each Party shall comply in all
---------------------------------------
material respects with the terms of this Agreement and with all laws, rules and
regulations applicable to the discovery, development, manufacture, distribution,
import and export and sale of pharmaceutical products pursuant to this
Agreement.
8.4 Disclaimer. Schering and Pharmacopeia expressly disclaim any
---------------
representation, warranty or guaranty that the Collaboration will be successful.
EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, PHARMACOPEIA AND
SCHERING AND
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THEIR RESPECTIVE AFFILIATES MAKE NO REPRESENTATIONS AND EXTEND NO WARRANTIES OR
CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE
PHARMACOPEIA TECHNOLOGY, THE PHARMACOPEIA ENABLING TECHNOLOGY, THE SCHERING
TECHNOLOGY, THE COLLABORATION TECHNOLOGY, DISCOVERY LIBRARIES, OPTIMIZATION
LIBRARIES, LIBRARY COMPOUNDS, ACTIVE COMPOUNDS, DERIVATIVE COMPOUNDS, AGREEMENT
COMPOUNDS OR AGREEMENT PRODUCTS, OR INFORMATION DISCLOSED PURSUANT TO ARTICLE
VII, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, VALIDITY OF THE PHARMACOPEIA TECHNOLOGY, PHARMACOPEIA
ENABLING TECHNOLOGY, COLLABORATION TECHNOLOGY OR SCHERING TECHNOLOGY (IN EACH
CASE, WHETHER PATENTED OR UNPATENTED), OR NONINFRINGEMENT OF THE INTELLECTUAL
PROPERTY RIGHTS OF THIRD PARTIES.
ARTICLE IX
INDEMNIFICATION
9.1 Indemnification by Schering. Schering shall indemnify, defend and
--------------------------------
hold harmless Pharmacopeia and its Affiliates, and each of its and their
respective employees, officers, directors and agents (the "Pharmacopeia
Indemnitees") from and against any and all liability, loss, claims, damage,
cost, and expense (including reasonable attorneys' and professionals' fees and
other expenses of litigation) (collectively, a "Liability") arising out of or in
connection with Third Party claims relating to (i) the discovery, development,
manufacture, use, testing, marketing, sale or other disposition of Products by
on behalf of Schering or its Affiliates or Sublicensees, (ii) performance of the
Collaboration by Schering, (iii) any injury, illness or disease suffered by any
Schering employees in connection with the performance of the Collaboration, (iv)
the use of any and all Targets with respect to which research activities are
conducted in the Collaboration, including without limitation claims in
connection with materials relating to such Target, or (v) any breach by Schering
of its representations and warranties made under this Agreement, except, in each
case, to the extent such Liabilities result from the gross negligence or willful
misconduct of Pharmacopeia, its Affiliates, or any of their respective
employees, officers, directors or agents.
9.2 Indemnification by Pharmacopeia. Pharmacopeia shall indemnify, defend
------------------------------------
and hold harmless Schering and its Affiliates, and each of its and their
respective employees, officers, directors and agents (the "Schering
Indemnitees") from and against any Liability (as defined above) arising out of
or in connection with Third Party claims relating to (i) Pharmacopeia's encoding
or decoding of Libraries, pursuant to this Agreement, (ii) the performance of
the Collaboration by Pharmacopeia except to the extent directly related to the
use of Targets, (iii) any injury, illness or disease suffered by any
Pharmacopeia employees in connection with the performance of the Collaboration,
(iv) any product based upon a Library Compound developed, manufactured, used,
sold or otherwise distributed by or on behalf of Pharmacopeia, its Affiliates or
Licensees, as permitted under this Agreement (including, without limitation,
product liability and patent infringement claims), (v) any breach of
Pharmacopeia's contractual obligations to Third Parties (including, without
limitation, those relating to Reserved Targets), or (vi) any breach by
Pharmacopeia of its representations and warranties made under this Agreement,
except, in each case, to the extent such Liabilities result from the gross
negligence or willful misconduct of Schering, its Affiliates, or any of their
respective employees, officers, directors or agents.
9.3 No Consequential Damages. Except with respect to Third Party claims
-----------------------------
as provided for under Section 9.1 and 9.2, in no event shall any Party to this
Agreement have any claims against or liability to the other Party for any
special, consequential or incidental damages arising under this Agreement under
any theory of liability.
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9.4 Procedure. In the event that any Indemnitee intends to claim
---------------
indemnification under this Article IX, it shall promptly notify the other Party
in writing of any such alleged Liability. The indemnifying Party shall have the
right to control the defense thereof with counsel of its choice; provided,
--------
however, that any Indemnitee shall have the right to retain its own counsel,
- -------
with the fees and expenses to be paid by the indemnifying Party, if
representation of such Indemnitee by the counsel retained by the indemnifying
Party would be inappropriate due to actual or potential differing interests
between such Indemnitee and any other Party represented by such counsel in such
proceeding. The affected Indemnitees shall cooperate reasonably with the
indemnifying Party and its legal representatives in the investigation and
defense of any action, claim or liability covered by this Article IX. Neither
Party may settle a claim or action related to a Liability for which it or the
other Party seeks indemnification hereunder without the consent of the other
Party, if such settlement would impose any monetary obligation on the other
Party or require the other Party to submit to an injunction or otherwise limit
the other Party's rights under this Agreement. Any payment made by a Party to
settle any such claim or action shall be at its own cost and expense.
9.5 Insurance. Each Party shall obtain and maintain throughout the term
---------------
of this Agreement statutory Workers' Compensation and Employer's Liability
insurance covering all employees engaged in the performance of work under this
Agreement. Each Party shall provide the other Party with evidence of such
insurance and/or self-insurance program, upon request.
ARTICLE X
TERM AND TERMINATION
10.1 Term and Expiration. This Agreement shall be effective as of the
-------------------------
Effective Date and unless terminated earlier as provided in this Article X or by
mutual written agreement of the Parties, the term of this Agreement shall
continue in full force and effect, on a country-by-country and Product-by-
Product basis, until Schering and its Affiliates and Sublicensees have no
further obligation to pay royalties under Article V hereof in a country, at
which time the Agreement shall expire in its entirety in such country and the
Parties shall have no further payment obligations or other financial obligations
to each other with respect to the continuing use in such country of Pharmacopeia
Technology, Schering Technology and/or Collaboration Technology, as the case may
be, in the manner licensed herein. As royalty payment obligations for a Product
expire in a country, even if the Agreement thereafter remains in effect in such
country, Schering, its Affiliates and Sublicensees, shall no longer have any
remaining payment obligations hereunder with respect to such a Product in that
country.
10.2 Termination for Cause. This Agreement may be terminated by written
---------------------------
notice by either Party at any time during the term of this Agreement if the
other Party (the "Breaching Party") is in material breach or default of any of
its material obligations hereunder (including, without limitation, any payment
obligations), as follows: (i) the terminating Party shall send written notice
of the breach or default to the Breaching Party; and (ii) if such default or
breach thereafter continues for sixty (60) days after written notice thereof was
provided to the Breaching Party, then the termination shall become effective at
the end of such sixty (60) day period, unless the Breaching Party (or any other
party on its behalf) has cured any such breach or default prior to the
expiration of the sixty (60) day period or has commenced activities reasonably
expected to cure such breach within such sixty (60) day period and thereafter
uses diligent efforts to complete the cure as soon as practicable.
10.3 Termination Upon Bankruptcy or Insolvency. This Agreement may be
-----------------------------------------------
terminated by Pharmacopeia giving written notice of termination to Schering upon
the filing of bankruptcy or insolvency of Schering or the appointment of a
receiver for the assets of Schering, or the making by Schering of an assignment
for the benefit of creditors, or the institution of any proceedings against
Schering under any bankruptcy law. Termination shall be effective upon the date
specified in such notice. The rights of Schering under this Agreement shall not
terminate in the event of a bankruptcy of
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Pharmacopeia, unless Schering elects to terminate this Agreement in accordance
with the following provisions of this Section 10.3. In the event that (i)
Pharmacopeia shall make an assignment for the benefit of creditors, file a
petition in bankruptcy, petition or apply to any tribunal for the appointment of
custodian, receiver or any trustee for it or a substantial part of its assets,
or shall commence any case or proceeding under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereafter in effect; or (ii) if there shall
have been filed any such bona fide petition or application, or any such
---------
proceeding shall have been commenced against it, in which an order for relief is
entered or which remains undismissed for a period of sixty (60) days or more; or
(iii) if Pharmacopeia by any act or omission of act shall indicate its consent
to, approval of or acquiescence in any such bona fide petition, application, or
proceeding or order for relief or the appointment of a custodian, receiver or
trustee for it or any substantial part of its property, or shall suffer any such
custodianship, receivership or trusteeship to continue undischarged for a period
of sixty (60) days or more; (each such event a "Pharmacopeia Bankruptcy Event"),
then Schering shall have the following rights. Schering shall have the right,
in its sole discretion, to elect to terminate this Agreement by giving written
notice of such termination to Pharmacopeia. In the event that Schering does not
elect to terminate this Agreement, then notwithstanding any rejection of this
Agreement by Pharmacopeia (which, for purposes of this Section 10.3, includes
any debtor in possession, trustee or other entity that may succeed Pharmacopeia)
pursuant to 11 U.S.C. (S)365, Schering shall retain all of its rights, benefits,
licenses, protections and privileges under this Agreement and shall be entitled
to all of the rights, benefits and protections of a licensee under 11 U.S.C.
365(n). *
provided that Schering's obligations to make payments to Pharmacopeia under
this Agreement shall automatically be reduced by the amount of all out-of-pocket
costs and expenses incurred by Schering in exercising such rights. In the event
of any Pharmacopeia Bankruptcy Event, Pharmacopeia shall, upon written request
of Schering, *
solely to the extent necessary for Schering to *
hereunder prior to the applicable Pharmacopeia Bankruptcy Event, and for
purposes of 11 U.S.C. (S)365; provided, however, that *
-------- -------
shall only be exercisable if Pharmacopeia fails to perform its obligations under
this Agreement substantially as contemplated herein, and further provided that
*shall be limited to * of this sentence. The Parties acknowledge and agree that
all information, data and other intellectual property referred to in this
Section 10.3 (including, without limitation, Pharmacopeia Technology,
Pharmacopeia Enabling Technology and Libraries) and all Agreement Compounds,
Agreement Products, Collaboration Technology and any other intellectual property
that is licensed, or is the subject of any other right, benefit, protection or
privilege that is granted, transferred or otherwise afforded, to Schering
hereunder is "intellectual property" within the meaning of 11 U.S.C. (S)365.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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10.4 Termination for Pharmacopeia Change in Control. In the event of any
----------------------------------------------------
Pharmacopeia Change in Control during the term of this Agreement, Schering shall
have the right to terminate the Agreement upon ninety (90) days written notice
after such Pharmacopeia Change in Control. In the event that such Pharmacopeia
Change in Control occurs during the term of the Collaboration, Schering may, in
its discretion, elect to terminate the Collaboration and not the Agreement as
set forth in Section 2.2.
10.5 Concurrent Termination with the International Agreement. In the
-------------------------------------------------------------
event of any termination of the International Agreement by either Pharmacopeia
or Schering-Plough Ltd. under the provisions of Sections 10.2, 10.3 or 10.4
thereof, as applicable, this Agreement shall automatically terminate
concurrently under the corresponding Section 10.2, 10.3 or 10.4 of this
Agreement.
10.6 Effect of Termination.
---------------------------
10.6.1 Accrued Obligations. Termination of this Agreement for any
---------------------------
reason shall not relieve the Parties from any liability which at the time of
such termination has already accrued to the other Party, or which is
attributable to a period prior to such termination, nor preclude either Party
from pursuing all rights and remedies it may have hereunder or at law or in
equity with respect to any breach of this Agreement.
10.6.2 Return of Materials. Upon any termination of this Agreement,
---------------------------
Schering and Pharmacopeia shall promptly return to the other Party all
Confidential Information (including without limitation all Existing Schering
Know-How or Existing Pharmacopeia Know-How, as the case may be) as set forth in
Section 7.3.
10.6.3 Effect on Agreement Products. In the event that * or more
------------------------------------
Agreement Compounds and/or Agreement Products are being developed and/or
commercially exploited by Schering, its Affiliates or Sublicensees under this
Agreement and a breach entitling Pharmacopeia to terminate this Agreement occurs
which relates solely to a single Agreement Compound or Agreement Product, then
Pharmacopeia shall have the option to terminate this Agreement only with respect
to the applicable Agreement Compound or Agreement Product, and in which case all
of the terms of this Agreement shall remain in full force and effect with regard
to the other Agreement Compounds and/or Agreement Products being developed and
commercialized. In the event this Agreement is terminated with respect to a
given Agreement Product, Schering shall have the right to continue to sell its
remaining inventory of such Agreement Product for a period of up to * after
the date of termination, provided that Schering continues to pay royalties to
Pharmacopeia with respect to such sales.
__________________
* CONFIDENTIAL TREATMENT REQUESTED
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10.6.4 Licenses.
----------------
(a) Termination by Pharmacopeia Pursuant to Section 10.2.
----------------------------------------------------
In the event of termination by Pharmacopeia under Section 10.2, the licenses
granted hereunder relating to any Agreement Product, Discovery Library or
Optimization Library with respect to which there has been a material breach,
shall terminate, and the licenses granted to Pharmacopeia hereunder shall remain
in effect, subject to the terms and conditions of this Agreement; provided,
--------
however, a breach shall have no effect on Schering's licenses hereunder other
- -------
than with respect to the Library or Agreement Product to which the breach
specifically relates, and the remaining licenses granted hereunder shall remain
in effect, subject to the terms and conditions of this Agreement. In the event
that Pharmacopeia terminates the Agreement for a breach of Schering's payment
obligations regarding any SP Product as to which Pharmacopeia is entitled to
receive royalty payments hereunder, then the licenses granted to Schering
hereunder relating to Agreement Compounds active against the same Target as such
SP product shall terminate concurrently.
(b) Termination by Schering Pursuant to Sections 10.2 or
----------------------------------------------------
10.3. In the event of any termination by Schering pursuant to Section 10.2 or
- ----
10.3 above, any licenses granted by Schering hereunder shall terminate
concurrently, and any licenses granted by Pharmacopeia shall remain in effect,
subject to the terms and conditions of this Agreement; provided, however, a
-------- -------
breach shall have no effect on the licenses granted to Pharmacopeia hereunder
other than with respect to the Agreement Product to which the breach
specifically relates, and the remaining licenses granted hereunder shall remain
in effect, subject to the terms and conditions of this Agreement.
(c) Termination by Pharmacopeia Pursuant to Section 10.3.
----------------------------------------------------
In the event of any termination by Pharmacopeia pursuant to Section 10.3 above,
any licenses granted by Pharmacopeia hereunder shall terminate concurrently, and
any licenses granted by Schering shall remain in effect, subject to the terms
and conditions of this Agreement.
(d) Termination by Schering Pursuant to Section 10.4. In
------------------------------------------------
the event of any termination by Schering pursuant to Section 10.4 above, any
licenses granted by Pharmacopeia to Schering, and by Schering to Pharmacopeia,
shall remain in effect, except for the licenses under Section 4.7, which shall
terminate concurrently.
10.6.5 Surviving Provisions. Articles VI, VII, VIII, IX and XI of
----------------------------
this Agreement, as well as Sections 2.9.2, 2.9.3, 2.12, 2.13, the last sentence
of 3.5, 4.1.2, 4.4, 4.5, 4.8, 4.9, 4.10, 5.3, 5.4, 5.5, 5.6, 5.7, 5.8, 5.9 and
10.6 shall survive the expiration or termination of this Agreement for any
reason.
ARTICLE XI
MISCELLANEOUS
11.1 Assignment. This Agreement shall not be assigned, or assignable, by
----------------
either Party hereto to any Third Party without the prior written consent of the
other Party, and any such attempted assignment shall be void and without force
or effect; provided, however, that notwithstanding the foregoing, either Party
-------- -------
may, without such consent, assign this Agreement and its rights and obligations
hereunder to an Affiliate or in connection with the transfer or sale of all or
substantially all of its business or assets related to the subject matter to
which this Agreement pertains, or in the event of its merger, reorganization,
acquisition, sale, consolidation or change in control or similar transaction.
This Agreement shall be binding upon, and inure to the benefit of, each Party,
its Affiliates, and its permitted successors and assigns. Each Party shall be
responsible for the compliance by its Affiliates with the terms and conditions
of this Agreement.
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11.2 Governing Law. This Agreement and any dispute arising from the
-------------------
performance or breach hereof, shall be governed, interpreted and construed in
accordance with the laws of the State of New Jersey, without giving effect to
conflict of law principles. The Parties expressly exclude application of the
United Nations Convention for the International Sale of Goods.
11.3 Dispute Resolution. Except as set forth in Section 5.4.5(b), any
------------------------
dispute under this Agreement which is not settled by mutual consent shall be
finally settled by binding arbitration, conducted in accordance with the
Commercial Arbitration Rules of the American Arbitration Association by three
arbitrators appointed in accordance with said rules. The arbitration shall be
held in New York, New York and at least one of the arbitrators shall be an
independent expert in pharmaceutical product development (including clinical
development and regulatory affairs). Any written evidence originally in a
language other than English shall be submitted in English translation
accompanied by the original or a true copy thereof. The costs of the
arbitration, including administrative and arbitrators' fees, shall be shared
equally by the Parties. Each Party shall bear its own costs and attorneys' and
witness' fees. A disputed performance or suspended performances pending the
resolution of the arbitration must be completed within thirty (30) days
following the final decision of the arbitrators or such other reasonable period
as the arbitrators determine in a written opinion. Any arbitration subject to
this Section 11.3 shall be completed within one (1) year from the filing of
notice of a request for such arbitration.
11.4 No Implied Licenses. Only the licenses granted pursuant to the
-------------------------
express terms of this Agreement shall be of any legal force or effect. No
license rights shall be created by implication, estoppel or otherwise.
11.5 Representation by Legal Counsel. Each Party hereto represents that
-------------------------------------
it has been represented by legal counsel in connection with this Agreement and
acknowledges that it has participated in the drafting hereof. In interpreting
and applying the terms and provisions of this Agreement, the Parties agree that
no presumption shall exist or be implied against the Party which drafted such
terms and provisions.
11.6 Waiver. Any delay or failure in enforcing a Party's rights under
------------
this Agreement or any waiver as to a particular default or other matter shall
not constitute a waiver of such Party's rights to the future enforcement of its
rights under this Agreement, nor operate to bar the exercise or enforcement
thereof at any time or times thereafter, excepting only as to an express written
and signed waiver as to a particular matter for a stated duration.
11.7 Independent Contractors. The relationship of the Parties hereto is
-----------------------------
that of independent contractors. Nothing herein contained shall be deemed to
create an employment, agency, joint venture or partnership relationship between
the Parties hereto or any of their agents or employees. Neither Party shall
have any power to enter into any contracts or commitments or to incur any
liabilities in the name of, or on behalf of, the other Party, or to bind the
other Party in any respect whatsoever.
11.8 Solicitation of Employees. Schering and Pharmacopeia both agree
-------------------------------
that, during the Collaboration Term and for one (1) year thereafter, without the
express prior written consent of the other Party, they will not knowingly induce
or attempt to induce, directly or indirectly, any scientific or technical
personnel then employed by the other Party to accept employment or affiliation
with the inducing Party or its Affiliates.
11.9 Compliance with Laws. In exercising their rights under this license,
--------------------------
the Parties shall fully comply with the requirements of any and all applicable
laws, regulations, rules and orders of any governmental body having jurisdiction
over the exercise of rights under this license.
-42-
<PAGE>
11.10 Export Control. This Agreement and the obligations of both Parties
---------------------
hereunder are made subject to, and limited by, all applicable restrictions
concerning the export of products or technical information from the United
States of America which may be imposed upon or related to Pharmacopeia or
Schering from time to time by the government of the United States of America.
Furthermore, Schering agrees that it will not export, directly or indirectly,
any technical information acquired from Pharmacopeia under this Agreement or any
products using such technical information to any country for which the United
States government or any agency thereof at the time of export requires an export
license or other governmental approval, without first obtaining the written
consent to do so from the Department of Commerce or other agency of the United
States government when required by an applicable statute or regulation.
11.11 Patent Marking. Schering agrees to mark and have its Affiliates and
---------------------
Sublicensees mark all Agreement Products sold pursuant to this Agreement in
accordance with the applicable statute or regulations relating to patent marking
in the country or countries of manufacture and sale thereof.
11.12 Notices. Any notice required or permitted to be given or sent under
--------------
this Agreement shall be in writing and shall be hand delivered or sent by
express delivery service or certified or registered mail, postage prepaid, or by
facsimile transmission (with written confirmation copy by registered first-class
mail) to the Parties at the addresses and facsimile numbers indicated below.
If to Pharmacopeia, to:
Pharmacopeia, Inc.
3000 East Park Boulevard
Cranbury, New Jersey 08512
Attn: Chief Executive Officer
Fax No.: (609) 452-3672
If to Schering, to:
Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attention: Vice President, Business Development
Facsimile No.: (908) 298-5379
-43-
<PAGE>
with copies to:
Schering Corporation
2000 Galloping Hill Road
Kenilworth, New Jersey 07033
Attention: Law Department, Staff Vice President Licensing
Facsimile No.: (908) 298-2739
Schering-Plough Ltd.
Toepferstrasse 5
CH 6004 Lucerne, Switzerland
Attention: President
Facsimile No.: (011) 41 41 418 1630
Any such notice shall be deemed to have been given when received. Either
Party may change its address or its facsimile number by giving the other Party
written notice, delivered in accordance with this Section.
11.13 Force Majeure. Failure of any Party to perform its obligations
--------------------
under this Agreement (except the obligation to make payments when properly due)
shall not subject such Party to any liability or place them in breach of any
term or condition of this Agreement to the other Party to the extent (and only
to the extent) that such failure is due to fire, explosion, flood, drought, war,
riot, sabotage, embargo, strikes or other labor trouble, failure of suppliers, a
national health emergency, compliance with any order or regulation of any
government entity acting with color of right, or any other cause beyond the
reasonable control of such non-performing Party and not caused by the
negligence, intentional conduct or misconduct of the non-performing Party (such
event or cause referred to as "force majeure"). The Party affected shall
promptly notify the other Party of the condition constituting force majeure as
defined herein and shall exert reasonable efforts to eliminate, cure or overcome
any such event of force majeure and to resume performance of its obligations
with all possible speed. If a condition constituting force majeure as defined
herein exists for more than ninety (90) consecutive days, the Parties shall meet
to negotiate a mutually satisfactory resolution to the problem, if practicable.
The foregoing notwithstanding, nothing herein shall require any Party to settle
on terms unsatisfactory to such Party any strike, lock-out or other labor
difficulty, any investigation or proceeding by any public authority or any
litigation by any Third Party.
11.14 Severability. If any provision of this Agreement becomes or is
-------------------
declared by a court of competent jurisdiction to be illegal, invalid or
unenforceable or void, it is mutually agreed that this Agreement shall remain in
full force and effect without such provision, and the Parties will, in good
faith, renegotiate the terms and conditions of this Agreement so as to lawfully
include the substance of such provision (to the extent possible) in order to as
fully as possible realize the intent of the Parties and their commercial
bargain.
11.15 Counterparts. This Agreement shall become binding when any one or
-------------------
more counterparts hereof, individually or taken together, shall bear the
signatures of each of the Parties hereto. This Agreement may be executed in any
number of counterparts, each of which shall be an original as against either
Party whose signature appears thereon, but all of which taken together shall
constitute but one and the same instrument.
-44-
<PAGE>
11.16 Captions. The captions of this Agreement are solely for the
---------------
convenience of reference and shall not affect its meaning or interpretation.
11.17 Complete Agreement. This Agreement with its Exhibits, together with
-------------------------
the International Agreement entered by the Parties of even date herewith,
constitutes the entire agreement, both written and oral, between the Parties
with respect to the subject matter hereof, and all prior agreements respecting
the subject matter hereof, either written or oral, expressed or implied, shall
be abrogated, canceled, and are null and void and of no effect; provided,
--------
however that nothing herein shall effect the rights and obligations of the
- -------
Parties under the certain Collaboration Agreement and the certain Random Library
Agreement between Pharmacopeia, Schering Corporation and Schering-Plough Ltd.
effective as of December 22, 1994, as amended. No amendment or change hereof or
addition hereto shall be effective or binding on either of the Parties hereto
unless reduced to writing and executed by the respective duly authorized
representatives of Pharmacopeia and Schering.
