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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 0-27406
CONNETICS CORPORATION
(Exact name of registrant as specified in its charter)
3400 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
(650) 843-2800
(Address, including zip code and telephone number,
of principal executive offices)
DELAWARE 94-3173928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
PREFERRED SHARE PURCHASE RIGHTS
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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 period than the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 26, 1999 was approximately $103,667,000. There were
21,173,668 shares of Common Stock issued and outstanding as of February 26,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates information by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held on
May 19, 1999.
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PART I
ITEM 1. BUSINESS
Special Note: The Company desires to take advantage of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995.
Specifically, the Company wishes to alert investors and other readers that the
following discussion contains certain forward-looking statements that involve
risks and uncertainties. The Company's actual results or events may differ
significantly from the results contemplated by the forward-looking statements.
These factors could in the future affect, and in the past have affected, the
Company's actual results and could cause the Company's results for future years
or quarters to differ materially from those expressed in any forward looking
statements made by or on behalf of the Company. These factors should be
considered carefully in addition to the other information presented in this
report.
THE COMPANY
Connetics Corporation ("Connetics" or the "Company") is focused on the
acquisition, development and commercialization of marketed and late-stage
products. The Company's product and commercial focus is initially targeted at
rheumatology and dermatology, two specialty medical markets. These commercially
attractive markets have large patient populations yet relatively small physician
treating groups. U.S. dermatologists and rheumatologists write prescriptions
each year exceeding $5.0 billion. The Company's goal is to leverage these
markets by commercializing novel products to meet currently unmet medical needs
and employing focused and highly trained sales staff. Connetics currently
markets Ridaura(R) (auranofin), a treatment for rheumatoid arthritis, and
ACTIMMUNE(R) (interferon gamma-1b), a treatment for chronic granulomatous
disease (beginning January 1999). On March 1, 1999 Connetics received clearance
from the FDA to begin marketing Luxiq(TM) (betamethasone valerate) Foam, 0.12%,
a product to treat corticosteroid-responsive scalp dermatoses. Connetics has
several other products in development: ConXn(R) (recombinant human relaxin H2)
("relaxin"), targeting scleroderma, organ fibrosis, and infertility; and
OLUX(TM) (clobetasol propionate) Foam, 0.05%, a novel formulation for the
treatment of severe scalp dermatoses; and interferon gamma (through its
wholly-owned subsidiary, InterMune Pharmaceuticals, Inc.) for the treatment of
certain congenital, infectious and other diseases.
The Company is subject to the uncertainties and risks associated with
any young company focused on pharmaceutical product development. The Company has
experienced operating losses every year since its incorporation, and expects to
incur additional losses over the next few years. The losses are expected to
fluctuate from period to period based on timing of product revenues, clinical
material purchases, possible acquisitions of new products and technologies,
scale-up activities and clinical activities. The time required by the Company to
reach profitability is uncertain and there can be no assurance that the Company
will ever be able to generate revenue from its products now under development or
achieve profitability on a sustainable basis.
The Company was incorporated in the State of Delaware on February 8,
1993. In May 1997, the Company's stockholders approved a change of the Company's
name from "Connective
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Therapeutics, Inc." to "Connetics Corporation." The "C with interlocking
hemisphere" logo (used alone and with the Company's name), "Connetics", "ConXn",
and "Ridaura" are registered trademarks of the Company, and "Luxiq" and "OLUX"
are trademarks of the Company. All other tradenames and trademarks appearing in
this report are the property of their respective holders.
The Company's principal executive offices are located at 3400 West
Bayshore Road, Palo Alto, California 94303. Its telephone number is (650)
843-2800. The Company maintains an internet website at http://www.connetics.com.