11.18 Recording. Each Party shall have the right, at any time, to record,
----------------
register, or otherwise notify this Agreement in appropriate governmental or
regulatory offices anywhere in the world, and each Party shall provide
reasonable assistance to the other in effecting such recording, registering or
notifying. The Parties acknowledge that this Agreement may be notified by
either Party to the European Community for compliance with applicable laws.
11.19 Further Actions. Each Party agrees to execute, acknowledge and
----------------------
deliver such further instruments, and to do all other acts, as may be necessary
or appropriate in order to carry out the purposes and intent of this Agreement
including, without limitation, any filings with any antitrust agency which may
be required.
IN WITNESS WHEREOF, this Agreement has been executed by the duly authorized
representatives of the Parties as of the date set forth below.
------------
LEGAL REVIEW
/s/
------------
PHARMACOPEIA, INC. SCHERING-CORPORATION
By:/s/Richard Walsh By: /s/ David Poorvin
---------------------------- -------------------------------
Title: Sr. Vice President Title: Vice President
---------------------------- ----------------------------
Date: October 29, 1998 Date: 29 October 1998
-------------------------- -----------------------------
-45-
<PAGE>
EXHIBIT A
CURRENCY CONVERSION
*
__________________
* CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
Schedule 1.29
-------------
Elements of Fully Absorbed Manufacturing Costs
----------------------------------------------
The following expenses are included in manufacturing costs:
1. Direct Materials
----------------
Materials used in the manufacturing process that are traced directly to the
completed product, such as:
. Inert raw materials or excipients
. Active substances/ingredients
. Packaging components such as bottles, caps, labels, etc.
2. Direct Labor
------------
The cost of employees engaged in production activities that are directly
identifiable with product costs. Excludes supervision, which is included in
indirect labor, and production support activities such as inspection, plant and
equipment maintenance labor, and material handling personnel. Direct Labor cost
includes:
. Base pay, overtime, vacation and holidays, illness, personal time with
pay, and shift differential.
. Cost of employee fringe benefits such as health and life insurance,
payroll taxes, welfare, pension, profit sharing and bonuses.
3. Indirect Manufacturing Costs
----------------------------
Costs which are ultimately allocated to product based on an appropriate
method such as standard direct labor hours, tank hours, grams, vials, etc., of
the operating departments. These costs include:
i
<PAGE>
. Indirect Production Labor - salaries of employees engaged in
----------------
production activities who are not classified as direct labor,
including supervision, clerical, etc.
. Costs of Direct Labor - employees not utilized for the manufacturing
---------------------
of product such as training, downtime and general duties.
. Indirect Materials - supplies and chemicals which are used in the
------------------
manufacturing process and are not assigned to specific products but
are included in manufacturing overhead costs. Includes supplies for
which direct assignment to products is not practical.
. Utilities - expenses incurred for fuel, electricity and water in
---------
providing power for production and other plant equipment.
. Maintenance and Repairs - amount of expense incurred in-house or
-----------------------
purchased to provide services for plant maintenance and repairs of
facilities and equipment.
. Other Services - purchased outside services and rentals such as the
--------------
cost of security, ground maintenance, etc.
. Depreciation - of plant and equipment utilizing the straight-line
------------
method of calculation.
. Insurance - cost of inventory insurance, comprehensive insurance and
---------
other insurance necessary for the safeguard of manufacturing plant and
equipment.
. Taxes - expense incurred for taxes on real and personal property
-----
(manufacturing site, buildings and the fixed assets of equipment,
furniture and fixtures, etc.). If manufacturing site includes other
operations (marketing, R&D, etc.), taxes are allocated to
manufacturing on the basis of total real and personal property.
. Cost of manufacturing, service departments - such as:
------------------------------------------
(where applicable)
ii
<PAGE>
. Packaging Engineering
. Manufacturing Maintenance
. Industrial Engineering
. Receiving and Warehousing
. Purchasing and Accounting
. Production Scheduling
. Inventory Management
. Plant Materials Management
. Central Weigh
. Manufacturing Administration
. Regulatory Affairs direct support to manufacturing
(not to exceed $80,000 per year for a three(3) year period)
. Allocated costs of services provided to manufacturing including:
-----------------------------------------------------
(where applicable)
. Cafeteria
. Personnel Operations
. Health and Safety Services
. Division Engineering and Operations Services
. Plant Services (housekeeping)
. Manufacturing Information Systems
. Plant Power
. Office of V.P. Manufacturing
Various bases are used for allocating these costs to manufacturing
operating departments including headcount, square feet, metered utilities
use, estimated services rendered, EDP computer hours, etc.
4. Quality Assurance Costs
-----------------------
Direct labor and indirect costs for Quality Assurance departments
testing and approving materials used in manufacturing and completed
manufacturing batches and finished products. This includes all manufacturing in-
process testing and testing of finished
iii
<PAGE>
materials. Excluded from product costs are QA costs related to research and
development, stability testing, etc.
The following expenses are not included in manufacturing costs:
---
a) Inventory Carrying Costs
b) Regulatory Affairs Costs (except as set forth above)
c) Pilot plant costs, research batches and other similar costs prior to
turnover to manufacturing. These are handled as development costs and
expensed to R&D. This excludes commercial goods produced by a
research facility.
d) Costs incurred by Manufacturing for special projects, or for Schering-
Plough Research Institute requests, to establish and certify new
production processes, batch sizes and product line improvements, and
new vendor certification of equipment and primary materials
components. These costs are expensed to R&D.
e) Manufacturing start-up costs and initial one-time extraordinary
manufacturing costs incurred prior to plant operation and achievement
of a normal production activity level. Includes costs of training,
testing, qualification/ validation of new equipment and facilities and
initial trial batches. These costs are deferred and then amortized to
Other Production Costs over five years.
f) Significant idle capacity is eliminated from factory overhead and
product cost. Idle or excess capacity costs are culled out of the
Manufacturing Budget and expensed as a period cost to Other Production
Costs.
g) Finished goods warehousing, shipping and other distribution costs.
These are included in distribution costs which are part of marketing
expenses.
h) Product liability and/or business interruption insurance expenses.
iv
<PAGE>
Exhibit 10.45
GUARANTEE
This GUARANTEE is dated as of October 29, 1998 by Schering-Plough
Corporation, a New Jersey corporation ("GUARANTOR") in favor of Pharmacopeia,
Inc., a Delaware corporation ("BENEFICIARY").
WHEREAS, Schering Corporation, a New Jersey corporation ("SCHERING") and
Beneficiary have entered into a Collaboration and License Agreement (the
"SCHERING AGREEMENT") dated as of October 29, 1998;
WHEREAS, Schering-Plough Ltd., a Swiss corporation ("LTD.") and Beneficiary
have entered into a Collaboration and License Agreement (the "LTD. AGREEMENT")
dated as of October 29, 1998 (Schering and Ltd. are collectively referred to as
the "SUBSIDIARIES") (the Schering Agreement and the Ltd. Agreement are
collectively referred to as the "AGREEMENTS");
WHEREAS, Guarantor is the parent company of the Subsidiaries; and
WHEREAS, to induce Beneficiary to enter into the Agreements, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor has agreed to guarantee the Guaranteed Obligations
(as hereinafter defined) on the terms set forth herein.
NOW THEREFORE, the parties hereto agree as follows:
Section 1. Guarantee. Subject to the terms and conditions set forth
---------
below, Guarantor hereby irrevocably and unconditionally guarantees the
performance of all obligations of the Subsidiaries under the Agreements and
promises to pay in full any amounts, including any arbitration awards, which
become due by either or both of the Subsidiaries to Beneficiary under the
Agreements, except to the extent previously paid by the Subsidiaries (such
obligations being herein collectively called the "GUARANTEED OBLIGATIONS" or
"GUARANTEED PAYMENTS"). Guarantor's obligation to make Guaranteed Payments may
be satisfied by direct payment of the required amounts to Beneficiary or by
causing a Subsidiary to pay such amounts to Beneficiary.
1.1 Waiver of Certain Rights. Guarantor hereby waives, to the
------------------------
fullest extent permitted by law, notice of acceptance of this Guarantee and of
any liability to which it applies or may apply, presentment, demand for payment,
protest, notice of nonpayment, notice of dishonor, notice of redemption and all
other notices and demands.
1.2 Continuing Guarantee. The guarantee in this Section 1 is
--------------------
a continuing guarantee, and shall apply to all Guaranteed Obligations whenever
arising.
1.3 Adequate Information. Guarantor acknowledges and
--------------------
confirms that Guarantor itself has established its own adequate means of
obtaining from its Subsidiaries on a continuing basis all information desired by
Guarantor concerning the financial condition of the
<PAGE>
Subsidiaries and their performance under the Agreements and that Guarantor will
look to the Subsidiaries and not to Beneficiary in order for Guarantor to keep
adequately informed of changes in the Subsidiaries' financial condition or
performance under the Agreements.
1.4 Proceeding Directly Against Guarantor. This Guarantee is
-------------------------------------
a guarantee of payment and not of collection. Beneficiary may enforce this
Guarantee directly against Guarantor, and Guarantor waives any right or remedy
to require that any action be brought against the Subsidiaries or any other
person or entity before proceeding against Guarantor. All waivers herein
contained shall be without prejudice to the right of Beneficiary, at its option,
to proceed against the Subsidiaries, whether by separate action or by joinder.
Guarantor agrees that this Guarantee shall not be discharged except by payment
of the Guarantee Payments in full (to the extent not previously paid by the
Subsidiaries) and by complete performance of all Guaranteed Obligations under
this Guarantee.
1.5 Independent Obligations. Guarantor acknowledges that its
-----------------------
obligations hereunder are independent of the obligations of the Subsidiaries
with respect to the Agreements and that Guarantor shall be liable as principal
and sole debtor under this Guarantee to make Guarantee Payments in full pursuant
to the terms of this Guarantee.
1.6 Amendment of Agreements Not Require Guarantor Consent.
-----------------------------------------------------
Any amendment, modification or alteration of, or waiver by the Subsidiaries with
respect to the terms of the Agreements shall be effective without requiring any
consent on the part of the Guarantor.
Section 2. Representations and Warranties. Guarantor represents and
------------------------------
warrants to Beneficiary that (a) Guarantor is a corporation, duly organized,
validly organized and in good standing under the laws of the State of New
Jersey, (b) Guarantor has all requisite power and authority to enter into and
perform this Guarantee and all corporate action on the part of Guarantor
necessary for the execution and performance of this Guarantee has been taken,
(c) this Guarantee is the legal and binding obligation of Guarantor, enforceable
in accordance with its terms, except where such enforceability may be limited by
bankruptcy, insolvency, or other laws of general application relating to or
affecting the enforcement of creditors' rights generally, and (d) Guarantor's
execution, delivery and performance of this Guarantee will not violate or
conflict with any laws, regulations or agreements binding upon Guarantor or to
which Guarantor is otherwise subject or is a party.
Section 3. Miscellaneous.
-------------
3.1 Governing Law. This Guarantee shall be governed by, and
-------------
construed in accordance with, the laws of the State of New Jersey.
3.2 Successors and Assigns. This Guarantee may not be
----------------------
assigned or transferred by Guarantor without the express written consent of
Beneficiary. This Guarantee shall be binding upon Guarantor, its permitted
successors and assigns, and shall inure to the benefit of and be enforceable by
Beneficiary and its successors, transferees and assigns.
-2-
<PAGE>
3.3 Attorneys' Fees. If Beneficiary commences any action or
---------------
proceeding against Guarantor to enforce this Guarantee, the prevailing party in
such action or proceeding shall be entitled to recover from the other party the
reasonable attorneys' fees and other costs and expenses incurred by that
prevailing party in connection with such action or proceeding and in connection
with enforcing any judgment, award or order thereby obtained.
3.4 Miscellaneous. This Guarantee, together with the
-------------
Agreements, constitutes the entire agreement of Guarantor with respect to the
matters set forth herein. The rights and remedies herein provided are cumulative
and not exclusive of any remedies provided by law or any other agreement, and
this Guarantee shall be in addition to any other guarantee of or collateral
security provided by the Subsidiaries or any other person or entity for any of
the Guaranteed Obligations. The invalidity or unenforceability of any one or
more sections of this Guarantee shall not affect the validity or enforceability
of its remaining provisions. Captions are for ease of reference only and shall
not affect the meaning of the relevant provisions. The meanings of all defined
terms used in this Guarantee shall be equally applicable to the singular and
plural forms of the terms defined.
3.5 Termination. This Guarantee shall terminate
-----------
automatically upon the termination of both the Ltd. Agreement and the Schering
Agreement.
IN WITNESS WHEREOF, the undersigned does hereby execute this Guarantee as
of the date first set forth above.
"GUARANTOR"
By: /s/ Raul Cesan
--------------------------------------
Name: Raul Cesan
-----------------------------------
Title: Corporate Executive Vice President
----------------------------------
-3-
<PAGE>
Exhibit 10.46
[Letterhead of Pharmacopeia, Inc.]
December 17, 1998
Lewis Shuster
18 East Kincaid Drive
Cranbury, NJ 08512
Dear Lew:
As you know, the letter agreement between you and Pharmacopeia, Inc.
(the "Company") dated October 4, 1994, as amended on October 10, 1994 (the "1994
Letter"), provided for, among other things, severance payments by the Company in
the event that you are terminated without cause within twenty-four months of the
execution of the "1994 Letter." Now that such term has expired, the purpose of
this letter is to set forth our agreement with respect to the Company's
obligation to make severance payments to you under certain circumstances. Upon
execution of this letter by both you and the Company, the terms set forth herein
shall become effective immediately.
Termination Without In the event your employment is terminated by the Company
- -------------------
Cause: without Cause, the Company will continue to pay your base
- -----
salary as of the date of termination for twelve months
after the date of such termination, provided that the
Company's obligation to continue to pay such salary shall
cease as of the date you commence full-time employment
with another business entity.
For the purposes of this agreement, "Cause" shall mean
the occurrence of any of the following: (a) any
intentional action or intentional failure to act by you
which was performed in bad faith and to the material
detriment of the Company; (b) your refusal to follow the
reasonable directives of the CEO; or (c) conviction of a
felony crime involving moral turpitude; provided that in
the event that any of the foregoing events is capable of
being cured, the Company shall provide written notice to
you describing the nature of such event and you shall
thereafter have fifteen (15) days to cure such event. In
the event your employment is terminated by the Company
with Cause, or is terminated by you voluntarily, you
shall not be entitled
<PAGE>
to any severance compensation as set forth above.
Termination Upon a In the event that the Company is acquired by way of
- ------------------
Change in Control: merger, sale of assets, or acquisition of more than fifty
- -----------------
percent (50%) of the outstanding voting securities of the
Company by a single entity during your employment by the
Company (the "Acquisition") and if (A) prior to or
contemporaneously with the consummation of an
Acquisition, the corporation acquiring the Company's
assets or into which the Company is merged fails to
assume the obligations of the Company under this
Agreement, or (B) within twelve (12) months after an
Acquisition your employment shall be involuntarily
terminated without Cause, then in either such case you
shall be entitled to an immediate lump sum payment by the
Company of all severance benefits as described herein.
At-Will Employment: Your employment will continue to will, which means it may
- ------------------
be terminated at any time by you or the Company with or
without notice and with or without cause.
Governing Law: The agreements set forth herein shall be construed under
- -------------
and governed by the laws of the State of New Jersey.
If the foregoing accurately reflects our agreement, please so indicate
by signing where indicated below and returning the enclosed duplicate copy of
this letter to me.
Sincerely,
/s/ Joseph Mollica
Joseph Mollica
On behalf of the Board of Directors
of Pharmacopeia, Inc.
The foregoing is agreed and accepted:
/s/ Lewis Shuster
- ----------------------------------
Lewis Shuster
Date:
<PAGE>
Exhibit 10.47
================================================================================
SAN DIEGO TECH CENTER
OFFICE BUILDING LEASE
BETWEEN
SAN DIEGO TECH CENTER, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
AND
MOLECULAR SIMULATIONS INC.,
A DELAWARE CORPORATION
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
BASIC LEASE TERMS OF OFFICE BUILDING LEASE BETWEEN SAN DIEGO TECH
CENTER, LLC AND MOLECULAR SIMULATIONS INC. .................................................... i
1. Definitions.................................................................................... 1
1.1 Location of Definitions............................................................... 1
2. Premises....................................................................................... 1
2.1 Premises/Building/Building Real Property Defined...................................... 1
2.2 Building Common Area Defined.......................................................... 2
2.3 Project Defined....................................................................... 2
2.4 Project Common Area and Project Real Property Defined. .............................. 2
2.5 Rentable Area Defined................................................................. 2
2.6 Building Rentable Area Defined........................................................ 2
2.7 Project Rentable Area Defined......................................................... 2
3. Term........................................................................................... 2
3.1 First Expansion Premises.............................................................. 2
3.2 Second Expansion Premises............................................................. 3
3.3 Existing Premises..................................................................... 3
4. Rent; Additional Charges....................................................................... 3
4.1 Rent.................................................................................. 3
4.2 Additional Charges.................................................................... 3
4.3 Manner of Payment..................................................................... 3
4.4 Rent Increases........................................................................ 3
5. Additional Charges for Expenses................................................................ 3
5.1 Definitions........................................................................... 3
5.2 Special Allocations................................................................... 6
5.3 Payment of Tenant's Building Share and Tenant's Project Share of Building Expenses
and Project Expenses.................................................................. 6
5.4 Partial Year Adjustments.............................................................. 6
5.5 Tenant's Right to Audit Landlord's Records............................................ 6
5.6 Objections to Statements.............................................................. 7
6. Security Deposit............................................................................... 7
6.1 Landlord's Obligations................................................................ 7
7. Acceptance of Premises......................................................................... 7
7.1 Construction of Tenant Improvements................................................... 7
7.2 Acceptance of Tenant Improvements..................................................... 7
7.2.1 Condition at Delivery........................................................ 7
8. Common Areas................................................................................... 7
8.1 Right to Use Common Areas............................................................. 7
8.2 Alteration of Building or Project Common Areas........................................ 7
9. Use............................................................................................ 8
9.1 Office Use............................................................................ 8
9.2 No Nuisance........................................................................... 8
9.3 Compliance with Laws.................................................................. 8
9.4 Hazardous Materials................................................................... 8
10. Alterations and Tenant's Property.............................................................. 9
10.1 Alterations Defined................................................................... 9
10.2 Removal of Property................................................................... 9
11. Repairs and Other Work......................................................................... 9
11.1 Tenant's Obligations.................................................................. 9
11.2 Conditions Applicable to Repairs and Other Work....................................... 9
12. Liens.......................................................................................... 10
13. Subordination.................................................................................. 10
14. Inability to Perform........................................................................... 10
15. Destruction.................................................................................... 10
15.1 Repair................................................................................ 10
15.2 Tenant's Right to Terminate........................................................... 11
15.3 Landlord's Right to Terminate......................................................... 11
15.4 Extent of Repair Obligations.......................................................... 11
15.5 Arbitration........................................................................... 11
15.6 Non-Application of Certain Statutes................................................... 11
16. Insurance...................................................................................... 11
16.1 Insurance on Tenant's Property........................................................ 11
16.2 Tenant's Liability Insurance.......................................................... 11
16.3 Form of Policies...................................................................... 12
16.4 Compliance with Insurance Requirements................................................ 12
16.5 Landlord's Insurance.................................................................. 12
17. Eminent Domain................................................................................. 12
17.1 Effect of Taking...................................................................... 12
17.2 Award................................................................................. 12
17.3 Abatement of Rent..................................................................... 12
17.4 Temporary Taking...................................................................... 13
18. Assignment..................................................................................... 13
18.1 Consent Required...................................................................... 13
18.2 Notice................................................................................ 13
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
18.3 No Release.................................................................................13
18.4 Cost of Processing Request.................................................................13
18.5 Corporation or Partnership Transfers.......................................................13
18.6 Assumption of Obligations..................................................................13
18.7 No Signs...................................................................................14
18.8 Upon Termination...........................................................................14
19. Utilities and Services..............................................................................14
19.1 Landlord to Furnish........................................................................14
19.2 Excess Usage...............................................................................14
19.3 Interruption of Service....................................................................14
19.4 Security Systems and Programs..............................................................14
19.5 No Liability...............................................................................15
20. Default.............................................................................................15
20.1 Events Constituting Default................................................................15
20.2 Remedies...................................................................................15
20.3 Remedies Cumulative........................................................................16
20.4 Recovery Against Landlord..................................................................16
20.5 Events of Default by Landlord..............................................................16
21. Insolvency or Bankruptcy............................................................................16
22. Fees and Expenses; Indemnity; Payment...............................................................17
22.1 Landlord's Right to Remedy Defaults........................................................17
22.2 Indemnity..................................................................................17
22.3 Assumption of Risk.........................................................................17
22.4 Payment of Sums Due........................................................................17
22.5 Interest On Past Due Obligations; Service Charge...........................................17
23. Access to Premises..................................................................................18
23.1 Landlord's Right to Enter..................................................................18
23.2 Means of Entry.............................................................................18
24. Notices.............................................................................................18
25. No Waiver...........................................................................................18
26. Tenant's Certificates...............................................................................18
27. Rules and Regulations...............................................................................19
28. Tenant's Taxes......................................................................................19
29. Corporate Authority.................................................................................19
30. Miscellaneous.......................................................................................19
30.1 Asbestos Disclosure........................................................................19
30.2 Financial Statements.......................................................................19
30.3 References.................................................................................19
30.4 Successors and Assigns.....................................................................19
30.5 Severability...............................................................................20
30.6 Construction...............................................................................20
30.7 Integration................................................................................20
30.8 Surrender..................................................................................20
30.9 Quiet Enjoyment............................................................................20
30.10 Holding Over...............................................................................20
30.11 Time of Essence............................................................................20
30.12 Broker's Commissions.......................................................................20
30.13 No Merger..................................................................................20
30.14 Consents...................................................................................21
30.15 Survival...................................................................................21
30.16 Amendments.................................................................................21
30.17 Attorneys' Fees............................................................................21
30.18 Arbitration of Disputes....................................................................21
30.19 [Intentionally Omitted]....................................................................22
31. Design and Construction Process.....................................................................22
31.1 Tenant's Design Development Documents......................................................22
31.2 Tenant's Construction Documents............................................................22
31.3 Applicable Law; Budgetary Constraints......................................................22
31.4 Requirements of Tenant's Documents.........................................................22
31.5 Contractors/Bidding Procedures.............................................................22
31.6 Construction...............................................................................22
31.7 Disbursement of T.I. Allowance.............................................................22
31.8 Access.....................................................................................22
31.9 Construction...............................................................................23
32. Extension Option....................................................................................23
32.1 Tenant Option..............................................................................23
32.2 Extension Rent.............................................................................23
32.3 Rent Notice by Landlord....................................................................23
32.4 Fair Market Value Rent.....................................................................23
32.5 Effect of Default..........................................................................23
33. Termination of Existing Lease.......................................................................24
34. Right of First Offer Space..........................................................................24
35. Parking.............................................................................................24
</TABLE>
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<PAGE>
BASIC LEASE TERMS OF OFFICE BUILDING LEASE
BETWEEN
SAN DIEGO TECH CENTER, LLC
AND
MOLECULAR SIMULATIONS INC.
The following Basic Lease Terms constitute a general summary of the
San Diego Tech Center Office Building Lease to which they are attached. This
summary is for convenience only; the terms and provisions of the Lease attached
hereto are controlling.
1. Landlord: San Diego Tech Center, LLC, a Delaware limited liability
company.
2. Tenant: Molecular Simulations Inc., a Delaware corporation.
3. Premises:
3.1 Expansion Premises: Approximately 25,000 rentable square feet in
the building located at 9725 Scranton Road, San Diego, California 92121,
commonly known as Building 3 of the San Diego Tech Center, consisting of "First
Expansion Premises" of approximately 5,695 rentable square feet, and "Second
Expansion Premises" of approximately 19,305 rentable square feet.
3.2 Existing Premises: Approximately 51,635 rentable square feet in
the building located at 9685 Scranton Road, San Diego, California 92121,
commonly known as Building 3D of the San Diego Tech Center.
4. Lease Term:
4.1 Expansion Premises:
(a) First Expansion Premises: Ninety-Nine (99) months
(b) Second Expansion Premises: Eighty-Eight (88) months
4.2 Existing Premises: Eighty-Four (84) months
5. Commencement Date:
5.1 Expansion Premises:
(a) First Expansion Premises: (estimated) October 1, 1998
(b) Second Expansion Premises: (estimated) September 1, 1999
5.2 Existing Premises: January 1, 2000
5.3 Expiration Date (for the Premises): December 31, 2006
5.4 Option to Extend (for the Premises): One five (5) year option to
extend, subject to the terms of Article 32.
6. Rent:
6.1 $1.30 per rentable square foot per month, subject to annual
increases under the terms of Section 4.4.
6.2 Additional Charges: (See Section 5.1(e) and (f) for Tenant's
Share of Building Expenses and Tenant's Share of Project Expenses,
respectively.)
7. Security Deposit: Thirty-Two Thousand Five Hundred Dollars ($32,500)
(one (1) month's Rent for the Expansion Premises) payable upon the Commencement
Date for the Second Expansion Premises, in addition to Thirty-Seven Thousand Six
Hundred Ninety-Three Dollars ($37,693) (the amount of the Tenant's current
security deposit for the Existing Premises).
8 Permitted Use: General office purposes.
9. Tenant Improvement Allowance: Eight and 25/100 Dollars ($8.25) per
rentable square foot for the Premises, subject to the provisions of Article 7.
10. Insurance: Tenant to obtain insurance as described in Section 16 of
the Lease.
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<PAGE>
11. Address for Payments and Notices to Landlord:
c/o SENTRE Partners, Inc.
9605 Scranton Road, Suite 102
San Diego, California 92121.
12. Address for Notices to Tenant:
Molecular Simulations Inc.
9685 Scranton Road
San Diego, California 92121
Attn: Director of Facilities
With a copy to:
Molecular Simulations Inc.
9685 Scranton Road
San Diego, California 92121
Attn: General Counsel
Broker(s): CB/Richard Ellis Commercial Real Estate.
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<PAGE>
SAN DIEGO TECH CENTER
OFFICE BUILDING LEASE BETWEEN
SAN DIEGO TECH CENTER, LLC, A DELAWARE
LIMITED LIABILITY COMPANY
AND MOLECULAR SIMULATIONS INC., A DELAWARE CORPORATION
THIS LEASE, dated as of October 23, 1998, for purposes of reference
only, is made and entered into by and between SAN DIEGO TECH CENTER, LLC, a
Delaware limited liability company ("Landlord"), and MOLECULAR SIMULATIONS INC.,
a Delaware corporation ("Tenant").
Landlord and Tenant hereby covenant and agree as follows:
1. Definitions.
-----------
1.1 Location of Definitions. For convenience of reference only, the
-----------------------
following terms are defined in the Section indicated:
(a) AAA - 30.18(a)
(b) Additional Charges - 4.2
(c) Alterations - 10.1
(d) Asbestos Reports - 30.1
(e) Assignment - 18.1
(f) Building - 2.1
(g) Buildings - 2.3
(h) Building Common Area(s) - 2.2
(i) Building Expenses - 5.1(c)
(j) Building Real Property - 2.1
(k) Building Rentable Area - 2.6
(l) Commencement Date - 3.1
(m) Damaged Property - 15.1
(n) Existing Lease - 34
(o) Existing Premises - 2.1, 2.5
(p) Expansion Premises - 2.1, 2.5
(q) Expiration Date - 3.1
(r) Extension Term - 3.2
(s) First Expansion Premises - 2.1, 2.5
(t) Hazardous Material - 9.4
(u) Initial Term - 3.1
(v) Landlord's Expense Statement - 5.3
(w) Partial Year - 5.4
(x) Premises - 2.1
(y) Project - 2.3
(z) Project Common Area(s) - 2.4
(aa) Project Expenses - 5.1(d)
(bb) Project Real Property - 2.4
(cc) Project Rentable Area - 2.7
(dd) Real Estate Taxes - 5.1(a)
(ee) Related Entities - 22.2
(ff) Relocation Notice - 30.19
(gg) Rent - 4.1
(hh) Rentable Area - 2.5
(ii) Second Expansion Premises - 2.1, 2.5
(jj) Security Deposit - 6
(kk) Space Plan - 7.1
(ll) Sublease - 18.1
(mm) Substitute Premises - 30.19
(nn) Target Commencement Date - 3.1
(oo) Tenant Improvements - 7.1
(pp) Tenant Owned Property - 10.2
(qq) Tenant's Agents - 22.2
(rr) Tenant's Building Share - 5.1(e)
(ss) Tenant's Delay - 3.1
(tt) Tenant's Project Share - 5.1(f)
(uu) Term - 3.1
(vv) The worth at the time of award - 20.2(f)
2. Premises.
--------
2.1 Premises/Building/Building Real Property Defined. Subject to the
terms, covenants and conditions hereinafter set forth, Landlord hereby leases to
Tenant and Tenant hereby hires from Landlord those premises (the "Premises")
consisting of the area shown on the floor plan(s) attached hereto as Exhibit "A"
located in the buildings located at 9685 Scranton Road, San Diego, California
92121,
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<PAGE>
commonly known as Building 3D of the San Diego Tech Center ("Existing
Premises"), and 9725 Scranton Road, San Diego, California 92121, commonly known
as Building 3 of the San Diego Tech Center ("Expansion Premises") (the Expansion
Premises consist of the "First Expansion Premises" and "Second Expansion
Premises"). The Existing Premises and the Expansion Premises are herein
collectively called "the Premises" or "all Premises". Building 3D and Building 3
are herein collectively called the "Building". The Building and the real
property upon which the Building is located, together with the utilities,
facilities, drives, walkways and other amenities directly appurtenant to and
servicing the Building are herein sometimes collectively called the "Building
Real Property". The exact boundary of the Premises shall be as constructed, and
shall extend to the unfinished surface of all floors and the underside of the
structural concrete slab forming the ceiling of the Premises. Landlord shall
have the right at Landlord's sole discretion to lease portions of the Building
for retail and other uses from time to time so long as Landlord maintains the
Project as a multi-building project, and Landlord makes no representations or
warranties as to the character or nature of any of the tenancies in the
Building.
2.2 Building Common Area Defined. The terms "Building Common Area"
----------------------------
and "Building Common Areas" shall mean spaces, facilities, and installations
such as toilets, janitor, telephone, electrical, and mechanical rooms and
closets, trash facilities, stairs, public lobbies, corridors and other
circulation areas, wherever located in the Building, and all other areas of the
Building not leased or intended by Landlord to be leased to tenants, as may be
designated by Landlord from time to time.
2.3 Project Defined. The Building is part of a real estate project
---------------
commonly known as the San Diego Tech Center (the "Project"). For purposes of
this Lease, the Project shall be deemed to consist of the Building, Buildings 1,
2, 4, 5, 5A, 5B and 5C, a free-standing restaurant, a free-standing athletic
club, an aerobic center, a racquetball court, two tennis courts, two volleyball
courts, walking/running paths, landscape, sidewalks and adjacent parking areas
and all appurtenances to the foregoing, all as shown on the site plan attached
hereto as Exhibit "B". The Building and Buildings 1, 2, 4, 5, 5A, 5B and 5C
(including common areas within said Buildings) are sometimes herein collectively
called the "Buildings." Landlord shall have the exclusive right to determine the
nature, location, and mix of tenants of the Building and of the Project and all
other matters relating to the operation thereof.
2.4 Project Common Area and Project Real Property Defined. The term
-----------------------------------------------------
"Project Common Area" and "Project Common Areas" shall mean all portions of the
Project other than (i) the Buildings (but including the aerobic center and
racquetball court if they are located in any of the Buildings), and (ii) the
Building Common Areas. The real property upon which the Project Common Areas are
located, together with the utilities, facilities, drives, walkways and other
amenities appurtenant to or servicing the Project Common Areas, are herein
sometimes collectively called the "Project Real Property." Tenant acknowledges
and agrees that Landlord, in its sole discretion, may relocate, eliminate, alter
or otherwise make such decisions with respect to the various components of
Project Common Areas as Landlord in good faith deems appropriate, provided
Tenant's use and enjoyment of the Premises and the Project Common Areas are not
materially and adversely affected. Tenant acknowledges that Landlord anticipates
to replace approximately half of the parking area located immediately adjacent
and south of Building 3D with a green belt area, and that possibly additional
buildings and/or a parking structure may be constructed in the parking area to
the east of Building 3 and 3D.
2.5 Rentable Area Defined. For purposes of this Lease, the "Rentable
---------------------
Area" of the Premises shall be 76,635 rentable square feet which consists of the
"Rentable Area" of the Existing Premises (approximately 51,635 rentable square
feet), and the "Rentable Area" of the Expansion Premises (approximately 25,000
rentable square feet which consists of the "Rentable Area" of the First
Expansion Premises (approximately 5,695 rentable square feet), and the "Rentable
Area" of the Second Expansion Premises (approximately 19,305 rentable square
feet)); provided, however, that Landlord makes no representations or warranties
as to the exact square footage in the Premises.
2.6 Building Rentable Area Defined. For purposes of this Lease, the
------------------------------
"Building Rentable Area" shall be 100,325 rentable square feet, consisting of
rentable square feet in the Building; provided, however, that Landlord makes no
representations or warranties as to the exact square footage in the Building.
2.7 Project Rentable Area Defined. For purposes of this Lease, the
-----------------------------
"Project Rentable Area" shall be 632,809 square feet, consisting of rentable
square feet contained in the Buildings; provided, however, that Landlord makes
no representations or warranties as to the exact square footage in the Project.
3. Term.
----
3.1 First Expansion Premises. The "Term" for the First Expansion
------------------------
Premises shall commence on the date the Landlord has delivered to Tenant the
First Expansion Premises in broom clean condition. The parties anticipate such
date to occur on November 15, 1998. The date the First Expansion Premises are
actually delivered to Tenant shall be referred to herein as the "Commencement
Date" for the First Expansion Premises. Prior to the Commencement Date for the
First Expansion Premises, Landlord will allow Tenant access to the First
Expansion Premises for thirty (30) days in order to install fixtures,
furnishings and equipment and to ready the First Expansion Premises for Tenant's
occupancy; provided that such early entry will be subject to all the terms and
provisions of this Lease as though the Commencement Date for the First Expansion
Premises had occurred, except for the payment of Rent and Additional Charges
which commence on the Commencement Date for the First Expansion Premises as set
forth in this Lease.
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<PAGE>
3.2 Second Expansion Premises. The "Term" for the Second Expansion
-------------------------
Premises shall commence on the date the Landlord has delivered to Tenant the
Second Expansion Premises in broom clean condition. The parties anticipate such
date to occur on September 1, 1999. The date the Second Expansion Premises are
actually delivered to Tenant shall be referred to herein as the "Commencement
Date" for the Second Expansion Premises. Notwithstanding the foregoing, the
Commencement Date for the Second Expansion Premises shall not occur prior to
August 1, 1999. Prior to the Commencement Date for the Second Expansion
Premises, Landlord will allow Tenant access to the Second Expansion Premises for
thirty (30) days in order to install fixtures, furnishings and equipment and to
ready the Second Expansion Premises for Tenant's occupancy; provided that such
early entry will be subject to all the terms and provisions of this Lease as
though the Commencement Date for the Second Expansion Premises had occurred,
except for the payment of Rent and Additional Charges which commence on the
Commencement Date for the Second Expansion Premises as set forth in this Lease.
3.3 Existing Premises. The "Term" for the Existing Premises shall
-----------------
commence on January 1, 2000 (herein called the "Commencement Date" for the
Existing Premises).
Notwithstanding the estimated commencement dates set forth in Section
3.1 and 3.2 above, if for any reason the Commencement Date for the First
Expansion Premises occurs after the estimated commencement date set forth in
Section 3.1, and/or the Commencement Date for the Second Expansion Premises
occurs after the estimated commencement date set forth in Section 3.2, Landlord
shall not be subject to any liability therefor, nor shall such failure effect
the validity of this Lease or relieve Tenant of any of its obligations hereunder
or extend the "Term" of this Lease, unless Landlord fails to deliver to Tenant
such portion of the Expansion Premises within six (6) months following the
estimated commencement date applicable to such portion of the Expansion Premises
for any reason other than Tenant delays, in which event Tenant may, upon written
notice delivered to Landlord ten (10) days thereafter, terminate this Lease. If
such written notice of intent to cancel by Tenant is not timely received by
Landlord then Tenant's right to terminate this Lease hereunder shall terminate
and be of no further force or effect. The "Term" of this Lease shall commence
upon the earliest Commencement Date set forth in this Article and shall expire
as to all Premises on December 31, 2006 ("Expiration Date"), unless sooner
terminated pursuant to the terms of this Lease.
4. Rent; Additional Charges.
------------------------
4.1 Rent. As of the Commencement Date for the First Expansion
----
Premises, Tenant shall pay to Landlord during the Term of the First Expansion
Premises $1.30 per month per rentable square foot for the First Expansion
Premises. As of the Commencement Date for the Second Expansion Premises, Tenant
shall pay to Landlord during the Term for the Second Expansion Premises $1.30
per month per rentable square foot for the Second Expansion Premises. As of the
Commencement Date for the Existing Premises, Tenant shall pay to Landlord during
the Term of the Existing Premises $1.30 per month per rentable square foot for
the Existing Premises. Tenant shall continue to pay all Rent and Additional
Charges payable by Tenant for the Existing Premises in accordance with the terms
of the Existing Lease until the Commencement Date for the Existing Premises
under this Lease. Rent shall be payable by Tenant monthly beginning on the
applicable Commencement Date and thereafter on or before the first day of each
month, in advance. If any Commencement Date should occur on a day other than the
first day of a calendar month, or the Expiration Date should occur on a day
other than the last day of a calendar month, then the Rent for such fractional
month shall be prorated upon a daily basis based upon a thirty (30) day calendar
month, and based upon the rate for the immediately following or preceding month.
4.2 Additional Charges. Commencing on the Commencement Date for the
------------------
First Expansion Premises, the Commencement Date for the Second Expansion
Premises, and the Commencement Date for the Existing Premises, respectively,
Tenant shall pay to Landlord, as to such applicable space, in equal monthly
installments on or before the first day of each month, in advance and at the
place where the Rent is payable, all charges, fees and expenses and other
amounts whatsoever as provided in or due under this Lease ("Additional
Charges"), including without limitation all amounts due pursuant to the
provisions of Article 5. Landlord shall have the same remedies for Tenant's
failure to pay any item of Additional Charges when due as for failure to pay any
installment of Rent when due. For purposes of determining Landlord's remedies in
the event of Tenant's default and calculating amounts due thereunder, Additional
Charges shall be deemed to be Rent.
4.3 Manner of Payment. All payments of Rent and Additional Charges
-----------------
shall be made without prior demand and without offset, deduction or
counterclaim, in lawful money of the United States of America. Such payments
shall be made at the address for Landlord specified herein or at such other
place as Landlord shall designate from time to time.
4.4 Rent Increases. The Rent for all Premises shall be increased by
--------------
four percent (4%) commencing January 1, 2001, and every one (1) year anniversary
thereafter on a cumulative basis.
5. Additional Charges for Expenses.
-------------------------------
5.1 Definitions. For purposes of this Article 5, the following terms
-----------
shall have the following meanings:
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<PAGE>
(a) "Real Estate Taxes" shall mean all general real property
taxes and general and special assessments, transit charges or fees, fees or
assessments, housing fund assessments, payments in lieu of taxes, and any tax,
fee or excise levied or assessed (whether at the date of this Lease or
thereafter) (i) on the Building Real Property or Project Real Property, any
portion thereof or Landlord's interest therein, or Landlord's personal property
used in the operation of the Building or the Project Common Areas, (ii) on the
use or occupancy of the Building Real Property or the Project Real Property or
any portion thereof, including any tax or levy made against Rent, Additional
Charges, or gross receipts from the Building or the Project Common Areas, (iii)
in connection with the business of renting space in the Building or the Project
Common Areas, or (iv) as a result of the transfer of any interest in the
Building Real Property or Project Real Property or any portion thereof or
interest therein, that are now or hereafter levied or assessed by the United
States of America, the State of California, or any political subdivision, public
corporation, district or other political or public entity. Real Estate Taxes
shall also include any other tax, fee or other excise, however described, that
may be levied or assessed as a substitute for, in whole or in part, any other
Real Estate Taxes. Real Estate Taxes shall not include income, franchise,
inheritance or capital stock taxes, unless, resulting from a change in the
method of taxation, any of such taxes is levied or assessed against Landlord as
a substitute for, in whole or in part, any other tax, assessment or charge that
would otherwise constitute a Real Estate Tax. Real Estate Taxes shall not
include those amounts payable by Tenant pursuant to Section 28, or similar
amounts attributable to other tenants of the Building.
(b) Notwithstanding anything to the contrary contained herein,
Real Estate Taxes shall not include income tax, excess profits or revenue tax,
excise tax, inheritance tax, gift tax, gains tax, franchise tax, transfer tax
(as opposed to increases in Real Estate Taxes resulting from a transfer of any
interest in the Building Real Property or Project Real Property), corporation
tax, capital levy, estate, succession or other similar tax or charge that may be
payable by or chargeable to Landlord under any present or future laws.
(c) "Building Expenses" shall mean the costs and expenses
directly and reasonably paid or incurred by Landlord in connection with the
management, operation, maintenance and repair of the Building, including,
without limitation, (i) Real Estate Taxes related to the Building Real Property,
(ii) the cost of heating, ventilation, air conditioning, steam, electricity,
gas, domestic water, sewer services, mechanical, elevator and other systems and
all other utilities, and the cost of supplies and equipment and maintenance and
service contracts in connection therewith, (ii) the cost of repairs,
replacements, general maintenance and cleaning, including the cost of janitorial
and other service agreements and trash removal, (iii) the cost of such fire,
extended coverage, boiler, sprinkler, apparatus, public liability, property
damage, rent, earthquake (at prevailing, commercially reasonable rates for such
coverage), and other insurance as Landlord is required to carry under this Lease
or reasonably deems it appropriate to carry or is required to carry by any
mortgagee under any mortgage against the Building Real Property or any portion
thereof or interest therein with respect to the Building or any of Landlord's or
a property manager's personal property used in the operation of the Building,
(iv) the cost (including loan fees) of any capital improvements made to the
Building after the date of this Lease as a labor-saving measure or to effect
other economies in the operation or maintenance of the Building to the extent
such improvements result in a reduction of Building Expenses (amortized over
such reasonable period as Landlord shall determine), or made to the Building
after the date of this Lease that are required under any governmental law or
regulation that was not applicable to the Building at the date of this Lease
(amortized over the useful life of the improvement), together with interest on
the unamortized balance(s) at the rate of ten percent (10%) per annum or such
higher market rate as may have been paid by Landlord on funds borrowed for the
purpose of constructing such capital improvements, (v) costs of maintenance,
repair and replacement of the roof of the Building, (vi) all supplies,
materials, equipment and tools used in the management, operation and maintenance
of the Building, including any rental fees, (vii) all costs and fees for
licenses, inspections or permits that Landlord may be required to obtain with
respect to the Building, (viii) exterior and interior landscaping, and (ix) any
other reasonable expenses of any other kind whatsoever reasonably incurred in
managing, operating, maintaining and repairing the Building. Building Expenses
shall not include any of the following: (a) legal fees, brokerage commissions,
advertising costs or other related expenses incurred in connection with the
leasing of the Building; (b) repairs, alterations, additions, improvements or
replacements made to rectify or correct any defect in the design, materials or
workmanship of the Building or Building Common Areas; (c) costs incurred in
connection with damage or repairs which are covered under any insurance policy
carried by Landlord in connection with the Building or Building Common Areas;
(d) costs associated with damage or repairs to the Building or Building Common
Areas necessitated by the gross negligence or willful misconduct of Landlord or
Landlord's agents; (e) executive salaries or salaries of service personnel to
the extent that such salaries are payable in connection with services other than
in connection with the management, operation, repair or maintenance of the
Building or Building Common Areas; (f) the cost of off-site service personnel to
the extent that such personnel are not engaged in the management, operation,
repair or maintenance of the Building or Building Common Areas; (g) Landlord's
general overhead expenses not related to the Building or Building Common Areas;
(h) payments of principal or interest on any mortgage or other encumbrance
(other than those related to capital improvements as provided herein); (i) legal
fees, accountant fees, and other expenses incurred in connection with disputes
with other tenants or occupants of the Building or associated with the
enforcement of any other leases or defense of Landlord's title to or interest in
the Building or any part thereof; (j) costs (including permit, license and
inspection fees) incurred in renovating or otherwise improving, decorating,
painting or altering space for other tenants or other occupants of vacant space
in the Building; (k) costs incurred due to a violation by Landlord or any other
tenant in the Building of the terms and conditions of any lease; (l) services or
installations furnished to any tenant in the Building which are not furnished to
Tenant or quantities of such services furnished to any tenant in the Building
which are also furnished to Tenant but are furnished to other tenants in an
amount materially in
-4-
<PAGE>
excess of that which would represent a fair proportion of such services; and (m)
the cost of any service provided to Tenant or other occupants of the Building
for which Landlord is entitled to be reimbursed. Landlord shall not collect in
excess of one hundred percent (100%) of all Building Expenses.
(d) "Project Expenses" shall mean the costs and expenses
directly and reasonably paid or incurred by Landlord in connection with the
management, operation, maintenance and repair of the Project Common Areas,
including, without limitation (i) Real Estate Taxes related to the Project Real
Property, (ii) the cost of heating, ventilation, air conditioning, steam,
electricity, gas, domestic water, sewer services, mechanical, elevator and other
systems and all other utilities, and the costs of supplies and equipment and
maintenance and service contracts in connection therewith, (iii) the cost of
repairs, replacements, general maintenance and cleaning, including the cost of
janitorial and other service agreements and trash removal, (iv) the cost of such
fire, extended coverage, boiler, sprinkler, apparatus, public liability,
property damage, rent, earthquake (at prevailing, commercially reasonable rates
for such coverage), and other insurance as Landlord reasonably deems it
appropriate to carry or is required to carry by any mortgagee under any mortgage
against the Project Common Areas or any portion thereof or interest therein with
respect to the Project Common Areas or any of Landlord's or a property manager's
personal property used in the operation of the Project Common Areas, (v) wages,
salaries and other labor costs of all on-site employees, and all off-site
employees to the extent engaged in the operation, management, maintenance and
security of the Project, including taxes, insurance, retirement, medical and
other employee benefits, but excluding leasing commission, (vi) fees, charges
and other costs, including property management fees, consulting fees, attorneys'
fees and accounting fees of all independent contractors engaged by Landlord, and
all such fees reasonably charged by Landlord if Landlord performs management
services in connection with the Project, (vii) the cost of supplying, replacing
and cleaning employee uniforms, (viii) the fair market rental value of
Landlord's or the property manager's offices in the Project (which shall be of
reasonable size), to the extent utilized for the management or operation of the
Project, (ix) the costs (including loan fees) of any capital improvements made
to the Project Common Areas after the date of this Lease as a labor-saving
measure or to effect other economies in the operation or maintenance of the
Project Common Areas to the extent such improvements result in a reduction of
Project Expenses (amortized over such reasonable period as Landlord shall
determine), or made to the Project Common Areas after the date of this Lease
that are required under any governmental law or regulation that was not
applicable to the Project Common Areas at the date of this Lease (amortized over
the useful life of the improvement), together with interest on the unamortized
balance(s) at the rate of ten percent (10%) per annum or such higher market rate
as may have been paid by Landlord on funds borrowed for the purpose of
constructing such capital improvements, (x) costs of maintenance repair and
replacement of the roof of any portion of the Project Common Areas, (xi) all
supplies, materials, equipment and tools used in the management, operation and
maintenance of the Project Common Areas, including any rental fees, (xii) all
costs and fees for licenses, inspections or permits that Landlord may be
required to obtain in connection with the Project Common Areas, (xiii) expenses
incurred for the maintenance of art work, streetscaping and similar enhancements
of the Project which in Landlord's judgment will benefit the Project, and (xiv)
any other reasonable expenses of any other kind whatsoever reasonably incurred
in managing, operating, maintaining and repairing the Project Common Areas.