CONNETICS' STRATEGY
The key elements of the Company's strategy include:
o Develop a Commercial Organization Targeting Specialty Markets and Novel
Therapies. The Company is targeting its initial commercial activities at
the dermatology and rheumatology markets, which can be served by a focused,
specialized marketing organization. Scalp psoriasis and skin dermatoses,
the target indications for the Company's foam products, are treated
primarily by dermatologists. Scleroderma, ConXn's lead indication, and
rheumatoid arthritis, treated by Ridaura, are primarily treated by
rheumatologists. The Company's strategy is to target its marketing
activities to the approximately 7,000 dermatologists and 3,000
rheumatologists practicing in the United States. Because dermatologists and
rheumatologists are primarily concentrated in major metropolitan areas, the
Company believes these physician groups can be accessed efficiently by a
relatively small sales force.
o In-License Development Stage and Currently Marketed Products. The Company
expects to continue to in-license and acquire rights to late-stage
development products and currently marketed products in the areas of
dermatology and rheumatology. Increasing consolidation in the
pharmaceutical and biotechnology industries and continuing changes in the
health care system are changing the way therapeutic products are developed
and marketed. As a result, the Company believes there are opportunities to
in-license or acquire additional products that pharmaceutical companies are
not developing or promoting, or that do not fit in the present business
strategy of such companies. The Company believes that this strategy can
result in accelerated development and commercialization of novel products
to treat diseases, while minimizing the Company's exposure to the risks
inherent in drug discovery and basic research.
o Use Corporate Partnerships to Pursue Additional Markets. In its strategic
markets, the Company's goal is to retain commercial rights to its products
in the United States and to enter into corporate partnerships with respect
to additional market segments in North America and international markets.
This strategy will allow the Company to pursue additional therapeutic
markets, offset near-term development costs and enter international
markets. To date, the Company has entered into two strategic relationships
(one each with a European and a Japanese company) for its relaxin program.
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Future product acquisitions, if any, may require substantial additional
funds (1) for the initial acquisition of rights to these products, (2) for the
steps necessary to obtain FDA approval for the product and (3) to market, sell
and distribute the product successfully. In addition, if the newly-acquired
product is already approved for commercialization, the Company will likely be
assuming the marketing, sale and distribution of such product, which may require
the Company to recruit a substantial number of qualified employees to perform
these functions. If the Company is unable to hire a sufficient number of
employees with the appropriate levels of experience, or if the Company is unable
to effectively manage the integration of any newly-acquired products into the
Company's product line, the Company's business, financial condition and results
of operations could be materially and adversely affected. Finally, any
newly-acquired products may not achieve the marketing or therapeutic success
expected of it by the Company, industry analysts or others at the time of
acquisition.
RELAXIN
The Company has exclusive rights to develop and commercialize human
recombinant relaxin (ConXn). See "Collaborative Relationships: Relaxin," below.
Relaxin is a naturally occurring protein that is known to promote remodeling of
connective tissues. Connective tissues are components of the body that form
structural or binding elements such as skin, joints, ligaments and lining of
organs. Organs of the body such as lungs, kidneys and skin function normally in
part because of the precise arrangement of specialized cells within a connective
tissue framework. Connective tissue undergoes constant turnover through a normal
remodeling process that normally keeps the amount of connective tissue, which is
95% collagen, in balance. When this balance is broken, as in the case of certain
chronic diseases, the result can lead to excessive formation of or destruction
of connective tissue, resulting in serious disease. The most severe forms of
these diseases cause painful disfigurement, disability and, in certain cases,
death.
Scleroderma. As an example, the overproduction of collagen can result in
a severe fibrotic disorder called scleroderma. The Company is developing relaxin
for the treatment of scleroderma, a serious disease involving the uncontrolled
formation of connective tissue. Scleroderma is characterized by thickening and
hardening of the skin and internal organs, including the heart, lungs, kidneys
and gastrointestinal tract and generally afflicts women in their child-bearing
years. Scleroderma can cause extensive disfigurement and quality of life
impairment, making it impossible for afflicted patients to carry out the most
routine daily functions. Approximately 300,000 individuals, primarily women,
suffer from various forms of this disease, with approximately 70,000 having
systemic sclerosis, and in some cases diffuse scleroderma. In the United States,
scleroderma is primarily treated by rheumatologists. Currently there is no cure
for this often fatal disease, and few therapies ease the pain and suffering of
scleroderma patients. Current therapies are directed toward alleviating the
symptoms of the disease, not the underlying cause.