Project Expenses shall not include any of the following: (a) legal fees,
brokerage commissions, advertising costs or other related expenses in connection
with the leasing of the Project; (b) repairs, alterations, additions,
improvements or replacements made to rectify or correct any defect in the
design, materials or workmanship of the Project of Project Common Areas; (c)
costs incurred in connection with damage or repairs which are covered under any
insurance policy carried by Landlord in connection with the Project or Project
Common Areas; (d) costs associated with damage or repairs to the Project or the
Project Common Areas necessitated by the gross negligence or willful misconduct
of Landlord or Landlord's agents; (3) executive salaries or salaries of service
personnel to the extent that such salaries are payable in connection with
services other than in connection with the management, operation, repair or
maintenance of the Project or Project Common Areas; (f) the cost of off-site
service personnel to the extent that such personnel are not engaged in the
management, operation, repair or maintenance of the Project or Project Common
Areas; (g) Landlord's general overhead expenses not related to the Project or
Project Common Areas; (h) payments of principal or interest on any mortgage or
other encumbrance (other than those related to capital improvements as provided
herein); (i) legal fees, accountant fees and other expenses incurred in disputes
with other tenants or occupants of the Project or associated with the
enforcement of any other leases or defense of Landlord's title to or interest in
the Project or any part thereof; (j) costs (including permit, license and
inspection fees) incurred in renovating or otherwise improving, decorating,
painting or altering space for tenants or other occupants of vacant space in the
Project; (k) costs incurred due to a violation by Landlord or any other tenant
in the Project of the terms and conditions of any lease; (l) services or
installations furnished to any tenant in the Project which are not furnished to
Tenant or quantities of such services furnished to any tenant in the Project
which are also furnished to Tenant but are furnished to other tenants in an
amount materially in excess of that which would represent a fair proportion of
such services; and (m) the cost of any service provided to Tenant or other
occupants of the Project for which Landlord is entitled to be reimbursed.
Landlord shall not collect in excess of 100% of all Project Expenses.
(e) As of the Commencement Date for the First Expansion
Premises, "Tenant's Building Share" shall mean 5.8% (calculated by dividing the
Rentable Area of the First Expansion Premises (5,795) by the Building Rentable
Area (100,325)). As of the Commencement Date for Second Expansion Premises,
"Tenant's Building Share" shall be increased to 24.9% (calculated by dividing
the Rentable Area of the Expansion Premises (25,000) by the Building Rentable
Area (100,325)). Further, as of the Commencement Date for the Existing Premises,
"Tenant's Building Share" shall be increased to 76.4% (calculated by dividing
the Rentable Area of the Premises (76,635) by the Building Rentable Area
(132,500)). Tenant's Building Share of Building Expenses shall normally be
computed by multiplying such percentage by Building Expenses, but shall be
subject to adjustment as a result of special allocations made
-5-
<PAGE>
pursuant to Section 5.2 and the provisions of Section 5.3. If the Rentable Area
of the Premises is changed for any reason, including but not limited to the
addition of any expansion premises under Article 33 below, Tenant's Building
Share shall be modified by multiplying the percentage specified in this
Paragraph (e) by a fraction, the numerator of which shall be the rentable area
of the Premises after such change and the denominator of which shall be the
Rentable Area of the Premises immediately before such change. If the Building
Rentable Area is changed as a result of any cause not within Landlord's
reasonable control (for instance, as a result of a reduction in area due to
reconstruction following fire or the exercise or threatened exercise of the
right of eminent domain), then Tenant's Building Share shall be recalculated by
dividing the rentable area of the Premises after such occurrence by the rentable
area of the entire Building after such occurrence.
(f) As of the Commencement Date for the First Expansion
Premises, "Tenant's Project Share" shall mean .90% (calculated by dividing the
Rentable Area of the First Expansion Premises (5,695) by the Project Rentable
Area (632,809)). As of the Commencement Date for the Second Expansion Premises,
"Tenant's Project Share" shall be increased to 3.95% (calculated by dividing the
Rentable Area of the Expansion Premises (25,000) by the Project Rentable Area
(632,809)). Further, as of the Commencement Date for the Existing Premises,
Tenant's Project Share shall be increased to 12.11% (calculated by dividing the
Rentable Area of the Premises (76,635) by the Project Rentable Area (632,809)).
The Tenant's Project Share of Project Expenses shall normally be computed by
multiplying such percentage by Project Expenses, but shall be subject to
adjustment as a result of special allocations made pursuant to Section 5.2 and
the provisions of Section 5.3. If the Rentable Area of the Premises is changed
for any reason, including but not limited to the addition of any expansion
premises under Article 33 below, Tenant's Project Share shall be modified by
multiplying the percentage specified in this Paragraph (f) by a fraction, the
numerator of which shall be the rentable area of the Premises after such change
and the denominator of which shall be the Rentable Area of the Premises
immediately before such change. If the Project Rentable Area is changed as a
result of any cause not within Landlord's reasonable control (for instance, as a
result of a reduction in area due to reconstruction following fire or the
exercise or threatened exercise of the right of eminent domain), then Tenant's
Project Share shall be recalculated by dividing the rentable area of the
Premises after such occurrence by the rentable area of the entire Project after
such occurrence.
5.2 Special Allocations. Building Expenses and Project Expenses
-------------------
which are, in Landlord's reasonable discretion, properly chargeable solely to a
single tenant or to a group of tenants shall be so allocated. Landlord shall
endeavor to make all such allocations fairly. Any amount so allocated to Tenant
shall be paid by Tenant as Additional Charges.
5.3 Payment of Tenant's Building Share and Tenant's Project Share of
----------------------------------------------------------------
Building Expenses and Project Expenses. Commencing on the Commencement Date for
- --------------------------------------
the First Expansion Premises, the Commencement Date for the Second Expansion
Premises, and the Commencement Date for the Existing Premises, respectively,
Tenant shall pay to Landlord, as to such applicable space, as Additional Charges
one twelfth (1/12th) of Tenant's Building Share of Building Expenses and one
twelfth (1/12th) of Tenant's Project Share of Project Expenses, respectively, on
or before the first day of each month of the Term, in advance, in an amount
reasonably estimated by Landlord and billed by Landlord to Tenant; provided that
Landlord shall have the right to revise such estimate at any time. Within one
hundred twenty (120) days after the end of each calendar year, Landlord shall
furnish Tenant with a statement ("Landlord's Expense Statement"), certified as
true and correct by an accounting or auditing officer of Landlord or a property
manager, setting forth in reasonable detail the actual amount of Building
Expenses and Project Expenses for such year, and Tenant's Building Share of
Building Expenses and Tenant's Project Share of Project Expenses, respectively.
If the actual amount of Tenant's Building Share or Tenant's Project Share of
Building Expenses or Project Expenses, respectively, due for such year differs
from the estimated amount of Tenant's Building Share or Tenant's Project Share
of Building Expenses or Project Expenses, respectively, paid by Tenant for such
year, the difference shall be paid by Tenant within thirty (30) days after the
receipt of Landlord's Expense Statement, or refunded in cash to Tenant within
thirty (30) days after determination thereof, as the case may be; provided,
however, that in no event shall Building Expenses or Project Expenses actually
payable for a given calendar year be less than zero.
5.4 Partial Year Adjustments. For the purpose of calculating
------------------------
Tenant's Building Share of Building Expenses and Tenant's Project Share of
Project Expenses, respectively, for the period between the Expiration Date or
date of early termination and the immediately preceding January 1 (each such
period being a "Partial Year"), Building Expenses and Project Expenses for the
calendar year in which the Partial Year occurs shall be reduced by multiplying
such amounts by a fraction, the numerator of which is the number of days in the
applicable Partial Year and the denominator of which is three hundred and sixty-
five (365), and such reduced amounts shall be the amounts payable during such
Partial Year, and monthly payments of Tenant's Building Share of estimated
Building Expenses and of Tenant's Project Share of Project Expenses shall be
based on the number of months in the applicable Partial Year.
5.5 Tenant's Right to Audit Landlord's Records. Within thirty (30)
------------------------------------------
days after Tenant's request, but not more than twice per year, Landlord shall
provide Tenant with copies of Landlord's records relating to Building Expenses
and Project Expenses; provided, however, that Tenant shall reimburse Landlord
for the reasonable cost thereof. In the event of any dispute or uncertainty as
to said amounts, Tenant shall be entitled to review legible copies of all of
Landlord's tax bills, invoices, files and records with respect to the disputed
items at the place where such materials are normally maintained, but not more
often than twice per year.
-6-
<PAGE>
5.6 Objections to Statements. Tenant acknowledges that Landlord's
------------------------
ability to budget and incur expenses depends on the finality of Landlord's
Expense Statements and agrees that Tenant shall have ninety (90) days following
receipt of such Statements within which to raise any objection to the
calculations contained therein. Failure of Tenant to object within such ninety
(90) day period shall be deemed a waiver of any such objection, absent fraud or
manifest errors. Tenant shall continue to make all payments required hereunder
pending resolution of any such objection. No delay by Landlord in providing any
Statement shall be deemed a default by Landlord or a waiver of Landlord's right
to require payment of Tenant's obligations for actual or estimated Building
Expenses or Project Expenses.
6. Security Deposit. On the Commencement Date for the Second Expansion
----------------
Premises, Tenant shall deposit with Landlord the sum of Thirty-Two Thousand Five
Hundred Dollars ($32,500) (the amount equal to one monthly installment of Rent
and Additional Charges for the Expansion Premises), and on the Commencement Date
for the Existing Premises Tenant shall deposit with Landlord the sum of
Thirty-Seven Thousand Six Hundred Ninety-Three Dollars ($37,693) (the amount
equal to Tenant's current security deposit for the Existing Premises) in the
form of immediately available funds, which shall be held by Landlord under the
terms of this Lease (collectively, the "Security Deposit") as security for the
full performance of Tenant's obligations under this Lease. Upon default by
Tenant with respect to the payment of any item of Rent or Additional Charges or
any other obligation contained herein, Landlord may use or retain all or any
portion of the Security Deposit for the payment of any Rent or Additional
Charges or other such sum in default or for the payment of any amount Landlord
may spend or may become obligated to spend by reason of Tenant's default. In the
event any portion of the Security Deposit is applied or used, Tenant shall,
within five (5) days after written notice thereof, deposit an additional amount
with Landlord sufficient to restore the Security Deposit to its original amount
as specified in this Section and Tenant's failure to do so shall constitute a
material breach of this Lease. If Tenant is not in default under this Lease at
the termination hereof, Landlord shall return the Security Deposit to Tenant
within thirty (30) days after such termination, minus any amounts required to
restore the Premises to good condition and repair, including damage resulting
from the removal by Tenant of its trade fixtures or equipment.
6.1 Landlord's Obligations. Landlord's obligation with respect to
----------------------
any Security Deposit is that of a debtor and not as a trustee, consequently such
sums may be commingled with rental receipts or dissipated and no interest shall
accrue thereon. In the event of the sale of the real property of which the
Premises constitute a part, Landlord or its agent shall transfer to Landlord's
successor in interest the sums held as Security Deposit and notify Tenant in
writing of such transfer and the name and address of Landlord's successor in
interest. Upon such written notification, Tenant shall have no further claim
against Landlord with respect to the Security Deposit.
7. Acceptance of Premises.
----------------------
7.1 Construction of Tenant Improvements. Tenant will construct but
-----------------------------------
Landlord will own (and to the extent set forth in this Section 7.1 will pay for)
certain improvements (the "Tenant Improvements") in the Expansion Premises and
Existing Premises. The Tenant Improvements for the Expansion Premises and the
Existing Premises will be designed and completed in accordance with Article 31,
the cost to Landlord of which shall not exceed the product of Eight and 25/100
Dollars ($8.25) times the rentable square feet of the Expansion Premises (i.e.
Two Hundred Six Thousand Two Hundred Fifty Dollars ($206,250) assuming 25,000
rentable square feet for the Expansion Premises), and the product of Eight and
25/100 Dollars ($8.25) times the rentable square feet of the Existing Premises
(i.e. Four Hundred Twenty-Five Nine Hundred Eighty-Eight and 75/100 Dollars
($425,988.75) assuming 51,635 rentable square feet for the Existing Premises)
(collectively, the "T.I. Allowance"). Tenant shall pay the amount, if any, by
which the costs in connection with the construction and installation of the
Tenant Improvements exceed the T.I. Allowance. If the cost of the Tenant
Improvements is less than the T.I. Allowance, the difference shall be retained
by Landlord; provided that at any time during the Term such difference may be
used by Tenant towards the cost of future refurbishment of the Premises such as
re-carpeting, subject to the terms of Article 10.
7.2 Acceptance of Tenant Improvements.
---------------------------------
7.2.1 Condition at Delivery. Landlord will cause all Building
---------------------
systems to be in good working order and condition at the time the Premises are
delivered to Tenant. Except as aforesaid, Tenant shall receive the Premises
broom clean in their "as is" condition as of the date of this Lease without any
demolition or other work having been done and subject to reasonable wear and
tear arising from any current tenant's or occupant's occupancy and moving out of
the Premises. Tenant agrees to accept possession of the Premises in such
condition, and Tenant shall notify Landlord of any defects in the condition of
the Premises within thirty (30) days after Tenant takes possession of the
Premises. By so accepting the Premises and thereafter occupying the Premises for
such thirty (30) days without notifying Landlord of any defects, Tenant shall be
deemed to have accepted the same and to have acknowledged that the Premises
fully comply with Landlord's obligations under this Section.
8. Common Areas.
------------
8.1 Right to Use Common Areas. Tenant and Tenant's Agents shall have
-------------------------
the right to use the Building Common Areas and Project Common Areas in common
with other persons, subject to Landlord's reasonable rules and regulations and
the provisions of this Lease.
8.2 Alteration of Building or Project Common Areas. Landlord hereby
----------------------------------------------
reserves the right, at any time and from time to time, without liability to
Tenant of any kind whatsoever (including without
-7-
<PAGE>
limitation liability for loss of business or profits), to make alterations or
additions to the Building, the Building Common Areas or the Project Common
Areas; to change, add to, eliminate or reduce the extent, size, shape, number or
configuration of any aspect of the Building, the Building Common Areas or the
Project Common Areas or their operations; to close to the general public all or
any portion of the Building, the Building Common Areas or the Project Common
Areas, to the extent and for the period necessary to avoid any dedication to the
public, to effect any repairs or further construction, or in case of invasion,
mob, riot, public excitement or other circumstances rendering such action
advisable in Landlord's reasonable opinion; to change the arrangement,
character, use or location of entrances or passageways, doors and doorways,
corridors, elevators, stairs, landscaping, toilets, mechanical, plumbing,
electrical or other operating systems or any other portions of the Building, the
Building Common Areas or the Project Common Areas; to change common area to
rental space and rental space to common area; to utilize portions of the common
area for entertainment, displays, product shows, the leasing of temporary or
permanent kiosks or other such uses as, in Landlord's judgment, tend to attract
the public; and to change the name, number or designation by which the Building
is commonly known. Landlord shall have the exclusive rights to the airspace
above and around, and the subsurface below, the Premises and other portions of
the Building. Landlord shall have the exclusive right to use all exterior walls,
roofs and other portions of the Building, including common areas, for signs,
notices, and other promotional purposes. Landlord shall, to the extent
reasonably possible under the circumstances, provide Tenant with advance notice
of any such alterations which Landlord reasonably anticipates will materially
impair Tenant's use of the Premises, and shall perform any such alterations in a
manner so as to cause as little interference with Tenant's use of the Premises
as is reasonably possible; provided, however, that Landlord shall not be
obligated to perform work during other than normal business hours. Tenant waives
all rights to consequential damages (including without limitation damages for
lost profits and lost opportunities) arising in connection with Landlord's
exercise of its right under this Section. Notwithstanding anything to the
contrary in this Section, Landlord shall not alter the Building or Project
Common Areas in such manner that materially and adversely impairs or impedes
Tenant's use or enjoyment of the Premises or its rights under this Lease.
9. Use.
---
9.1 Office Use. The Premises shall be used for general office
----------
purposes only. Tenant shall be responsible for compliance with all zoning laws
and ordinances and Tenant acknowledges that neither Landlord nor its agents has
made any representations or warranties with respect thereto.
9.2 No Nuisance. Tenant shall not allow, suffer or permit the
-----------
Premises or any use thereof to constitute a nuisance or unreasonably interfere
with the safety, comfort or enjoyment of the Project by Landlord or any other
occupants of the Project or their customers, invitees or any others lawfully in,
upon or about the Project or its environs.
9.3 Compliance with Laws. Tenant, at Tenant's expense, shall comply
--------------------
with and cause all of Tenant's Agents to comply with all applicable laws,
ordinances, rules and regulations of governmental authorities applicable to the
Building and the Project Common Areas or the use or occupancy thereof.
9.4 Hazardous Materials. Tenant shall not cause or suffer or permit
-------------------
any Hazardous Materials to be brought upon, kept, used, discharged, deposited or
leaked in or about the Premises or any other portion of the Project by Tenant or
any of Tenant's Agents or by anyone in the Premises (other than Landlord or its
agents, employees or contractors), except to the extent such Hazardous Materials
are customarily kept or used by typical office tenants and are kept, used and
disposed of in strict compliance with all laws, ordinances and regulations
relating to Hazardous Materials. If Tenant breaches the obligations stated in
the preceding sentence, or if the presence of any Hazardous Material on the
Premises or any other portion of the Project caused or permitted by Tenant or
any of Tenant's Agents or by anyone in the Premises (other than Landlord or its
agents, employees or contractors) results in contamination of the Premises or
any other portion of the Project, or if contamination of the Premises or any
other portion of the Project by any Hazardous Material otherwise occurs for
which Tenant is legally liable, then Tenant shall indemnify, defend and hold
Landlord harmless from any and all claims, judgments, damages, penalties, fines,
costs, liabilities, expenses and losses (including without limitation diminution
in value of the Project, damages for the loss of restriction on use of leasable
space or of any amenity of the Building or the Project, damages arising from any
adverse impact on marketing of space and sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees) which arise during or after
the term of this Lease as a result of such contamination. This indemnification
shall include, without limitation, costs incurred in connection with any
investigation of site conditions or any clean-up, remedial, removal or
restoration work required by any federal, state or local governmental agency or
political subdivision because of any Hazardous Material present in the soil or
groundwater on or under the Premises or any other portion of the Project.
Without limiting the foregoing, if the presence of any Hazardous Material on the
Premises or any other portion of the Project caused or permitted by Tenant or
any of Tenant's Agents or by anyone in the Premises (other than Landlord or its
agents, employees or contractors) results in any contamination of the Premises
or any other portion of the Project, Tenant shall, at its sole cost and expense,
promptly take all actions necessary to return the Premises and all other
portions of the Project affected to the condition existing prior to the
introduction of any such Hazardous Material to the Premises or other portions of
the Project, provided that Landlord's approval of such actions shall first be
obtained, which approval shall not be unreasonably withheld if such actions
would not potentially have any material adverse effect on the Premises or any
other portion of the Project.
"Hazardous Material" means any hazardous or toxic substance, material
or waste which is or becomes regulated by any local governmental authority, the
State of California or the United States Government. The term "Hazardous
Material" includes, without limitation, any material or substance which
-8-
<PAGE>
is (i) defined as "hazardous waste," "extremely hazardous waste" or "restricted
hazardous waste" under Sections 25115, 25117 or 25122.7, or listed pursuant to
Section 25140, of the California Health and Safety Code (Hazardous Waste Control
Law), (ii) defined as a "hazardous substance" under Section 25316 of the
California Health and Safety Code (Carpenter-Presley-Tanner Hazardous Substance
Account Act), (iii) defined as a "hazardous material," "hazardous substance" or
"hazardous waste" under Section 25501 of the California Health and Safety Code
(Hazardous Materials Release Response Plans and Inventory), (iv) defined as a
"hazardous substance" under Section 25281 of the California Health and Safety
Code (Underground Storage of Hazardous Substances), (v) listed under Article 9,
or defined as hazardous or extremely hazardous pursuant to Article 11, of Title
22 of the California Code of Regulations, Division 4, Chapter 30, (vi)
designated as a "hazardous substance" pursuant to Section 311 of the Federal
Water Pollution Control Act (33 U.S.C. Section 1317), (vii) defined as a
"hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq. (42 U.S.C. Section 6903), (viii)
defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601,
et seq. (42 U.S.C. Section 9601), (ix) petroleum or (x) asbestos or asbestos-
- -- ---
containing materials.
10. Alterations and Tenant's Property.
---------------------------------
10.1 Alterations Defined. Tenant shall not make or suffer or allow
-------------------
to be made any alterations, additions or improvements in or to the Premises
(herein collectively called "Alterations") without first obtaining Landlord's
written consent based on detailed plans and specifications (where reasonably
necessary) submitted by Tenant. Landlord's consent may be withheld in Landlord's
sole discretion if Alterations may affect any portions of the Project containing
asbestos or may affect the structure or the mechanical, electrical, HVAC,
plumbing or life safety systems of the Building; otherwise Landlord's consent
shall not be unreasonably withheld.
10.2 Removal of Property. All Alterations shall become the property
-------------------
of Landlord, and shall be surrendered to Landlord, upon the expiration or
earlier termination of this Lease; provided, however, that this provision shall
not apply to movable equipment, trade fixtures, personal property or furniture
owned by Tenant ("Tenant Owned Property"). At Landlord's sole election, any or
all Alterations made by or on behalf of Tenant shall be removed from the
Premises at Tenant's sole cost and expense at the expiration or sooner
termination of this Lease (provided that, if Landlord's consent was required for
the installation of any Alteration(s), Landlord conditioned its consent upon the
requirement that Tenant remove such Alteration(s) upon expiration or earlier
termination of this Lease), and the Premises shall be restored, at Tenant's sole
cost and expense, to their condition before the making of such Alterations. The
foregoing removal and restoration obligation shall not apply to the Tenant
Improvements. Tenant shall repair at its sole cost and expenses all damage
caused to the Premises or the Building by removal of any Alterations or Tenant
Owned Property. Any Tenant Owned Property not removed from the Premises before
the expiration or earlier termination of this Lease shall, at Landlord's option,
become the property of Landlord, or Landlord may remove them and Tenant shall
pay to Landlord the cost of removal. Tenant waives and releases its rights under
Section 1019 of the California Civil Code, or any similar law now or hereafter
in effect, to the extent inconsistent with the provisions of this Lease.
11. Repairs and Other Work.
----------------------
11.1 Tenant's Obligations. Tenant shall at all times maintain the
--------------------
Premises (including without limitation utility systems accessible from the
Premises, all signs, metal work, doors, and windows, except as is otherwise
provided in this Lease) in good, clean and sanitary condition and, at Tenant's
cost and expense, shall make all repairs and replacements as and when necessary
to preserve the Premises in good working order and condition. Notwithstanding
the foregoing, if any portion of the plumbing (including condenser water lines),
mechanical, electrical, HVAC, life safety or structural systems of the Premises
requires maintenance or repair which Tenant is otherwise obligated to perform
under this Lease, Landlord shall have the option to repair and maintain such
portion on Tenant's behalf provided Landlord performs any such work in a
commercially reasonable time and manner under the circumstances. If Landlord
performs any work on Tenant's behalf pursuant to this Section, Tenant shall pay
in advance Landlord's reasonable estimate of the cost of such work, subject to
adjustment of final costs upon completion. Landlord shall not be liable for, and
there shall be no abatement of Rent or Additional Charges with respect to, any
injury to or interference with Tenant's business arising from any repairs,
maintenance, alteration or improvement in or to any portion of the Building,
including the Premises, or in or to the fixtures, appurtenances and equipment
therein. Tenant hereby waives and releases its rights under Sections 1941,
1941.1 and 1942 of the California Civil Code or under any similar law now or
hereafter in effect, except to the extent expressly provided herein. Tenant
specifically waives all rights to consequential damages (including without
limitation damages for lost profits and lost opportunities) arising in
connection with any repairs, maintenance, alteration or improvement in or to any
portion of the Building.
11.2 Conditions Applicable to Repairs and Other Work. All repairs,
-----------------------------------------------
replacements, and reconstruction (including without limitation all Alterations)
made by or on behalf of Tenant or any of Tenant's Agents (as defined below)
shall be made and performed (a) at Tenant's cost and expense and at such time
and in such manner as Landlord may reasonably designate, (b) by contractors or
mechanics reasonably approved by Landlord, (c) at least equal in quality of
materials and workmanship to the original work or installation, (d) in
accordance with such reasonable requirements as Landlord may impose with respect
to insurance and bonds to be obtained by Tenant in connection with the proposed
work, (e) in accordance with the Rules and Regulations for the Building adopted
by Landlord from time to time and in accordance with all applicable laws and
regulations of governmental authorities having jurisdiction over the Premises,
(f) so as not to interfere with the use and enjoyment of the Building by
Landlord, other
-9-
<PAGE>
tenants of the Building or any other persons, and (g) in compliance with such
other requirements as Landlord may reasonably impose (including without
limitation a requirement that Tenant furnish Landlord with as-built drawings
upon completion of the work).
12. Liens.
-----
12.1 Tenant shall keep the Premises and the Building Real Property
free from any liens arising out of any (a) work performed or material furnished
to or for the Premises between the time Tenant has been provided access to the
Premises and the time Tenant surrenders possession of the Premises (at or after
expiration or earlier termination of the Lease), or (b) obligations incurred by
or for Tenant or any of Tenants' Agents before or during the term of this Lease.
In the event that Tenant shall not, within fifteen (15) days following notice of
the imposition of any such lien, cause same to be released of record by payment
or posting of a bond fully satisfactory to Landlord in form and substance,
Landlord shall have, in addition to all other remedies provided herein and by
law, the right (but not the obligation) to cause the lien to be released by such
means as Landlord shall reasonably deem proper, including payment of the claim
giving rise to such lien. All such sums reasonably paid by Landlord and all
expenses incurred by it in connection therewith shall be considered Additional
Charges and shall be payable by Tenant within thirty (30) days after demand.
Landlord shall have the right at all times to post and keep posted on the
Premises any notices permitted or required by law, or that Landlord shall deem
proper for the protection of Landlord, the Premises, the Building Real Property
and any other party having an interest therein, from mechanics', materialmen's
and other liens. In addition to all other requirements contained in this Lease,
Tenant shall give to Landlord at least ten (10) business days prior written
notice of commencement of any construction on the Premises.
13. Subordination.
-------------
13.1 Tenant agrees that this Lease shall be subject and subordinate
at all times to (a) all ground leases or underlying leases that may now exist or
hereafter be executed affecting the Building Real Property or any portion
thereof, (b) the lien of any mortgage or other security instrument (and any
advances thereunder) that may now exist or hereafter be executed in any amount
for which the Building Real Property or any portion thereof, any ground leases
or underlying leases, or Landlord's interest or estate therein is specified as
security; and (c) all modifications, renewals, supplements, consolidations and
replacements thereof. Notwithstanding the foregoing, Landlord shall have the
right to subordinate or cause to be subordinated to this Lease any such ground
leases, underlying leases or liens provided Tenant's rights hereunder are not
disturbed if Tenant is in compliance with the terms of this Lease. If any ground
lease or underlying lease terminates for any reason or any mortgage or other
security instrument is foreclosed or a conveyance in lieu of foreclosure is made
for any reason, Tenant shall, notwithstanding any subordination, attorn to and
become the tenant of the successor in interest to Landlord. Tenant covenants and
agrees to execute and deliver, within ten (10) calendar days after demand by
Landlord and in the form reasonably requested by Landlord, any additional
documents evidencing the priority or subordination of this Lease with respect to
any such ground leases, underlying leases, mortgages, or other security
instruments.
14. Inability to Perform.
--------------------
14.1 Except to the extent expressly provided herein, if, by reason
of acts of God, governmental restrictions, strikes, labor disturbances,
shortages of materials or supplies or any other cause or event beyond Landlord's
reasonable control, Landlord is (i) unable to furnish or is delayed in
furnishing any utility or service required to be furnished by Landlord under the
provisions of Article 19, any other Article of this Lease, or any collateral
instrument, (ii) unable to perform or make or is delayed in performing or making
any installations, decorations, repairs, alterations, additions or improvements,
required to be performed or made under this Lease or under any collateral
instrument, or (iii) unable to fulfill or is delayed in fulfilling any of
Landlord's other obligations under this Lease or any collateral instrument, no
such inability or delay shall (a) constitute an actual or constructive eviction,
in whole or in part, (b) entitle Tenant to any abatement or diminution of Rent
or Additional Charges except as provided in Section 19.3, (c) relieve Tenant
from any of its obligations under this Lease, or (d) impose any liability upon
Landlord or its agents by reason of inconvenience or annoyance to Tenant or by
reason of injury to or interruption of Tenant's business, or otherwise. Tenant
hereby waives and releases its right to terminate this Lease under Section
1932(1) of the California Civil Code or under any similar law, statue or
ordinance now or hereafter in effect, except to the extent expressly provided
herein.
15. Destruction.
-----------
15.1 Repair. If any portion of the Building is damaged by fire,
------
earthquake, flood or other casualty (the "Damaged Property") to the extent that
such portion is rendered unusable by Tenant or renders a portion of the Premises
unusable and the Damaged Property can, in Landlord's reasonable opinion, be
repaired within one hundred eighty (180) days after the date of damage (under a
normal construction schedule not requiring the payment of overtime or premium),
Landlord shall proceed immediately to make such repairs in accordance with
Section 15.4 below (unless this Lease is terminated pursuant to this Article
15). Landlord's opinion shall be delivered to Tenant within thirty (30) days
after the date of the damage. Landlord shall consider and include as part of its
evaluation, the period of time necessary to obtain the required approvals of the
mortgagee and insurer and governmental entities, to order and obtain materials,
and to engage contractors. Notwithstanding anything to the contrary herein, the
total destruction of the Building shall automatically terminate this Lease as of
the date of destruction.
-10-
<PAGE>
15.2 Tenant's Right to Terminate. If such damage causes all or any
---------------------------
material portion of the Premises to be unusable by Tenant and (i) in Landlord's
reasonable opinion damage to the Damaged Property cannot be repaired within one
hundred eighty (180) days from the date of the damage (under a normal
construction schedule not requiring the payment of overtime or premium), Tenant
may terminate this Lease by delivery of written notice to Landlord within thirty
(30) days after the date on which Landlord's opinion is delivered to Tenant.
Upon termination, Rent and Additional Charges pursuant to Article 4 shall be
apportioned as of the date of the damage and all prepaid Rent and Additional
Charges pursuant to Article 4 shall be repaid.
15.3 Landlord's Right to Terminate. In the event (i) the uninsured
-----------------------------
portion of any damage to or destruction of the Building equals or exceeds fifty
percent (50%) of the replacement cost of the Building; or (ii) the Lease will
expire within one (1) year from the date of any material damage to or
destruction of the Premises and Tenant fails to extend the term in accordance
with any right expressly granted in this Lease within thirty (30) days after the
date of damage, Landlord may elect to terminate this Lease as hereinafter
provided. Landlord may terminate this Lease for the reason stated in clause (i)
of this Section, by delivery of written notice to Tenant within thirty (30) days
after the date of damage or destruction; and for the reason stated in clause
(ii) of this Section, by delivery of written notice to Tenant within forty-five
(45) days after the date of the damage or destruction. For purposes of the
foregoing, the uninsured portion shall not include a deficiency in insurance
proceeds to the extent caused by (i) Landlord's failure to carry insurance
required by this Lease; (ii) Landlord's election to carry required insurance in
an amount less than 100% of the replacement costs; or (iii) Landlord's election
to obtain insurance with a deductible amount or coinsurance obligations.
15.4 Extent of Repair Obligations. If this Lease is not terminated
----------------------------
as a result of any damage to the Premises covered by Section 15.1 above,
Landlord's repair obligation shall extend to the structure of the Building and
all improvements (except those constructed or installed by Tenant, including the
Tenant Improvements to the extent funded by Tenant) in the Premises at the
completion of construction of the Tenant Improvements, and Tenant shall repair
all other portions of the Premises (including without limitation the Tenant
Improvements to the extent funded by Tenant, Alterations, and Tenant's trade
fixtures, equipment, furnishings and other personal property). All such repairs
shall be performed in a good and workmanlike manner, with due diligence, and
shall restore the items repaired to substantially the same usefulness, design
and construction as existed immediately before the damage. All work by Tenant
shall be performed in accordance with the requirements of Section 11.2 above.
Notwithstanding anything to the contrary in this Lease, Landlord shall not be
obligated to expend on such repairs more than the amount of insurance proceeds
actually received by Landlord on account of the damage; provided, however, that
Landlord shall complete all such repairs if Tenant pays to Landlord in advance
the difference between the cost of such repairs and the amount of insurance
proceeds received by Landlord on account of the damage. In the event of any
termination of this Lease, the proceeds from any insurance paid by reason of
damage to or destruction of the Building Real Property or any portion thereof,
or any other element, component or property insured by Landlord shall belong to
and be paid to Landlord, except for proceeds payable under Tenant's fire
insurance policies. In the event of a casualty covered by insurance which
Landlord is required to carry under this Lease, Rent and Additional charges
under Article 4 above shall abate commencing on the date of the casualty and
ending when the Damaged Property is repaired as aforesaid by Landlord and the
Premises are delivered to Tenant. The extent of the abatement shall be based
upon the portion of the Premises rendered untenantable, inaccessible or unfit
for use in a reasonable business manner for the purposes stated in this Lease.
15.5 Arbitration. If the parties are unable to agree upon the
-----------
appropriate abatement of Rent and Additional Charges pursuant to this Article 15
within thirty (30) days after repairs are completed, either party may submit the
dispute to arbitration in accordance with Section 30.18.
15.6 Non-Application of Certain Statutes. The provisions of this
-----------------------------------
Lease, including this Article 15, constitute an express agreement between
Landlord and Tenant with respect to any and all damage to, or destruction of,
all or any part of the Premises, or any other portion of the Building. Any
statute or regulation of the State of California or any other governmental
authority or body, including, without limitation, Sections 1932(2) and 1933(4)
of the California Civil Code, with respect to any rights or obligations
concerning any such damage or destruction in the absence of an express agreement
between the parties, and any other statute or regulation relating to damage or
destruction of leased premises, now or hereafter in effect, shall have no
application to this Lease or any damage or destruction to all or any part of the
Premises or any other portion of the Building.
16. Insurance.
---------
16.1 Insurance on Tenant's Property. Tenant shall provide insurance
------------------------------
coverage for all risks of physical loss or damage insuring the full replacement
value of the Tenant Improvements, Alterations, Tenant's trade fixtures,
furnishings, equipment, plate glass, signs and all other items of personal
property of Tenant.
16.2 Tenant's Liability Insurance. Tenant shall procure at its cost
----------------------------
and expense and keep in effect during the term of this Lease broad form
commercial general liability insurance, and automobile liability insurance, each
with a minimum combined single limit of liability of at least Two Million
Dollars ($2,000,000.00), and statutory worker's compensation insurance with a
Two Million Dollars ($2,000,000.00) employer's liability limit covering all of
Tenant's employees. Such broad form commercial general liability insurance shall
include, without limitation, products and completed operations liability
insurance, fire legal liability insurance, contractual liability insurance
applicable to all of Tenant's indemnity
-11-
<PAGE>
obligations under this Lease, and such other coverage as Landlord may reasonably
require from time to time. At Landlord's request, Tenant shall increase such
insurance coverage to a level that is reasonable and customary. If the parties
are unable to agree on the amount that is reasonable and customary, the matter
shall be determined by arbitration pursuant to Section 30.18 below.
16.3 Form of Policies. All insurance policies required to be
----------------
carried by Tenant under this Lease shall (i) be written by companies rated A 10
or better in "Best's Insurance Guide," or as acceptable to Landlord, and
authorized to do business in California, (ii) name Landlord, SENTRE Partners,
Inc. and any other parties designated by Landlord as additional insureds, (iii)
as to liability coverages, be written on an "occurrences" basis, (iv) provide
that Landlord shall receive at least thirty (30) days notice from the insurer
before any cancellation or change in coverage, and (v) contain a provision that
no act or omission of Tenant shall affect or limit the obligation of the insurer
to pay the amount of any loss sustained. Each such policy shall contain a
provision that such policy and the coverage evidenced thereby shall be primary
and non-contributing with respect to any policies carried by Landlord and that
any coverage carried by Landlord shall be excess insurance. Any deductible
amounts under any insurance policies required hereunder shall be subject to
Landlord's prior written approval (which shall not be unreasonably withheld) and
in any event Tenant shall be liable for payment of same in the event of any
casualty. Tenant shall deliver reasonably satisfactory evidence of such
insurance to Landlord on or before the Commencement Date, and thereafter at
least thirty (30) days before the expiration dates of expiring policies; and, in
the event Tenant shall fail to procure such insurance or to deliver reasonably
satisfactory evidence thereof within five (5) business days after written notice
from Landlord of such failure, Landlord may, at its option and in addition to
Landlord's other remedies in the event of a default by Tenant hereunder, procure
such insurance for the account of Tenant, and the cost thereof shall be paid to
Landlord as Additional Charges. Notwithstanding the foregoing, if any such
insurance expires without having been renewed by Tenant, Landlord shall have the
option in addition to Landlord's other remedies to procure such insurance for
the account of Tenant immediately and without notice to Tenant, and the cost
thereof shall be paid to Landlord as Additional Charges. The limits of the
insurance required under this Lease shall not limit the liability of Tenant.
16.4 Compliance with Insurance Requirements. Tenant shall not do
--------------------------------------
anything, or suffer or permit anything to be done, in or about the Premises that
shall invalidate or be in conflict with the provisions of any fire or other
insurance policies covering the Building or any property located therein.
Tenant, at Tenant's expense, shall comply with, and shall cause all occupants of
the Premises to comply with, all applicable customary rules, orders, regulations
or requirements of any board of fire underwriters or other similar body.
16.5 Landlord's Insurance. Landlord shall purchase and keep in full
--------------------
force and effect "special form coverage" insurance covering the Project in an
amount equal to 100% of the full replacement value of the Project improvements
at the time of the loss, and at least Three Million Dollars ($3,000,000.00) in
liability insurance with respect to the Project, including coverage for Project
Common areas.
17. Eminent Domain.
--------------
17.1 Effect of Taking. If all of the Premises is condemned or taken
----------------
in any manner for public or quasi-public use, or any transfer of the Premises is
made in avoidance of an exercise of the power of eminent domain (each of which
events shall be referred to as a "taking"), this Lease shall automatically
terminate as of the date of the vesting of title as a result of such taking. If
a part of the Premises is so taken, this Lease shall automatically terminate as
to the portion of the Premises so taken as of the date of the vesting of title
as a result of such taking. If such portion of the Real Property is taken as to
render the Building incapable of economically feasible operation, this Lease may
be terminated by Landlord, as of the date of the vesting of title as a result of
such taking, by written notice to Tenant within sixty (60) days following notice
to Landlord of the date on which said vesting will occur; provided that such
termination by Landlord is made in good faith in a nondiscriminatory manner. If
such portion of the Premises is taken as to render the Premises or the remaining
portion thereof unusable by Tenant, this Lease may be terminated by Tenant as of
the date of the vesting of title as a result of such taking, by written notice
to Landlord within sixty (60) days following notice to Tenant of the date on
which said vesting will occur. If this Lease is not terminated as a result of
any taking, Landlord shall restore the Building to an architecturally whole
unit; provided, however, that Landlord shall not be obligated to expend on such
restoration more than the amount of condemnation proceeds actually received by
Landlord, unless Tenant pays to Landlord in advance the difference between the
cost of such restoration and the amount of the condemnation proceeds received by
Landlord.
17.2 Award. Landlord shall be entitled to the entire award for
-----
any taking, including, without limitation, any award made for the value of the
leasehold estate created by this Lease. No award for any partial or entire
taking shall be apportioned, and Tenant hereby assigns to Landlord any award
that may be made in any taking, together with any and all rights of Tenant now
or hereafter arising in or to such award or any part thereof; provided, however,
that nothing contained herein shall be deemed to give Landlord any interest in
or to require Tenant to assign to Landlord any separate award made to Tenant for
its relocation expenses, the taking of personal property and fixtures belonging
to Tenant, the unamortized value of improvements made or paid for by Tenant or
the interruption of or damage to Tenant's business.
17.3 Abatement of Rent. In the event of a partial taking that does
-----------------
not result in a termination of this Lease as to the entire Premises, the Rent
shall abate in proportion to the portion of the Premises taken or rendered
untenantable by such taking. Tenant hereby waives and releases its rights
-12-
<PAGE>
under Section 1265.130 of the California Code of Civil Procedure or any similar
statute now or hereafter in effect.
17.4 Temporary Taking. If all or any portion of the Premises is
----------------
taken for a limited period of time, this Lease shall remain in full force and
effect; provided, however, that the Rent and Additional Charges payable pursuant
to Article 4 above shall abate during such limited period in proportion to the
portion of the Premises taken by such taking. Landlord shall be entitled to
receive the entire award made in connection with any such temporary taking. Any
temporary taking of all or a portion of the Premises which continues for twelve
(12) months shall be deemed a permanent taking of the Premises or such portion.
18. Assignment.
----------
18.1 Consent Required. Notwithstanding the provisions of Section
----------------
30.4 below, neither Tenant nor any sublessee or assignee of Tenant shall,
directly or indirectly, voluntarily or by operation of law, sell, assign,
encumber, pledge or otherwise transfer or hypothecate all or any part of the
Premises or Tenant's leasehold estate hereunder (each such act is herein
referred to as an "Assignment"), or sublet the Premises or any portion thereof
or permit the Premises to be occupied by anyone other than Tenant (each such act
is herein referred to as a "Sublease"), without Landlord's prior written consent
in each instance, which consent shall not be unreasonably withheld or delayed.
Any Assignment or Sublease that is not in compliance with this Article 18 shall
be void and, at the option of Landlord, shall constitute a material default by
Tenant under this Lease. The acceptance of Rent or Additional Charges by
Landlord from a proposed assignee, sublessee or occupant of the Premises shall
not constitute consent to such Assignment or Sublease by Landlord. Seventy
percent (70%) of the total amount paid to Tenant which is attributable to this
Lease in connection with any Assignment, and seventy percent (70%) of the excess
of the total amount of rent and other consideration paid under or in
consideration for any Sublease over the Rent and Additional Charges payable
hereunder, shall be payable to Landlord as Additional Charges. The right to such
amounts is expressly reserved from the grant of Tenant's leasehold estate for
the benefit of Landlord. Tenant shall use reasonable diligent efforts to collect
all such amounts. Landlord shall have the right from time to time, upon
reasonable advance notice, to review Tenant's records relating to any such
amounts payable to or received by Tenant.
18.2 Notice. Any request by Tenant for Landlord's consent to a
------
specific Assignment or Sublease shall include (a) the name of the proposed
assignee, sublessee or occupant, (b) the nature of the proposed assignee's,
sublessee's or occupant's business to be carried on in the Premises, (c) a copy
of the proposed Assignment or Sublease, and (d) such financial information (in
the event of an Assignment) and such other information as Landlord may
reasonably request concerning the proposed assignee, sublessee or occupant or
its business. Landlord shall respond in writing, stating the reasons for any
disapproval, within fifteen (15) business days after receipt of all information
reasonably necessary to evaluate the proposed Assignment or Sublease. If
Landlord fails to respond in writing within such fifteen (15) business day
period, and further fails to respond within five (5) business days after
Landlord's actual receipt of written notice from Tenant of Landlord's failure to
respond within such period, Tenant's request shall be deemed approved.
18.3 No Release. No consent by Landlord to any Assignment or
----------
Sublease by Tenant, and no specification in this Lease of a right of Tenant's to
make any Assignment or Sublease, shall relieve Tenant of any obligation to be
performed by Tenant under this Lease, whether arising before or after (a) the
Assignment or Sublease or (b) any extension of the Term (pursuant to exercise of
an option granted in this Lease). The consent by Landlord to any Assignment or
Sublease shall not relieve Tenant or any successor of Tenant from the obligation
to obtain Landlord's express written consent to any other Assignment or
Sublease.
18.4 Cost of Processing Request. Tenant shall pay to Landlord the
--------------------------
reasonable amount of Landlord's cost of reviewing and processing every proposed
Assignment or Sublease (including, without limitation, reasonable accountants'
and attorneys' fees not exceeding $750) and the reasonable amount of all direct
and indirect expenses incurred by Landlord arising from any assignee, occupant
or sublessee taking occupancy (including, without limitation, freight elevator
operation for moving of furnishings and trade fixtures, security service,
janitorial and cleaning service, and rubbish removal of service).
18.5 Corporation or Partnership Transfers. Any sale or other
------------------------------------
transfer, other than to any affiliate controlled by Tenant or which controls
Tenant or is under common control with Tenant, including without limitation by
consolidation, merger or reorganization, of a majority of the voting stock of
Tenant or any beneficial interest therein, if Tenant is a corporation, or any
sale or other transfer, other than to any affiliate controlled by Tenant or
which controls Tenant or is under common control with Tenant, of a majority of
the general partnership interests in Tenant or any beneficial interest therein,
if Tenant is a partnership, shall be an Assignment for purposes of this Lease.
18.6 Assumption of Obligations. Each assignee or other transferee
-------------------------
of Tenant's interest hereunder, other than Landlord, shall assume, as provided
in this Section, all obligations of Tenant under this Lease and shall be and
remain liable jointly and severally with Tenant for the payment of Rent and
Additional Charges, and for the performance of all the terms, covenants,
conditions and agreements herein contained on Tenant's part to be performed for
the Term. Each sublessee of all or any portion of the Premises shall agree in
writing for the benefit of Landlord (a) to comply with and agree to those
provisions of this Lease as are reasonably designated by Landlord, and (b) that
such sublease (and all further subleases of any portion of the Premises) shall
terminate upon any termination of this Lease, regardless
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<PAGE>
of whether or not such termination is voluntary. No Assignment or Sublease shall
be valid or effective unless the assignee or sublessee or Tenant shall deliver
to Landlord a fully-executed counterpart of the Assignment or Sublease and an
instrument that contains a covenant of assumption by the assignee or agreement
to perform Tenant's obligations, reasonably satisfactory in substance and form
to Landlord, consistent with the requirements of this Section. The failure or
refusal of the assignee to execute such instrument of assumption shall not
release or discharge the assignee from its liability as set forth above.
18.7 No Signs. Tenant shall not place or allow to be placed in, on
--------
or about the Building or any other portion of the Project any sign or other
notice indicating Tenant's desire to assign this Lease or sublet the Premises.
18.8 Upon Termination. In the event of a termination of this Lease
-----------------
by reason of Tenant's default or in the event of a mutually agreed termination,
at Landlord's option, each sublessee of any portion of the Premises shall attorn
to Landlord. Each such sublessee shall be deemed to have agreed to the
provisions of this Section and any such Assignment or Sublease shall
specifically provide as such.
19. Utilities and Services.
----------------------
19.1 Landlord to Furnish. Landlord shall furnish, subject to
--------------------
reimbursement pursuant to Article 5 above, (a) heating, ventilation and air
conditioning to the Premises during the hours of 7:00 a.m. until 6:00 p.m.
Monday through Friday and, upon request, 8:00 a.m. to 1:00 p.m. on Saturday
(excluding holidays), (b) automatic elevator service to the floor or floors
where the Premises are located at all times, and (c) hot and cold water at those
points of supply shown on the approved plans for the Premises. Tenant shall be
solely responsible for and shall promptly pay all other utilities and services
supplied to the Premises, including without limitation electrical service to the
Existing Premises. Tenant acknowledges and agrees that the Expansion Premises
share an electrical meter with other tenants, and Tenant shall reimburse
Landlord for Tenant's prorata share of the costs of such electrical service
(calculated by dividing the Rentable Area of the First Expansion Premises
(5,695) and Second Expansion Premises (19,305), as applicable, by the total
rentable area covered by such electrical meter (48,690)). Tenant shall, at its
cost, be responsible for all janitorial service for the Premises.
19.2 Excess Usage. Whenever heat generating machines or equipment
------------
or lighting are used in the Premises by Tenant which materially affect the
temperature otherwise maintained by the air conditioning system, Landlord shall
have the right to install supplementary air conditioning facilities in the
Premises or otherwise modify the ventilating and air conditioning system serving
the Premises, and the reasonable cost of such facilities and modifications shall
be borne by Tenant. Tenant also shall pay the cost of providing all heating or
cooling energy to the Premises during hours other than those specified in clause
(a) of Section 19.1 above; such cost to be charged at the current rate of $25.00
per hour, which rate is subject to change. Landlord shall furnish such
after-hours heating or cooling energy upon at least twenty-four (24) hours
advance notice from Tenant. If Tenant (a) installs lighting or other equipment
which results in an average electrical load per floor in the Premises in excess
of the amount specified in Section 19.1(c) above, or (b) uses electrical power
beyond the hours specified in Section 19.1(a), Tenant shall pay for the
reasonable cost of such excess power and the cost of installing any additional
risers or other facilities that may be necessary to furnish such excess power to
the Premises; provided, however, that Tenant shall have no right to install
lighting or other equipment which results in an average electrical load per
floor in excess of the amount specified in Section 19.1(c) above without
Landlord's prior written consent. Tenant shall pay in advance Landlord's
reasonable estimate of any and all costs for additional facilities and
modifications which may be constructed by Landlord under this Section (including
without limitation the costs of labor, materials, equipment, supervision and
management fee), subject to adjustment of final costs upon completion.
19.3 Interruption of Service. Landlord reserves the right to stop
-----------------------
the service of the heating, ventilating, air conditioning, elevator, plumbing,
electrical or other mechanical systems or facilities in the Premises or Building
when necessary by reason of accident or emergency, or for repairs, alterations,
replacements or improvements that, in the reasonable judgment of Landlord, are
desirable or necessary, until such accident or emergency shall have been
corrected or such repairs, alterations, replacements or improvements shall have
been completed. In the event Tenant is unable to use the Premises due to any
such interruption in services for more than five (5) consecutive business days,
Tenant shall be entitled to an equitable abatement of Rent. Landlord shall give
Tenant advance notice of any such interruption of services when reasonably
possible, and shall restore such services as soon as reasonably possible and in
a manner so as to cause as little interference with Tenant's use of the Premises
as is reasonably possible; provided, however, that Landlord shall not be
obligated to perform work during other than normal business hours. In addition,
Landlord reserves the right to limit, restrict or ration the use of water,
electricity, gas or any other form of energy or any other service or utility
serving the Premises or the Building, in compliance with the requirements of
federal, state or local governmental agencies or utilities suppliers in reducing
energy or other resources consumption. Tenant shall cooperate reasonably with
any voluntary energy conservation program initiated by Landlord in cooperation
with the efforts of federal, state or local governmental agencies or utilities
suppliers in reducing the consumption of energy or other resources.
19.4 Security Systems and Programs. The parties acknowledge that
-----------------------------
safety and security devices, services and programs provided by Landlord, if any,
while intended to deter crime and safety, may not in given instances prevent
theft or other criminal acts, or insure safety of persons or property. The risk
that any safety or security device, service or program may not be effective, or
may malfunction or be circumvented, is assumed by Tenant with respect to
Tenant's property and interests, and Tenant shall
-14-
<PAGE>
obtain insurance coverage to the extent Tenant desires protection against
criminal acts and other losses. Tenant agrees to cooperate with any reasonable
safety or security program developed by Landlord or required by law.
19.5 No Liability. Landlord shall not be liable or responsible for
------------
any interruption in the services to be provided under this Article 19, or for
any interruptions of services occurring in connection with the making of
repairs, replacements or improvements to the Premises or the Building.
20. Default.
-------
20.1 Events Constituting Default. Except as otherwise provided
---------------------------
herein, the failure to perform or honor any covenant, condition or other
obligation of Tenant or the failure of any representation made by Tenant under
this Lease (including Exhibits hereto) shall constitute a default hereunder by
Tenant upon expiration of the appropriate grace period hereinafter provided, if
any. Tenant shall have a period of three (3) business days from the date of
written notice from Landlord within which to cure any default in the payment of
Rent. Tenant shall have a period of ten (10) days from the date of written
notice from Landlord within which to cure any default in the payment of
Additional Charges. Tenant shall have a period of thirty (30) days from the date
of written notice from Landlord within which to cure any other default under
this Lease; provided, however, that with respect to any default (other than a
default which can be cured by the payment of money) that cannot reasonably be
cured within thirty (30) days, the default shall not be deemed to be uncured if
Tenant commences to cure within thirty (30) days from Landlord's notice,
continues to prosecute diligently the curing of such default and actually cures
such default within sixty (60) days after Landlord's notice. Any default under
the terms of this Lease shall constitute a default under the terms of the
Existing Lease, and any default under the terms of the Existing Lease shall
constitute a default under the terms of this Lease.
20.2 Remedies. Upon the occurrence of a default by Tenant that is
--------
not cured by Tenant within the grace periods specified in Section 20.1, Landlord
shall have the following rights and remedies in addition to all other rights and
remedies available to Landlord at the law or in equity:
(a) The rights and remedies provided by California Civil
Code Section 1951.2, including, but not limited to, the right to terminate
Tenant's right to possession of the Premises and to recover (i) "the worth at
the time of award" (as defined in Section 20.2(f) below) of the unpaid Rent and
Additional Charges which shall have been earned at the time of termination; plus
(ii) the worth at the time of award of the amount by which the unpaid Rent and
Additional Charges which would have been earned after termination until the time
of award shall exceed the amount of loss of such Rent and Additional Charges
that Tenant proves could have been reasonably avoided; plus (iii) the worth at
the time of award of the amount by which the unpaid Rent and Additional Charges
for the balance of the term of this Lease after the time of award shall exceed
the amount of loss of such Rent and Additional Charges that Tenant proves could
be reasonably avoided; plus (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or which would be likely to result therefrom
(including, without limitation, attorneys' and accountants' fees, costs of
alterations of the Premises, interest costs and brokers' fees incurred upon any
reletting of the Premises);
(b) The rights and remedies provided by California Civil
Code Section 1951.4 (Landlord may continue the Lease in effect after Tenant's
breach and abandonment and recover Rent and Additional Charges as they become
due. Acts of maintenance or preservation, efforts to relet the Premises or the
appointment of a receiver upon Landlord's initiative to protect its interest
under this Lease shall not of themselves constitute a termination of Tenant's
right to possession;
(c) The right and power to enter the Premises and remove
therefrom all persons and property, to store such property in a public warehouse
or elsewhere at the cost of and for the account of Tenant, and to sell such
property and apply the proceeds therefrom pursuant to applicable California law.
In such event, Landlord may from time to time sublet the Premises or any part
thereof for such term or terms (which may extend beyond the Term) and at such
rent and such other terms as Landlord in its sole discretion may deem advisable,
with the right to make alterations and repairs to the Premises. Upon each such
subletting, rents received from such subletting shall be applied by Landlord,
first, to payment of any indebtedness other than Rent and Additional Charges due
hereunder from Tenant to Landlord; second, to the payment of any costs of such
subletting (including with limitation attorneys' and accountants' fees, costs of
alterations of the Premises, interests costs, and brokers' fees) and of any such
alterations and repairs; third, to payment of Rent and Additional Charges due
and unpaid hereunder; and the residue, if any, shall be held by Landlord and
applied in payment of future Rent and Additional Charges as they become due
hereunder. If any rental or other charges due under such sublease shall not be
promptly paid to Landlord by the sublessee(s), or if such rentals received from
such subletting during any month are less than Rent and Additional Charges to be
paid during that month by Tenant hereunder, Tenant shall pay any such deficiency
to Landlord as well as any unpaid indebtedness other than Rent and Additional
Charges due hereunder from Tenant to Landlord and the costs of such subletting
(including without limitation attorneys' and accountants' fees, costs of
alterations of the Premises, interests costs and brokers' fees), and any other
amounts due Landlord under this Section. Such deficiency shall be calculated and
paid monthly. For all purposes set forth in this Section, Landlord is hereby
irrevocably appointed attorney-in-fact for Tenant, with power of substitution.
No taking possession of the Premises by Landlord shall be construed as an
election on its part to terminate this Lease unless a written notice of such
intention is given to Tenant. Landlord's subletting the Premises without
termination shall not constitute a waiver of Landlord's right to elect to
terminate this Lease for such previous breach;
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(d) The right to have a court appointed receiver appointed
for Tenant, upon application by Landlord, to take possession of the Premises, to
apply any rental collected from the Premises and to exercise all other rights
and remedies granted to Landlord pursuant to Section 20.2(c); and
(e) The right to specific performance of any or all of
Tenant's obligations hereunder, and to damages for delay in or failure to such
performance.
(f) For purposes of Section 20.2(a) the "worth at the time
of award" of the amounts referred to in subparagraphs (i) and (ii) shall be
computed with interest at the Interest Rate per annum or the maximum rate
allowed by law; the "worth at the time of award" of the amount referred to in
subparagraph (iii) shall be computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of the award plus
one percent (1%); and "Rent and Additional Charges" with respect to each month
shall be calculated by adding (a) one twelfth (1/12th) of the Rent payable for a
full lease year at the time of default, plus (b) the monthly average of the
Additional Charges payable by Tenant hereunder for the year immediately before
the year in which the default occurred, or if the default occurs in the first
year of the Term, Landlord's estimate of Additional Charges which would have
been payable monthly by Tenant during that year. For purposes of computing
amounts that would have accrued after the time of award, increases in Rent and
Additional Charges shall be projected based upon the average rate of inflation
from the Commencement Date through the time of award; provided, however, that in
no event shall Rent be deemed to decrease after the time of award, nor shall
Additional Charges under Article 5 be deemed to be less than zero.
20.3 Remedies Cumulative. The exercise of any remedy provided by
-------------------
law or the provisions of this Lease shall not exclude other remedies unless they
are expressly excluded by this Lease. Tenant hereby waives any right of
redemption or relief from forfeiture following the termination of, or exercise
of any remedy by Landlord with respect to, this Lease.
20.4 Recovery Against Landlord. Tenant shall look solely to
-------------------------
Landlord's interest in the Building Real Property (including any proceeds of
sale of the Building Real Property and insurance proceeds received by Landlord
with respect to the Building Real Property) for the recovery as provided under
applicable law of any judgment against Landlord; provided, however, that Tenant
shall not be entitled to recover out of any insurance proceeds received by
Landlord which Landlord is applying or has a good faith intention to apply to
work on the Building. Landlord, or if Landlord is a partnership, its partners
whether general or limited, or if Landlord or any constituent partner or
Landlord is a corporation, its directors, officers and shareholders, shall never
be personally liable for any such judgment.
20.5 Events of Default by Landlord. The failure by Landlord to
-----------------------------
observe or perform any of the covenants, conditions, or provisions of this Lease
to be observed or performed by Landlord, where such failure shall continue for a
period of thirty (30) days after written notice thereof by Tenant to Landlord,
shall be deemed to be a default by Landlord under this Lease, provided, however,
that if the nature of Landlord's default is such that more than thirty (30) days
are reasonably required for its cure, then Landlord shall not be deemed to be in
default if Landlord commences such cure within said thirty (30) day period and
thereafter diligently prosecutes such cure to completion, provided that the
default shall actually be cured within one hundred eighty (180) days after
notice. Notwithstanding the foregoing, Tenant shall give written notice of any
default by Landlord to all mortgagees under mortgages encumbering all or any
portion of the Building Real Property or any interest therein of which Tenant
has received written notice, and Landlord shall not be deemed to be in default
unless no mortgagee has commenced to cure such default or commenced foreclosure
proceedings within thirty (30) days (or such longer period as is reasonably
required, but not to exceed one hundred eighty (180) days) after such mortgagee
has received such notice.
21. Insolvency or Bankruptcy.
------------------------
21.1 The occurrence of any of the following shall, at Landlord's
option, constitute a breach of this Lease by Tenant: (i) the appointment of a
receiver to take possession of all or substantially all of the assets of Tenant
or the Premises, (ii) an assignment by Tenant for the benefit of creditors,
(iii) any action taken or suffered by Tenant under any insolvency, bankruptcy,
reorganization, moratorium or other debtor relief act or statute, whether now
existing or hereafter amended or enacted, (iv) the filing of any voluntary
petition in bankruptcy by Tenant, or the filing of any involuntary petition by
Tenant's creditors, which involuntary petition remains undischarged for a period
of thirty (30) days, (v) the attachment, execution or other judicial seizure of
all or substantially all of Tenant's assets or the Premises, if such attachment
or other seizure remains undismissed or undischarged for a period of ten (10)
business days after the levy thereof, (vi) the admission by Tenant in writing of
its inability to pay its debts as they become due, (vii) the filing by Tenant of
any answer admitting or failing timely to contest a material allegation of a
petition filed against Tenant in any proceeding seeking reorganization,
arrangement, composition, readjustment, liquidation or dissolution of Tenant or
similar relief, or (viii) if within thirty (30) days after the commencement of
any proceeding against Tenant seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under any
present or future statue, law or regulation, such proceeding shall not have been
dismissed. Upon the occurrence of any such event or at any time thereafter, this
Lease shall terminate five (5) days after written notice of termination from
Landlord to Tenant. In no event shall this Lease be assigned or assignable by
operation of law or by voluntary or involuntary bankruptcy proceedings or
otherwise, and in no event shall this Lease or any right or privileges hereunder
be an asset of Tenant under any bankruptcy, insolvency or reorganization
proceedings. If, upon the occurrence of any of the events enumerated above,
under applicable law Tenant or the trustee in bankruptcy has the right to affirm
this Lease and continue to perform the obligations of Tenant hereunder,
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Tenant or such trustee shall, in such time period as may be permitted by the
bankruptcy court having jurisdiction, cure all defaults of Tenant outstanding
hereunder as of the date of the affirmance of this Lease and provide to Landlord
such adequate assurances as may be necessary to ensure Landlord of the continued
performance of Tenant's obligations under this Lease. Notwithstanding the
provisions of Section 20.1, there shall be no cure periods for any breach or
default under this Article 21.
22. Fees and Expenses; Indemnity; Payment.
-------------------------------------
22.1 Landlord's Right to Remedy Defaults. If Tenant shall default
-----------------------------------
in the performance of any of its obligations under this Lease after notice of
expiration of the applicable cure period, if any, Landlord, at any time
thereafter and without additional notice, may remedy such default for Tenant's
account and at Tenant's expense, without thereby waiving any other rights or
remedies of Landlord with respect to such default. Notwithstanding the
foregoing, Landlord shall have the right to cure any failure by Tenant to
perform any of its obligations under this Lease without notice to Tenant if such
failure results in an immediate threat to life or safety of any person, or
impairs the Building or its efficient operation.
22.2 Indemnity. Subject to the provisions of Section 15.6 and
---------
except to the extent caused by the gross negligence or wilful misconduct of the
party seeking indemnification, Tenant shall indemnify Landlord, all partners of
any partnership constituting Landlord, and their respective officers, directors,
shareholders, employees, servants and agents, all mortgagees of Landlord's
interest in all or any portion of the Building Real Property, and the lessor or
lessors under all ground or underlying leases (sometimes collectively referred
to herein as "Related Entities") against and save Landlord and Related Entities
harmless from and defend Landlord and Related Entities through attorneys
reasonably satisfactory to Landlord which may include in-house attorneys) from
and against any and all claims, loss, cost liability, damage and expense
including, without limitation, penalties, fines and reasonable attorneys' fees,
to the extent incurred in connection with or arising from (a) any default by
Tenant in the observance or performance of any of the terms, covenants,
conditions or other obligations of this Lease to be observed or performed by
Tenant, or the failure of any representation made by Tenant in this Lease, (b)
the use or occupancy or manner of use or occupancy of the Premises by Tenant or
any person occupying the Premises, (c) any occurrence or happening on the
Premises arising out of Tenant's tenancy between the Commencement Date and the
time Landlord has accepted the surrender of the Premises after the expiration or
termination of this Lease, (d) any negligence or wilful misconduct of Tenant or
any person claiming through or under Tenant, or of the contractors,
subcontractors, agents, servants, employees, or licensees of Tenant or any
person claiming through or under Tenant (collectively "Tenant's Agents") in the
Premises or anyone in the Premises (other than Landlord or Landlord's agents,
employees or contractors), including without limitation, any negligence or
wilful misconduct in the making or performing of any Alterations, (e) any
negligence or wilful misconduct of Tenant or any subtenant of the Premises or
any of their respective employees while on the Building Real Property, (f)
Landlord's inability to obtain access to any portion of the Premises with
respect to which Landlord has not been furnished a key (if locked) or access has
been otherwise restricted, or (g) the use by Tenant or any of Tenant's Agents of
any Project Common Area or Building Common Area.
22.3 Assumption of Risk. Except to the extent caused by the gross
------------------
negligence or wilful misconduct of Landlord or any Related Entities, neither
Landlord nor any Related Entities shall be liable for any damage or damages of
any nature whatsoever to persons or property caused by explosion, fire, theft or
breakage, vandalism, falling plaster, by sprinkler, drainage or plumbing
systems, or air conditioning equipment, by failure for may cause to supply
adequate drainage, by the interruption of any public utility or service, by
steam, gas, electricity, water, rain or other substances leaking, issuing or
flowing into any part of the Premises, by natural occurrence, acts of the public
enemy, riot, strike, insurrection, war, court order, requisition or order of
governmental body or authority, or by anything done or omitted to be done by any
tenant, occupant or person in the Building, it being agreed that Tenant shall be
responsible for obtaining appropriate insurance to protect its interests.
22.4 Payment of Sums Due. Except as otherwise provided, Tenant
-------------------
shall pay to Landlord, within thirty (30) days after delivery by Landlord to
Tenant of bills or statements therefor, all Additional Charges and reasonable
expenditures made and reasonable monetary obligations incurred by Landlord in
collecting or attempting to collect the Rent, any Additional Charges or any
other sum actually due under this Lease or in enforcing or attempting to enforce
any rights of Landlord under this Lease or pursuant to law, including without
limitation reasonable attorneys' fees.
22.5 Interest On Past Due Obligations; Service Charge. Unless
------------------------------------------------
otherwise specifically provided herein, any amount due from Tenant to Landlord
under this Lease which is not paid within three (3) business days from the date
when due shall bear interest from the due date until paid at the lesser of the
highest rate then permitted by law or a rate per annum which is equal to four
percent (4%) plus the highest rate identified by Bank of America NT&SA as its
"reference rate" between the date such amount was due and the date such payment
was received. In addition, Tenant shall pay a service charge equal to five
percent (5%) of any amount which is not paid within the applicable grace period
specified in Section 20.1, to compensate Landlord for additional bookkeeping and
administrative expenses and lost investment opportunities which are likely to
result from such late payment. The payment of such interest or service charge
(or both) shall not alone excuse or cure any default under the Lease.
23. Access to Premises.
------------------
23.1 Landlord's Right to Enter. Landlord reserves for itself and
-------------------------
its agents, employees and independent contractors the right to enter the
Premises at all reasonable times (upon reasonable
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telephonic notice, if possible) to inspect the Premises, to supply any service
to be provided by Landlord to Tenant hereunder, to show the Premises to
prospective purchasers, mortgagees or (during the last nine (9) months of the
Lease only) tenants, to post notices of nonresponsibility, to determine whether
Tenant is complying with its obligations under this Lease, and to alter, improve
or repair the Premises or any other portion of the Building. Landlord's right to
enter the Premises shall include the right to grant access to the Premises to
governmental or utility employees. Landlord may erect use and maintain
scaffolding, pipes, conduits, and other necessary structures in and through the
Premises or any other portion of the Building where reasonably required by the
character of the work to be performed in making repairs or improvements,
provided that the entrance to the Premises shall not be blocked thereby, and
that there is no unreasonable interference with the business of Tenant. In the
event of an emergency Landlord shall have the right to enter the Premises at any
time without notice. Tenant hereby waives any claim for damages for any injury
or inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises, any right to abatement or Rent or
Additional Charges, or any other loss occasioned by Landlord's exercise of any
of its rights under this Article 23. Any entry to the Premises or portions
thereof obtained by Landlord in accordance with this Article 23 shall not be
construed or deemed to be a forcible or unlawful entry into, or a detainer of,
the Premises, or an eviction, actual or constructive, of Tenant from the
Premises or any portion thereof. Landlord shall perform all work pursuant to
this Section as quickly as is reasonably possible and in a manner designed to
cause as little interference with Tenant's use of the Premises as is reasonably
possible; provided, however, that Landlord shall not be obligated to perform
work during other than normal business hours. Tenant waives all rights to
consequential damages (including without limitation damages for lost profits and
lost opportunities) arising in connection with Landlord's exercise of its right
under this Section.
23.2 Means of Entry. Landlord shall have the right to use any and
--------------
all means that Landlord may deem necessary or proper to open doors in an
emergency, in order to obtain entry to any portion of the Premises. Landlord
shall be responsible for the cost of any repairs in connection with such entry,
except that if Tenant caused the reason for such entry Tenant shall reimburse
Landlord for the cost of any such repairs.
24. Notices. Except as otherwise provided in this Lease, any payment
-------
required to be made and any bills, statements, notices, demands, requests or
other communications given or required to be given under this Lease shall be
effective only if rendered or given in writing, sent by personal delivery or
registered or certified mail, return receipt requested, or by overnight courier
service, addressed (a) to Tenant at the Premises, (b) to Landlord c/o SENTRE
Partners, Inc., 9605 Scranton Road, Suite 102, San Diego, California 92121, or
(c) to such other address as either Landlord or Tenant may designate as its new
address in California for such purpose by notice given to the other in
accordance with the provisions of this Section. Any such bill, statement,
notice, demand, request or other communication shall be deemed to have been
rendered or given on the date of receipt or refusal to accept delivery.
25. No Waiver. Neither this Lease nor any term or provision hereof may be
---------
waived, and no breach thereof shall be waived, except by a written instrument
signed by the party against which the enforcement of the waiver is sought. No
failure by Landlord to insist upon the strict performance of any obligation of
Tenant under this Lease or to exercise any right, power or remedy consequent
upon a breach thereof, no acceptance of full or partial Rent or Additional
Charges during the continuance of any such breach, no course of conduct between
Landlord and Tenant, and no acceptance of the keys to or possession of the
Premises before the termination of the Term by Landlord or any employee of
Landlord shall constitute a waiver of any such breach or a waiver or
modification of any term, covenant or condition of this Lease or operate as a
surrender of this Lease. No waiver of any breach shall affect or alter this
Lease, but each and every term, covenant and condition of this Lease shall
continue in full force and effect with respect to any other then-existing or
subsequent breach thereof. No payment by Tenant or receipt by Landlord of a
lesser amount than the aggregate of all Rent and Additional Charges then due
under this Lease shall be deemed to be other than on account of the first items
of such Rent and Additional Charges then accruing or becoming due, unless
Landlord elects otherwise. No endorsement or statement on any check and no
letter accompanying any check of other payment of Rent or Additional Charges in
any such lesser amount and no acceptance by Landlord of any such check or other
payment shall constitute an accord and satisfaction. Landlord may accept such
check or payment without prejudice to Landlord's right to recover the balance of
such Rent or Additional Charges or to pursue any other legal remedy.
26. Tenant's Certificates.
---------------------
26.1 Tenant, at any time during the term of this Lease and from
time to time, within ten (10) days after written request, shall execute,
acknowledge and deliver to Landlord, addressed (at Landlord' request) to any
prospective purchaser, ground or underlying lessor or mortgagee of any part of
the Building Real Property, an estoppel certificate in reasonable and customary
form and substance. Tenant's failure to do so within such ten (10) day period
shall be conclusive upon Tenant that all facts set forth in Landlord's proposed
certificate are true and correct. In addition, Tenant shall be liable for all
loss, cost or expense resulting from the failure of or delay in any sale or
funding of any loan or other transaction caused by Tenant's failure to timely
furnish any such certificate within such ten (10) day period. It is intended
that any such certificate may be relied upon by any prospective purchaser,
ground or underlying lessor or mortgagee of all or any part of the Building Real
Property.
27. Rules and Regulations.
---------------------
27.1 Tenant shall before faithfully observe and comply with, and
shall cause all occupants of the Premises and Tenant's Agents to observe and
comply with, the rules and regulations, attached to
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this Lease as Exhibit C relating to the Building and the Project Common Areas
and all reasonable modifications thereof and additions thereto from time to time
put into effect by Landlord. Landlord shall not be responsible for the
nonperformance by any other tenant or occupant of the Project of any of such
rules and regulations. In the event of any conflict between any such rule or
regulation and this Lease, this Lease shall govern.
28. Tenant's Taxes.
--------------
28.1 In addition to all other sums to be paid by Tenant under this
Lease, Tenant shall pay, before delinquency, any and all taxes levied or
assessed during the term of this Lease, whether now customary or within the
contemplation of the parties hereto, (a) upon, measured by or reasonably
attributable to the Tenant Improvements, equipment, furniture, fixtures and
other personal property located in the Premises, including without limitation
any Alterations, (b) upon or measured by Rent or Additional Charges, or both,
payable under this Lease, including without limitation any gross income tax or
excise tax levied by the City and County of San Diego, the State of California,
the Federal Government or any other governmental body with respect to the
receipt of such rental; (c) upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises or any portion thereof; or (d) upon this transaction or
any document to which Tenant is a party creating or transferring an interest or
an estate in the Premises. Tenant shall reimburse Landlord upon demand for any
and all such taxes paid or payable by Landlord (other than state and federal,
personal or corporate income taxes measured by the net income of Landlord from
all sources).
29. Corporate Authority. If either party signs as a corporation or
-------------------
partnership or other entity, each of the persons executing this Lease on behalf
of such party does hereby covenant and warrant that such party is a duly
authorized and existing entity, that such party has and is qualified to do
business in California, that the entity has full right and authority to enter
into this Lease, and that each and both of the persons signing on behalf of the
entity is and are authorized to do so.
30. Miscellaneous.
-------------
30.1 Asbestos Disclosure. Tenant acknowledges that it has been
-------------------
furnished with and has reviewed a copy of the two reports prepared by the Szaras
Company, dated September 12, 1991 and January 20, 1992, respectively, regarding
the presence of asbestos in the Project (the "Asbestos Reports"). The Asbestos
Reports are hereby accepted and approved by Tenant. Tenant acknowledges that
Landlord has not made any representations or warranties as to the content,
accuracy or completeness of the Asbestos Reports, and that Landlord has merely
provided the Asbestos Reports for the information of Tenant. Tenant shall not
maintain any physical contact with the affected area described in the Asbestos
Reports and shall prohibit Tenant's Agents from doing the same. Tenant shall
notify Tenant's Agents of the presence of asbestos and shall share copies of the
Asbestos Reports with all Tenant's Agents and shall comply with all governmental
laws and regulations relating to disclosure, notification and warnings with
respect to the contents of the Asbestos Reports.
30.2 Financial Statements. Upon Landlord's written request from
--------------------
time to time (not more frequently than once per year), Tenant shall promptly
furnish Landlord with certified financial statements reflecting Tenant's
then-current financial condition, in such form and detail as Landlord may
reasonably request; provided, however, that so long as the stock of tenant is
traded on a national exchange, Tenant may furnish an annual report instead of
financial statements. Landlord shall keep and maintain such financial statements
confidential, provided that Landlord may disclose such information as required
by law and to Landlord's attorneys, accountants, consultants and lenders.
30.3 References. All personal pronouns used in this Lease, whether
----------
used in the masculine, feminine or neuter gender, shall include all other
genders; the singular shall include the plural, and vice versa. The use herein
of the words "including" or "include" when following any general statement, term
or matter shall not be construed to limit such statement, term or matter to the
specific items or matters set forth immediately following such word or to
similar items or matters, whether or not nonlimiting language (such as "without
limitation", or "but not limited to", or words of similar import) is used with
reference thereto. All references to "mortgage" and "mortgagee" shall include
deeds of trust and beneficiaries under deeds of trust, respectively. All
Exhibits referenced herein and attached to this Lease are hereby incorporated in
this Lease by this reference. The captions preceding the Sections and Articles
of this Lease have been inserted solely as a matter of convenience and such
captions in no way define or limit the scope or intent of any provision of this
Lease.
30.4 Successors and Assigns. The terms, covenants and conditions
----------------------
contained in this Lease shall bind and inure to the benefit of Landlord and
Tenant and except as otherwise provided herein, their respective personal
representatives and successors and assigns; provided, however, that upon the
sale, assignment or transfer by Landlord (or by any subsequent Landlord) of its
interest in the Building as owner or lessee, including any transfer upon or in
lieu of foreclosure or by operation of law, Landlord (or subsequent Landlord)
shall be relieved from all subsequent obligations or liabilities under this
Lease, and all obligations subsequent to such sale, assignment or transfer (but
not any obligations or liabilities that have accrued prior to the date of such
sale, assignment or transfer) shall be binding upon the grantee, assignee or
other transferee of such interest. Any such grantee, assignee or transferee, by
accepting such interest, shall be deemed to have assumed such subsequent
obligations and liabilities.
30.5 Severability. If any provision of this Lease or the
------------
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the
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application of such provision to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Lease shall remain in effect and shall be enforceable to the
full extent permitted by law.
30.6 Construction. This Lease shall be governed by the and
------------
construed in accordance with the laws of the State of California applicable to
leases of real property made and entirely performed in California. Any actions
or proceedings brought under this Lease, or with respect to any matter arising
under or out of this Lease, shall be brought and tried only in courts located in
the City and County of San Diego, California (excepting appellate courts).
30.7 Integration. The terms of this Lease (including the Exhibits
-----------
hereto) are intended by the parties as a final expression of their agreement
with respect to such terms as are included in this Lease and may not be
contradicted by evidence of any prior or contemporaneous agreement, arrangement,
understanding or negotiation (whether oral or written). The parties further
intend that this Lease constitutes the complete and exclusive statement of its
terms, and no extrinsic evidence whatsoever may be introduced in any judicial
proceeding involving this Lease. Neither Landlord nor Landlord's agents have
made any representations or warranties with respect to the Premises, the
Building, the Building Real Property, or any other portion of the Project or
this Lease except as expressly set forth herein. The language in all parts of
this Lease shall in all cases be construed as a whole and in accordance with its
fair meaning and not restricted for or against any party.
30.8 Surrender. Upon the expiration or sooner termination of the
---------
Term, Tenant will quietly and peacefully surrender to Landlord the Premises in
the condition in which they are required to be kept as provided in Articles 10
and 11, ordinary wear and tear excepted. Upon expiration or earlier termination
of this Lease, Tenant shall, immediately upon request of Landlord, execute,
acknowledge and deliver to Landlord a recordable deed quitclaiming to Landlord
any interest of Tenant in the Premises, the Building Real Property and this
Lease.
30.9 Quiet Enjoyment. Upon Tenant paying the Rent and Additional
---------------
Charges and performing all of Tenant's obligations under this Lease, Tenant may
peacefully and quietly enjoy the Premises during the Term as against all persons
or entities claiming by or through Landlord; subject, however, to the provisions
of this Lease and to any mortgages or ground or underlying leases referred to in
Article 13.
30.10 Holding Over. If Tenant shall hold over after the expiration
------------
of the Term, Tenant shall pay Rent equal to one hundred fifty percent (150%) of
the Rent payable during the final full lease year (exclusive of abatements, if
any), together with an amount reasonably estimated by Landlord for the monthly
Additional Charges payable under this Lease, and shall otherwise be on the terms
and conditions herein specified so far as applicable (but expressly excluding
all renewal or extension rights). No holding over by Tenant after the Term shall
operate to extend the Term. In the event of any holding over without Landlord's
prior written consent, Tenant shall indemnify Landlord against all claims for
damages by any other tenant to whom Landlord may have leased all or any part of
the Premises commencing upon or after the expiration of the Term, Any holding
over with Landlord's written consent shall be construed as a tenancy at
sufferance or from month to month, at Landlord's option. Any holding over
without Landlord' written consent shall entitle Landlord to reenter the Premises
as provided in Article 20, and to enforce all other rights and remedies provided
by law or this Lease.
30.11 Time of Essence. Time is of the essence of each and every
---------------
provision of this Lease.
30.12 Broker's Commissions. Each party represents and warrants to
--------------------
the other that it has not entered into any agreement or incurred or created any
obligation which might require the other party to pay any broker's commission,
finder's fee or other commission or fee relating to the leasing of the Premises,
except for an agreement by Landlord to pay CB Commercial Real Estate Group a
commission of one and one-half percent (1.5%) of the Net Aggregate Rent during
the initial Term of this Lease (100% of such commission as to the Existing
Premises and 50% of such commission as to the Expansion Premises shall be paid
no later than thirty (30) days following execution of this Lease by Landlord and
Tenant, and 50% of such commission as to the Expansion Premises shall be paid
upon the Commencement Date of the Second Expansion Premises). The term "Net
Aggregate Rent" for purposes of this Section 30.12 shall mean the sum equal to
the total Rent due and payable by Tenant for the Existing Premises and Expansion
Premises during the initial Term of this Lease less any Rent abated by Landlord
herein. Each party shall indemnify, defend and hold harmless the other and the
other's constituent partners and their respective officers, directors, agents
and employees from and against all claims for any such commissions or fees made
by anyone claiming by or through the indemnifying party, except for the broker
named above in this Section 30.12.
30.13 No Merger. The voluntary or other surrender or termination
---------
of this Lease by Tenant, or a mutual cancellation thereof shall not work a
merger, but, at Landlord' sole option, shall either terminate all existing
subleases or subtenancies or shall operate as an assignment to Landlord or all
such subleases or subtenancies. Tenant agrees that in the event Tenant becomes
the owner of the Building Real Property, Tenant's leasehold hereunder shall not
then or thereafter merge with the fee estate and Tenant hereby irrevocably
surrenders any right to effect such merger and this Lease shall continue in full
force and effect.
30.14 Consents. Unless otherwise expressly provided in this Lease,
--------
all consents and approvals to be given by Landlord or Tenant shall not be
unreasonably withheld.
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<PAGE>
30.15 Survival. All of Tenant's and Landlord's covenants and
--------
obligations contained in this Lease which by their nature might not be fully
performed or capable of performance before the expiration or earlier termination
of this Lease shall survive such expiration or earlier termination. No provision
of this Lease providing for termination in certain events shall be construed as
a limitation or restriction of Landlord's or Tenant's rights and remedies at law
or in equity available upon a breach by the other party of this Lease.
30.16 Amendments. No amendments or modifications of this Lease or
----------
any agreements in connection therewith shall be valid unless in writing duly
executed by both Landlord and Tenant. No amendment to this Lease shall be
binding on any mortgagee of Landlord (or purchaser at any foreclosure sale)
unless such mortgagee shall have consented thereto in writing.
30.17 Attorneys' Fees. If Landlord becomes a party to any
---------------
litigation not initiated by Tenant concerning this Lease, the Premises or the
Building Real Property by reason of any act or omission of Tenant or its
authorized representatives, and not by reason of Landlord's own act or omission
or any act or omission of Landlord's authorized representatives, Tenant shall be
liable to Landlord for reasonable attorneys' fees and court costs incurred by
Landlord in the litigation.
If either party commences an action against the other party arising
out of or in connection with this Lease, or institutes any proceeding in a
bankruptcy or similar court which has jurisdiction over the other party or any
or all of its property or assets, the prevailing party shall be entitled to have
and recover from the losing party reasonable attorneys' fees and court costs.
30.18 Arbitration of Disputes.
-----------------------
(a) If arbitration is expressly provided for in this Lease
as a dispute resolution procedure, the arbitration shall be conducted as
provided in this Article, except as otherwise provided in this Lease. All
proceedings shall be conducted according to the Commercial Arbitration Rules of
the American Arbitration Association (the "AAA"), or its successor organization,
except as hereinafter provided. No action at law or in equity in connection with
any such dispute shall be brought until arbitration hereunder shall have been
waived, either expressly or pursuant to this Article. The judgment upon the
award rendered in any arbitration hereunder shall be final and binding on both
parties hereto and may be entered in any court having jurisdiction thereof.
(b) During an arbitration proceeding pursuant to this
Article, the parties shall continue to perform and discharge all of their
respective obligations under this Lease, except as otherwise provided in this
Lease.
(c) Unless arbitration is specified as a dispute resolution
procedure as to a particular dispute hereunder, disputes under this Lease shall
not be resolved by arbitration unless both parties agree in writing to do so,
and disputes shall be resolved as otherwise provided by law.
(d) All disputes that may be arbitrated in accordance with
this Article shall be raised by notice to the other party, which notice shall
state with particularity the nature of the dispute and the demand for relief,
making specific reference by article number and title of the provisions of this
Lease alleged to have given rise to the dispute. The notice shall also refer to
this Article and shall state whether or not the party giving the notice demands
arbitration under this Article. If no such demand is contained in the notice,
the other party against whom relief is sought shall have the right to demand
arbitration under this Article within ten (10) business days after such notice
is received. Unless one of the parties demands arbitration, the provisions of
this Article shall be deemed to have been waived with respect to the dispute in
question.
(e) The notice specified in Paragraph (d) above shall
identify the arbitrator to act on the notifying party's behalf. The arbitrator
shall be a person who has demonstrated at least ten (10) years of experience in
commercial real estate matters and, in particular, the subject matter of the
dispute in question. Within twenty (20) business days after receipt of the
notice of arbitration, the other party shall notify the first party of the
identity of the arbitrator to act on such other party's behalf, which arbitrator
shall be similarly qualified. If such party fails to identify its arbitrator
within twenty (20) business day period, the arbitrator named by the notifying
party shall be the only arbitrator to resolve the dispute. If two (2)
arbitrators are chosen pursuant to the foregoing, they shall meet within ten
(10) business days after the second arbitrator is appointed and, if within ten
(10) business days after such first meeting the two arbitrators shall be unable
to agree promptly upon a resolution of the dispute, they shall appoint a third
arbitrator, who shall be similarly qualified. In the event they are unable to
agree upon such appointment within five (5) business days after expiration of
such ten (10) day period, the third arbitrator shall be selected by the parties
themselves, if they can agree thereon, within a further period of ten (10)
business days. If the parties do not so agree, either party, on behalf of both,
may request appointment of such a qualified person by the AAA. If the AAA shall
refuse or be unable to provide such selection, the arbitrator shall be appointed
by any successor organization providing substantially the same services, and in
the absence of such an organization, by the Presiding Judge of the California
Superior Court for the City and County of San Diego. The arbitrator(s) so
selected shall resolve the dispute. The arbitration proceedings shall take place
at a mutually acceptable location in the City and County of San Diego.
(f) When resolving any dispute, the arbitrators shall apply
the pertinent provisions of this Lease without departure therefrom in any
respect. The arbitrators shall not have the power to change any of the
provisions of this Lease, but this Article shall not prevent in any appropriate
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<PAGE>
case the interpretation, construction and determination by the arbitrators of
the applicable provisions of this Lease to the extent necessary in applying the
same to the matters to be determined by arbitration.
(g) Except as otherwise expressly provided in this Lease,
the cost of the arbitration, including reasonable attorneys' and expert witness
fees, shall be borne by the unsuccessful party (as determined by the
arbitrators).
30.19 [Intentionally Omitted].
31. Design and Construction Process.
-------------------------------
31.1 Tenant's Design Development Documents. Landlord will provide
-------------------------------------
Tenant with base building plans and drawings for the Building and any other
plans in Landlord's possession. Tenant will prepare for review by Landlord two
complete sets of Tenant's Design Development Documents consisting of drawings,
details, outlines, specifications and other documents to fix and describe the
size and character of the Premises with respect to architectural, structural,
mechanical, electrical and fire safety systems, materials and such other
components as may be appropriate; such documents shall indicate material
finishes, heat load requirements of Tenant-supplied equipment and such other
specialty systems and components as Landlord reasonably will request.
31.2 Tenant's Construction Documents. Within five (5) business days
-------------------------------
of Landlord's receipt of Tenant's Design Development Documents, Landlord will
review those documents. Based upon such review Landlord may order reasonable
modifications to any of Tenant's Design Development Documents, which
modifications will be made by Tenant in accordance with Landlord's direction and
will be incorporated in Tenant's Construction Documents to be prepared by
Tenant. Tenant will prepare for review by Landlord two complete sets of Tenant's
Construction Documents consisting of drawings and specifications setting forth
in complete detail the final requirements for the construction of the Premises.
Landlord will complete its review of Tenant's Construction Documents within five
(5) business days of receipt of those documents. Based upon such review Landlord
may order reasonable modifications to any of Tenant's Construction Documents and
the modifications will be made by Tenant in accordance with Landlord's direction
within fifteen (15) business days of request by Landlord.
31.3 Applicable Law; Budgetary Constraints. Tenant's Design
-------------------------------------
Development Documents and Tenant's Construction Documents are herein
occasionally collectively called "Tenant's Documents." All Tenant's Documents
will conform with applicable federal, state and local law (including without
limitation the ADA) and with Building and Project plans and specifications. It
will be the responsibility of Tenant to prepare and submit Tenant's Documents
that fall within Tenant's budgetary constraints (if any). Any redesign made
necessary by the failure of Tenant's documentation to fall within Tenant's
budgetary constraints, and any resulting delay therefrom, will be the sole
responsibility of Tenant. Landlord will not be responsible for any failure of
bidder's estimates to fall within Tenant's budgetary constraints.
31.4 Requirements of Tenant's Documents. Tenant's Documents will
----------------------------------
be completed and fully coordinated. Tenant's Documents will also illustrate all
existing site conditions and will include all work necessary to achieve a
Certificate or Statement of Occupancy for the Premises. Tenant's Documents will
be signed and sealed by an architect or professional engineer (where
applicable), licensed and registered in the State of California. All costs and
expenses incurred by Tenant in connection with Tenant's Documents may be paid
from the T.I. Allowance.
31.5 Contractors/Bidding Procedures. Landlord and Tenant will
------------------------------
agree on a list of mutually acceptable contractors who will be asked to submit
bids for the demolition of the existing tenant improvements (as may be
necessary) and construction of the Tenant Improvements. Upon receipt of the
bids, Tenant will select the contractor from the agreed upon list. The selected
bid need not be the low bid.
31.6 Construction. Tenant's contractor will comply with reasonable
------------
construction rules made by Landlord and will coordinate its work with any other
work being undertaken at the Project. The Tenant Improvements will be
constructed in accordance with Tenant's Documents. Tenant diligently will pursue
the demolition of the existing tenant improvements (as may be necessary) and the
construction of the Tenant Improvements in a lien free, good and workmanlike
manner in accordance with generally accepted construction practices until all of
the work has been completed, subject to Section 31.9.
31.7 Disbursement of T.I. Allowance. Landlord will disburse the
-------------------
T.I. Allowance upon receipt of invoices that have been approved by Tenant for
work that has been completed. Landlord will have no obligation to disburse any
portion of the T.I. Allowance for the Expansion Premises prior to the
Commencement Date for the Second Expansion Premises, and no obligation to
disburse any portion of the T.I. Allowance for the Existing Premises prior to
June 1, 1999.
31.8 Access. Landlord will be entitled (but will not be obligated)
------
to inspect the Tenant Improvements for the Expansion Premises under construction
and upon completion, at reasonable times and intervals, for the purpose of
determining that the work is being constructed in accordance with Tenant's
Documents and the provisions of this Lease.
31.9 Construction. Tenant may commence construction of the Tenant
------------
Improvements for the applicable portion of the Expansion Premises at any time on
or after the applicable Commencement Date for such applicable portion of the
Expansion Premises; provided, that Landlord will have no obligation to disburse
any portion of the T.I. Allowance for the Expansion Premises prior to the time
period set forth
-22-
<PAGE>
in Section 31.7. Tenant may commence construction of the Tenant Improvements for
the Existing Premises at any time after June 1, 1999; provided, that Landlord
will have no obligation to disburse any portion of the T.I. Allowance for the
Existing Premises prior to the time period set forth in Section 31.7.
Notwithstanding any phased construction by Tenant of the Tenant Improvements,
Tenant will pay all Rent and Additional Charges for the entire First Expansion
Premises, Second Expansion Premises and Existing Premises from and after the
Commencement Date for the First Expansion Premises, Second Expansion Premises,
and Existing Premises, respectively, as more particularly set forth in this
Lease.
32. Extension Option.
----------------
32.1 Tenant Option. Tenant shall have one (1) option to extend the
-------------
Term of this Lease for an additional period of five (5) years which will
commence on the day following the last day of the Term (the "Extension Term").
The option for the additional period may be exercised by Tenant only by written
notice (the "Extension Exercise Notice") given to Landlord not earlier than the
date which is twelve (12) months prior and not later than the date which is at
least nine (9) months prior to the expiration of the period of the Term (the
"Extension Exercise Date"). Except as stated below in this Section 32, all of
the terms and conditions of this Lease in effect immediately prior to the
commencement of an extension period shall equally pertain in all respects to
that extension period.
32.2 Extension Rent. The Rent and Additional Charges during the
--------------
first extension period will be the Market Rental Value of the Premises (as
defined and determined pursuant to Section 32.3) for that period.
32.3 Rent Notice by Landlord. The Market Rental Value as
-----------------------
determined by Landlord will be designated by notice to Tenant pursuant and
subject to Section 32.4 no later than eight (8) months prior to expiration of
the period of the Term.
32.4 Fair Market Value Rent. The Market Rental Value of the
----------------------
Premises will be the fair market rent and all additional charges and additional
rent for the Premises determined as of the date that the extension of the Term
is to commence, taking into consideration the rental rates then being obtained
by Landlord for comparable space in the Project and the rates being obtained by
other landlords in other projects in San Diego, California of the same
approximate age, quality, condition and level of amenities, as adjusted on
account of pertinent differences such as the heights of the floors in question,
incentives for initial occupancy such as free rent, existing lease takeover and
assumption costs, brokerage commissions and demolition and improvement costs (or
the inapplicability of such incentives in the case of renewals or extensions),
size of space, length of term and anticipated commencement date with respect to
such renewal and any other economic concessions; provided, however, that in no
event shall the Market Rental Value be less than the Rent in effect under this
Lease immediately prior to the commencement of the Extension Term. Landlord's
determination of Market Rental Value shall be final and binding unless Tenant,
within thirty (30) calendar days and by notice to Landlord, withdraws its
exercise of the extension option or gives notice to Landlord that it will, and
promptly thereafter does submit such determination of Market Rental Value to
arbitration pursuant to Section 30.18 of this Lease. In the event of such
submission, the Market Rental Value shall be determined by the arbitrators,
whose determination shall be based upon the same factors set forth in this
Section 32.4.
32.5 Effect of Default. If Tenant is in default or any event or
-----------------
condition has occurred which after notice or passage of time or both shall
constitute a default during the time period when it may otherwise exercise the
option, then any attempt to exercise the option shall be null, void, and of no
force or effect. If Tenant exercises the option and if Tenant is in default or
any event or condition has occurred which after notice or passage of time or
both shall constitute a default at any time after exercise of the option or on
the first day for commencement of the Extension Term, then the exercise of the
option by Tenant shall be null, void, and of no force or effect. If Tenant has
been in default in payment of any sum required by this Lease where a late charge
has become due under this Lease for more than three times during any twelve-
month period, then the provisions of this option to extend the Term shall be
canceled and shall be of no force or effect. No condition of the Premises,
including, without limitation, any alteration or improvement made by Tenant,
oral intention expressed by Tenant or detrimental reliance by Tenant on any
statement, act, or omission by Landlord shall vest any rights in Tenant for
exercise of this option or to possess the Premises during any period set for
extension of the Term in this option, or estop Landlord from eviction of Tenant
after the end of the Term of this Lease then in effect, or give rise to any
equitable defense to such eviction. Tenant hereby waives any and all equitable
remedies with respect to this option unless Tenant has complied in all respect
with the written notice requirements set forth herein. The sole and exclusive
method for exercise of the option contained herein shall be delivery of the
written notice called for herein by Tenant to Landlord on a timely basis.
Landlord and Tenant hereby agree that time is of the essence with respect to
delivery of any notice of exercise by Tenant to Landlord. The date for delivery
of any notice required or permitted in this option shall be determined by the
provisions for delivery of notice contained in this Lease.
33. Termination of Existing Lease. Landlord and Tenant acknowledge and
-----------------------------
agree that as of the Commencement Date for the Existing Premises under this
Lease, that certain R&D Building Lease dated as of February 26, 1987 between
Landlord's predecessor in interest, Sorrento Tech Limited, a California limited
partnership, as original landlord, and Tenant's predecessor in interest, Biosym
Technologies, Inc., a California corporation, as original tenant, as amended and
assigned ("Existing Lease"), shall terminate. Until such time, the terms of the
Existing Lease shall continue to control with respect to Tenant's rights and
obligations as to the Existing Premises. Upon such termination, all rights and
obligations of Landlord and Tenant under the Existing Lease, shall terminate,
except for those items that survive termination as
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specifically set forth in the Existing Lease. Tenant hereby represents and
warrants that it is not in default under the Existing Lease nor do any facts or
circumstances exist which with the passage of time or the giving of notice, or
both, could ripen into a default. Tenant hereby represents and warrants that it
has no claims or causes of action of any nature or sort against Landlord or its
agents which arise out of or relate in any way to the Existing Lease, and Tenant
hereby releases Landlord and its agents from any such claims and causes of
action.
34. Right of First Offer Space. During the Term, if Landlord proposes to
--------------------------
lease to a third party the additional approximately 20,000 rentable square feet
adjacent to the Expansion Premises in Building 3 (the "First Offer Space") in
the area shown as the "First Offer Space" on Exhibit D, Landlord will first
offer the First Offer Space to the then existing tenant of the First Offer
Space, and if there is no such existing tenant or if such existing tenant does
not agree to lease the First Offer Space, Landlord shall notify Tenant in
writing and offer the First Offer Space to Tenant at the Prevailing Market Rent
(defined below). If Tenant, within five (5) business days after receipt of
Landlord's notice, indicates in writing its agreement to lease all (but not
part) of the First Offer Space, and Tenant is not in default under the Lease,
the First Offer Space shall be included within the Premises and leased to Tenant
pursuant to the provisions of this Lease. If Tenant does not indicate within
five (5) business days its agreement to lease all of the First Offer Space,
Landlord shall thereafter have the right to lease the First Offer Space or part
of it to a third party upon such terms as Landlord, in its sole discretion,
shall deem appropriate and Tenant's right of first offer hereunder shall
terminate and be of no further force and effect. Tenant acknowledges that this
Section permits Landlord to hold open and offer for rent the First Offer Space
to a third party, subject to the limitations of this Section, and that this
Section does not grant to Tenant an option. The provisions of this Section shall
be operative each time Landlord determines to lease the First Offer Space to a
third party during the Term. If Tenant elects in writing to exercise its right
to lease the First Offer Space, this Lease shall become applicable to the First
Offer Space upon the date that Landlord has delivered to Tenant the First Offer
Space in broom clean condition, provided that Landlord will allow Tenant access
to the First Offer Space for thirty (30) days prior to such date in order to
install fixtures, furnishings and equipment subject to the terms herein. The
date on which the First Offer Space becomes part of the Premises under the terms
of this Section shall be referred to herein as the "First Offer Space
Commencement Date." The Rent and Additional Charges for the First Offer Space
shall commence to accrue on the First Offer Space Commencement Date and shall be
the fair market rent and additional charges determined as of the estimated First
Offer Space Commencement Date then being obtained by Landlord for comparable
space in the Project or other landlords for comparable space in the Sorrento
Mesa submarket ("Prevailing Market Rent"). Landlord and Tenant covenant to
negotiate with each other in good faith and diligently to agree upon the
Prevailing Market Rent. The additional rentable square feet within the First
Offer Space shall be added to the Premises in determining Tenant's Building
Share and Tenant's Project Share. Following the First Offer Space Commencement
Date, the requirements and conditions of this Lease, including the Expiration
Date (as defined below), shall apply to the First Offer Space.
35. Parking. Tenant presently uses twenty-five percent (25%) of the
-------
parking area adjacent and to the south of the Premises for visitor parking. Upon
the Commencement Date for the First Expansion Premises, Tenant shall be entitled
to approximately forty (40) parking spaces in such parking area for its visitor
parking. Further, Landlord will not alter the Project or add buildings to the
Project without providing to Tenant reasonably adequate parking within the
Project during the course of any such construction and for the remaining period
of the Term at a ratio of 3.1 parking spaces per 1,000 rentable square feet of
the Premises then leased by Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have each caused their duly
authorized representative to execute this Lease on their behalf as of the date
first above written.
LANDLORD: TENANT:
- --------
SAN DIEGO TECH CENTER, LLC, MOLECULAR SIMULATIONS INC.,
a Delaware limited liability company a Delaware corporation
By San Diego Realty Fund 5, LLC, By /s/ Michael J. Savage
--------------------------------
a California limited liability company, MICHAEL J. SAVAGE, CEO.
its Administrative Member --------------------------------
[Printed Name and Title]
By /s/ [SIGNATURE ILLEGIBLE]^^ By /s/ Thomas M. Carney
---------------------------- --------------------------------
Its: Manager Thomas M. Carney, Vice President
[Printed Name and Title]
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<PAGE>
EXHIBIT A
Floor Plan
[To Be Attached and Initialed]
A-1
<PAGE>
EXHIBIT B
Site Plan
[To Be Attached and Initialed]
B-1
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
ATTACHED TO AND MADE A PART OF OFFICE BUILDING LEASE
(Capitalized terms shall have the meaning set forth in the Lease.)
35.1 Parking-General. Subject to compliance with the rules and
---------------
regulations set forth below in paragraph 2, so long as the Lease to which this
Exhibit C is attached remains in effect, Tenant or persons designated by Tenant
shall be entitled to non-exclusive use of unreserved surface parking areas
located at the Project. All persons utilizing the Project parking facilities
shall comply with the rules and regulations set forth below. Landlord reserves
the right to modify and/or adopt such other reasonable and non-discriminatory
rules and regulations for the Project parking as it deems necessary. Landlord
may refuse to permit any person who violates the rules and regulations to park
in the Project parking facilities. Any violation of this Parking Agreement shall
subject the violator's car to removal from the Project parking facilities at the
violator's expense.
36. Parking-Rules and Regulations.
-----------------------------
(a) Cars must be parked entirely within the stall lines
painted on the floor.
(b) All directional signs and arrows must be observed.
(c) The speed limit shall be 5 miles per hour.
(d) Parking is prohibited:
(1) In areas not striped for parking;
(2) In fire lanes;
(3) Where "no parking" signs are posted;
(4) In cross-hatched areas; and
(5) In such other areas as may be designated by Landlord.
(e) Every parker is required to park and lock his or her own
car. All responsibility for theft and/or damage to cars, other personal property
or persons is assumed by the parker.
(f) No more than one vehicle may be parked in any one
parking space. Washing, waxing, cleaning or servicing of any vehicle by a parker
and/or his agents is prohibited.
(g) Tenant shall acquaint all its officers and employees
with these rules and regulations.
37. Asbestos.
--------
(a) Tenant has been provided with the Asbestos Reports
described in Section 30.1 of the Lease. The reports contain a management plan
and procedures.
(b) It is important to the health and safety of everyone in
the Project that the procedures described in the management plan and in the
Asbestos Reports be strictly followed. If Tenant has reason to believe that
anyone is not following these procedures, that there is asbestos in any area of
the Building or Project not indicated in the Asbestos Reports, or that any
asbestos containing materials have been damaged, Tenant shall immediately
contact Landlord or its property manager. Tenant shall not fail to follow the
attached procedures in any way and must obtain the property manager's approval
as to any work to be done by Tenant or any of Tenant's Agents if the work
involves any procedures to be done in any area containing asbestos. The property
manager may withhold consent to any such work if the property manager is of the
opinion that the work may create a danger to the employee, or others in the
Building or Project.
38. Miscellaneous
-------------
(a) No sign, placard, picture, advertisement, name or notice
shall be inscribed, displayed or printed or affixed on or to any part of the
Building without the written consent of Landlord, first had and obtained, and
Landlord shall have the right to remove any such sign, placard, picture,
advertisement, name or notice without notice to and at the expense of Tenant.
All signs or lettering on doors shall conform to Landlord's sign criteria for
the Building. Tenant shall not place anything or allow anything to be placed
near the glass of any window, door, partition or wall which may appear unsightly
from outside the Premises.
(b) Tenant shall not alter any lock or install any new or
additional locks or any bolts on any door of the Premises without obtaining the
prior express written consent of Landlord which consent shall not be
unreasonably withheld.
C-27
<PAGE>
(c) Toilet rooms, urinals, wash bowls and other apparatus
shall not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be thrown
therein, and the expense of any breakage, stoppage or damage resulting from the
violation of this rule shall be borne by Tenant or those employees or invitees
of Tenant who shall have caused it.
(d) Tenant shall not use, keep or permit to be used or kept,
any foul or noxious gas or substance in the Premises, or permit or suffer the
Premises to be occupied or used in a manner offensive or objectionable to
Landlord or other occupants of the Building by reason of noise, odors and/or
vibrations, or interfere in any way with other tenants or those having business
therein, nor shall any animals or birds be brought in or kept in or about the
Premises or the Building.
(e) Tenant shall not use or keep in the Premises any
flammable or combustible fluid or material, including, but not limited to,
kerosene or gasoline. Tenant shall not use any method of heating or air
conditioning other than that supplied or installed by Landlord.
(f) Upon the termination of its tenancy, Tenant shall
deliver to Landlord the keys for all offices, rooms and toilet rooms which shall
have been furnished to Tenant or which Tenant shall have had made, and in the
event of loss of any keys so furnished, shall pay Landlord therefor.
(g) Tenant shall not lay linoleum, tile, carpet or any other
similar floor covering so that the same shall be affixed to the floor of the
Premises in any manner, without obtaining the prior express written consent of
Landlord which consent shall not be unreasonably withheld. The expense of
repairing any damage resulting from a violation of this rule or removal of any
floor covering shall be borne by Tenant, or by the contractors, employees or
invitees of Tenant who caused the damage.
(h) Landlord reserves the right to exclude or expel from the
Buildings any person who, in the judgment of Landlord, is intoxicated or under
the influence of liquor or drugs, or who shall in any manner do any act in
violation of any of the rules and regulations of the Project.
(i) Landlord shall have the right, exercisable without
notice, to change the name and the street address of the Building of which the
Premises are a part.
(j) Tenant shall not disturb, solicit, or canvas any
occupant of the Building or Project and shall cooperate to prevent same.
(k) Without the written consent of Landlord, Tenant shall
not use the name of the Building or the Project in connection with or in
promotion or advertising of the business of Tenant except as Tenant's address.
(l) All exterior window coverings, whether curtains, blinds
or otherwise, used by Tenant shall be approved in writing by Landlord. Landlord
intends that all window coverings in the Project be uniform and standard in
color, texture and appearance and Tenant shall have no right to deviate from or
change the exterior window coverings approved by Landlord.
(m) Tenant shall comply with all documents, instruments and
covenants recording against the Project, including, without limitation, the
covenants, conditions and restrictions of the Lusk/Mira Mesa Industrial Park, a
copy of which has been received and reviewed by Tenant.
C-28
<PAGE>
EXHIBIT D
First Offer Space
[PLAN APPEARS HERE]
D-1
<PAGE>
Exhibit 10.48
INDEMNITY AGREEMENT
THIS AGREEMENT is made and entered into this 21st day of July, 1997 by and
between MOLECULAR SIMULATIONS INCORPORATED, a Delaware corporation (the
"Company"), and C. Peter W. Booth ("Agent").
RECITALS
WHEREAS, Agent performs a valuable service to the Company in his capacity
as Director of the Company;
WHEREAS, the stockholders of the Company have adopted Amended and Restated
Bylaws (the "Bylaws") providing for the indemnification of the directors,
officers, employees and other agents of the Company, including persons serving
at the request of the Company in such capacities with other corporations or
enterprises, as authorized by the Delaware General Corporation Law, as amended
(the "Code");
WHEREAS, the Bylaws and the Code, by their non-exclusive nature, permit
contracts between the Company and its agents, officers, employees and other
agents with respect to indemnification of such persons; and
WHEREAS, in order to induce Agent to continue to serve as Director of the
Company, the Company has determined and agreed to enter into this Agreement with
Agent;
NOW, THEREFORE, in consideration of Agent's continued service as Director
after the date hereof, the parties hereto agree as follows:
AGREEMENT
1. SERVICES TO THE COMPANY. Agent will serve, at the will of the Company
or under separate contract, if any such contract exists, as Director of the
Company or as a director, officer or other fiduciary of an affiliate of the
Company (including any employee benefit plan of the Company) faithfully and to
the best of his ability so long as he is duly elected and qualified in
accordance with the provisions of the Bylaws or other applicable charter
documents of the Company or such affiliate; provided, however, that Agent may at
any time and for any reason resign from such position (subject to any
contractual obligation that Agent may have assumed apart from this Agreement)
and that the Company or any affiliate shall have no obligation under this
Agreement to continue Agent in any such position.
1
<PAGE>
2. INDEMNITY OF AGENT. The Company hereby agrees to hold harmless and
indemnify Agent to the fullest extent authorized or permitted by the provisions
of the Bylaws and the Code, as the same may be amended from time to time (but,
only to the extent that such amendment permits the Company to provide broader
indemnification rights than the Bylaws or the Code permitted prior to adoption
of such amendment).
3. ADDITIONAL INDEMNITY. In addition to and not in limitation of the
indemnification otherwise provided for herein, and subject only to the
exclusions set forth in Section 4 hereof, the Company hereby further agrees to
hold harmless and indemnify Agent:
(A) against any and all expenses (including attorneys' fees), witness
fees, damages, judgments, fines and amounts paid in settlement and any other
amounts that Agent becomes legally obligated to pay because of any claim or
claims made against or by him in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative (including an action by or in the right of the
Company) to which Agent is, was or at any time becomes a party, or is threatened
to be made a party, by reason of the fact that Agent is, was or at any time
becomes a director, officer, employee or other agent of Company, or is or was
serving or at any time serves at the request of the Company as a director,
officer, employee or other agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise; and
(B) otherwise to the fullest extent as may be provided to Agent by
the Company under the non-exclusivity provisions of the Code and Section 43 of
the Bylaws.
4. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to Section
3 hereof shall be paid by the Company:
(A) on account of any claim against Agent for an accounting of
profits made from the purchase or sale by Agent of securities of the Company
pursuant to the provisions of Section 16(b) of the Securities Exchange Act of
1934 and amendments thereto or similar provisions of any federal, state or local
statutory law;
(B) on account of Agent's conduct that was knowingly fraudulent or
deliberately dishonest or that constituted willful misconduct;
(C) on account of Agent's conduct that constituted a breach of
Agent's duty of loyalty to the Company or resulted in any personal profit or
advantage to which Agent was not legally entitled;
2
<PAGE>
(D) for which payment is actually made to Agent under a valid and
collectible insurance policy or under a valid and enforceable indemnity clause,
bylaw or agreement, except in respect of any excess beyond payment under such
insurance, clause, bylaw or agreement;
(E) if indemnification is not lawful (and, in this respect, both the
Company and Agent have been advised that the Securities and Exchange Commission
believes that indemnification for liabilities arising under the federal
securities laws is against public policy and is, therefore, unenforceable and
that claims for indemnification should be submitted to appropriate courts for
adjudication); or
(F) in connection with any proceeding (or part thereof) initiated by
Agent, or any proceeding by Agent against the Company or its directors,
officers, employees or other agents, unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the Company, (iii) such indemnification is provided by the
Company, in its sole discretion, pursuant to the powers vested in the Company
under the Code, or (iv) the proceeding is initiated pursuant to Section 9
hereof.
5. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Company contained herein shall continue during the period Agent is a director,
officer, employee or other agent of the Company (or is or was serving at the
request of the Company as a director, officer, employee or other agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise) and shall continue thereafter so long as Agent shall be
subject to any possible claim or threatened, pending or completed action, suit
or proceeding, whether civil, criminal, arbitrational, administrative or
investigative, by reason of the fact that Agent was serving in the capacity
referred to herein.
6. PARTIAL INDEMNIFICATION. Agent shall be entitled under this Agreement
to indemnification by the Company for a portion of the expenses (including
attorneys' fees), witness fees, damages, judgments, fines and amounts paid in
settlement and any other amounts that Agent becomes legally obligated to pay in
connection with any action, suit or proceeding referred to in Section 3 hereof
even if not entitled hereunder to indemnification for the total amount thereof,
and the Company shall indemnify Agent for the portion thereof to which Agent is
entitled.
7. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty (30) days
after receipt by Agent of notice of the commencement of any action, suit or
proceeding, Agent will, if a claim in respect thereof is to be made against the
Company under this Agreement, notify the Company of the commencement thereof;
but the omission so to notify the Company will not relieve it from any liability
which it may have to Agent
3
<PAGE>
otherwise than under this Agreement. With respect to any such action, suit or
proceeding as to which Agent notifies the Company of the commencement thereof:
(A) the Company will be entitled to participate therein at its own
expense;
(B) except as otherwise provided below, the Company may, at its
option and jointly with any other indemnifying party similarly notified and
electing to assume such defense, assume the defense thereof, with counsel
reasonably satisfactory to Agent. After notice from the Company to Agent of its
election to assume the defense thereof, the Company will not be liable to Agent
under this Agreement for any legal or other expenses subsequently incurred by
Agent in connection with the defense thereof except for reasonable costs of
investigation or otherwise as provided below. Agent shall have the right to
employ separate counsel in such action, suit or proceeding but the fees and
expenses of such counsel incurred after notice from the Company of its
assumption of the defense thereof shall be at the expense of Agent unless (i)
the employment of counsel by Agent has been authorized by the Company, (ii)
Agent shall have reasonably concluded that there may be a conflict of interest
between the Company and Agent in the conduct of the defense of such action or
(iii) the Company shall not in fact have employed counsel to assume the defense
of such action, in each of which cases the fees and expenses of Agent's separate
counsel shall be at the expense of the Company. The Company shall not be
entitled to assume the defense of any action, suit or proceeding brought by or
on behalf of the Company or as to which Agent shall have made the conclusion
provided for in clause (ii) above; and
(C) the Company shall not be liable to indemnify Agent under this
Agreement for any amounts paid in settlement of any action or claim effected
without its written consent, which shall not be unreasonably withheld. The
Company shall be permitted to settle any action except that it shall not settle
any action or claim in any manner which would impose any penalty or limitation
on Agent without Agent's written consent which may be given or withheld in
Agent's sole discretion.
8. EXPENSES. The Company shall advance, prior to the final
disposition of any proceeding, promptly following request therefor, all expenses
incurred by Agent in connection with such proceeding upon receipt of an
undertaking by or on behalf of Agent to repay said amounts if it shall be
determined ultimately that Agent is not entitled to be indemnified under the
provisions of this Agreement, the Bylaws, the Code or otherwise.
9. ENFORCEMENT. Any right to indemnification or advances granted by
this Agreement to Agent shall be enforceable by or on behalf of Agent in any
court of competent jurisdiction if (i) the claim for indemnification or advances
is deemed, in whole or in part, or (ii) no disposition of such claim is made
within ninety (90) days of request therefor. Agent, in such enforcement action,
if successful in whole or in part,
4
<PAGE>
shall be entitled to be paid also the expense of prosecuting his claim. It shall
be a defense to any action for which a claim for indemnification is made under
Section 3 hereof (other than an action brought to enforce a claim for expenses
pursuant to Section 8 hereof, provided that the required undertaking has been
tendered to the Company) that Agent is not entitled to indemnification because
of the limitations set forth in Section 4 hereof. Neither the failure of the
Company (including its Board of Directors or its stockholders) to have made a
determination prior to the commencement of such enforcement action that
indemnification of Agent is proper in the circumstances, nor an actual
determination by the Company (including its Board of Directors or its
stockholders) that such indemnification is improper shall be a defense to the
action or create a presumption that Agent is not entitled to indemnification
under this Agreement or otherwise.
10. SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Agent, who shall execute all documents required and shall do all
acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on Agent by this
Agreement shall not be exclusive of any other right which Agent may have or
hereafter acquire under any statute, provision of the Company's Amended and
Restated Certificate of Incorporation or Bylaws, agreement, vote of stockholders
or directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office.
12. SURVIVAL OF RIGHTS.
(A) The rights conferred on Agent by this Agreement shall continue
after Agent has ceased to be a director, officer, employee or other agent of the
Company or to serve at the request of the Company as a director, officer,
employee or other agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise and shall inure to the benefit
of Agent's heirs, executors and administrators.
(B) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, expressly to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform if no such succession had taken
place.
13. SEPARABILITY. Each of the provisions of this Agreement is a separate
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid for any reason, such invalidity or
unenforceability shall not affect the validity or enforceability of the other
provisions hereof. Furthermore, if this Agreement
5
<PAGE>
shall be invalidated in its entirety on any ground, then the Company shall
nevertheless indemnify Agent to the fullest extent provided by the Amended and
Restated Bylaws, the Code or any other applicable law.
14. ENTIRE AGREEMENT. This Agreement and the agreements referenced herein
constitute the entire agreement between the parties hereto pertaining to the
subject matter hereof, and any and all other written or oral agreements existing
between the parties hereto pertaining to the subject matters hereof are
superseded and expressly canceled.
15. GOVERNING LAW. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Delaware.
16. AMENDMENT AND TERMINATION. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
17. IDENTICAL COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
but all of which together shall constitute but one and the same Agreement. Only
one such counterpart need be produced to evidence the existence of this
Agreement.
18. HEADINGS. The headings of the sections of this Agreement are inserted
for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof.
19. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given (i)
upon delivery if delivered by hand to the party to whom such communication was
directed or (ii) upon the third business day after the date on which such
communication was mailed if mailed by certified or registered mail with postage
prepaid:
(A) If to Agent, at the address indicated on the signature page
hereof.
(B) If to the Company, to
Molecular Simulations Incorporated
9685 Scranton Road
San Diego, CA 92121
or to such other address as may have been furnished to Agent by the Company.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of
the day and year first above written.
MOLECULAR SIMULATIONS INCORPORATED
By: /s/ Michael J. Savage
-------------------------------------
MICHAEL J. SAVAGE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
AGENT
/s/ C. Peter W. Booth
-----------------------------------------
Signature
/s/ C. Peter W. Booth
-----------------------------------------
Print Name
Address:
One Park Place
-----------------------------------------
Corning, N.Y. 14830
-----------------------------------------
7
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Molecular Simulations Incorporated, organized under the laws of Delaware
Molecular Simulations Limited, U.K., organized under the laws of the United
Kingdom
Molecular Simulations Limited SARL, organized under the laws of France
Molecular Simulations Software GmbH, organized under the laws of Germany
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
-------------------------------
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-80341) pertaining to the 1994 Incentive Stock Plan of Pharmacopeia,
Inc., the 1995 Director Option Plan of Pharmacopeia, Inc., and the 1995 Employee
Stock Purchase Plan of Pharmacopeia, Inc., in the Registration Statement (Form
S-8 No. 333-20883) pertaining to the 1994 Incentive Stock Plan of Pharmacopeia,
Inc. and in the Registration Statement (Form S-8 No. 333-56883) pertaining to
the Pharmacopeia, Inc. 1994 Incentive Stock Plan, the Molecular Simulations
Incorporated 1988 Stock Option and Purchase Plan, the Molecular Simulations
Incorporated 1996 Equity Incentive Plan, the Polygen Corporation 1986 Incentive
Stock Option Plan, the Polygen Corporation 1986 Incentive Stock Option Plan
(California), the Polygen Corporation 1986 Supplemental Stock Option Plan and
the Polygen Corporation 1986 Supplemental Stock Option Plan (California), of our
report dated January 28, 1999, with respect to the consolidated financial
statements of Pharmacopeia, Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1998.
Ernst & Young LLP
Princeton, New Jersey
March 23, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report on the financial statements of Molecular Simulations
Inc. dated February 4, 1998 included in this Form 10-K into Pharmacopeia, Inc.'s
previously filed Registration Statements on Form S-8 (File No.'s 33-80431, 333-
20883, 333-56883) pertaining to the 1994 Incentive Stock Plan of Pharmacopeia,
Inc., the 1995 Director Option Plan of Pharmacopeia, Inc. and the 1995 Employee
Stock Purchase Plan of Pharmacopeia, Inc. in the Registration Statement
pertaining to the 1994 Incentive Stock Plan of Pharmacopeia, Inc. and in the
Registration Statement pertaining to the Pharmacopeia, Inc. 1994 Incentive Stock
Plan, the Molecular Simulations Incorporated 1988 Stock Option and Purchase
Plan, the Molecular Simulations Incorporated 1996 Equity Incentive Plan, the
Polygen Corporation 1986 Incentive Stock Option Plan, the Polygen Corporation
1986 Incentive Stock Option Plan (California), the Polygen Corporation 1986
Supplemental Stock Option Plan and the Polygen Corporation 1986 Supplemental
Stock Option Plan (California). It should be noted that we have not audited any
financial statements of Molecular Simulations Inc. subsequent to December 31,
1997 or performed any audit procedures subsequent to the date of our report.
Arthur Andersen LLP
ARTHUR ANDERSEN LLP
San Diego, California
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE IN SUCH STATEMENTS.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 36,863
<SECURITIES> 44,235
<RECEIVABLES> 23,380
<ALLOWANCES> (609)
<INVENTORY> 0
<CURRENT-ASSETS> 109,643
<PP&E> 27,550
<DEPRECIATION> (13,850)
<TOTAL-ASSETS> 127,865
<CURRENT-LIABILITIES> 52,316
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 72,217
<TOTAL-LIABILITY-AND-EQUITY> 127,865
<SALES> 0
<TOTAL-REVENUES> 92,211
<CGS> 0
<TOTAL-COSTS> 30,844
<OTHER-EXPENSES> 74,823
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 333
<INCOME-PRETAX> (10,163)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,163)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,163)
<EPS-PRIMARY> (.54)
<EPS-DILUTED> 0
</TABLE>