In 1997, the Company completed a Phase II trial for relaxin in patients
with scleroderma. The results of the 64-patient Phase II trial showed that
administration of relaxin caused a statistically significant reduction in skin
score (a measure of skin thickening) and a trend toward improvement in
eleven other disease parameters. Based partly on the results of the Phase
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II trial and an earlier Phase I/II trial for scleroderma, the Company believes
that relaxin may have a beneficial effect on connective tissue turnover and may
provide a treatment for scleroderma. The Company initiated a 200-patient pivotal
trial of relaxin for scleroderma in February 1999. The Company has also
conducted a preclinical animal study that demonstrated Relaxin's potential
ability to inhibit pulmonary (lung) fibrosis and is conducting preclinical
studies with relaxin in liver and cardiac fibrosis, and infertility.
The Company has been granted Orphan Drug Status for ConXn for treatment
of progressive systemic sclerosis, a severe form of scleroderma. In the United
States, the Orphan Drug Act of 1983 provides incentives to drug manufacturers to
develop and manufacture products for the treatment of rare diseases, currently
defined as diseases that affect fewer than 200,000 individuals in the United
States, or for a disease that affects more than 200,000 individuals in the
United States where the sponsor does not realistically anticipate its product
becoming profitable. Under the Orphan Drug Act, a manufacturer of a designated
orphan product can seek certain tax benefits, and the holder of the first FDA
approval of a designated orphan product will be granted a seven-year period of
marketing exclusivity for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same product for the same indication, it would not
prevent other types of products from being approved for the same use. The U.S.
Congress has considered and may consider in the future, legislation that would
restrict the duration of the market exclusivity of an orphan drug and, thus,
there can be no assurance that the benefits of the existing statute will remain
in effect.
Organ Fibrosis. In addition to scleroderma, the Company believes that
ConXn may have potential in treating organ-specific fibroses, such as cardiac
and pulmonary fibrosis. Scarring of the heart is the cause of much of the
impairment in cardiac function that occurs in atherosclerosis, in hypertension,
or following a heart attack. Because ConXn is believed to stimulate new blood
vessel growth, as well as promoting the breakdown of fibrotic (scarred or
hardened) tissue, it may provide a dual mechanism for improving function of the
scarred heart. Cardiovascular diseases remain the leading cause of morbidity
and mortality in the United States, where approximately 13 million people
suffer from heart disease, and 800,000 new heart attacks occur annually.
Current therapies include angiotensin-converting enzyme (ACE) inhibitors.
Pulmonary fibrosis represents a group of diseases associated with chronic
inflammation and scarring in the walls of the alveoli in the lungs. Impairment
of lung function and in many cases, death occurs as consequences. Approximately
144,000 individuals who suffer from pulmonary fibrosis are treated by
pulmonologists and oncologists. Current therapies consist of corticosteroids
and cytotoxic drugs, such as cyclophosphamide, which are largely ineffective.
Infertility. Infertility is a serious problem that affects approximately
one in seven couples in the United States. The Company and collaborators have
accumulated data indicating that relaxin may be involved in stimulating new
blood vessel formation in the lining of the uterus, and that the increase in
blood flow may enhance embryonic implantation and pregnancy success. Relaxin
therapy may be useful in the treatment of infertility in the area of assisted
reproductive technologies, including in vitro fertilization. The Company has
begun a development program for relaxin in the treatment of infertility.
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FOAM PRODUCTS
Luxiq(TM). The Company has an exclusive license to develop and market a
foam formulation of betamethasone valerate, a dermatology therapy, in North
America. Connetics' tradename for the product is Luxiq(TM). The product has been
approved for sale in the United Kingdom and is being marketed in the U.K. by a
company affiliated with Medeva PLC. Under the terms of an exclusive license
agreement with Soltec Research Pty Ltd., the Company will pay a licensing fee to
Soltec, plus royalties on future sales of products, if any, arising from the
licensed technology. The Company also has an exclusive option on Soltec's foam
formulation for the delivery of other compounds. In August 1997, the Company
announced that results from its Phase III clinical trial with Luxiq demonstrated
statistically significant improvement over both placebo and betamethasone lotion
for the treatment of scalp psoriasis, a condition that affects over three
million persons in the United States. On February 28, 1999, the FDA approved the
Company's New Drug Application ("NDA") to market Luxiq for relief of the
inflammatory and pruritic manifestations of corticosteroid-responsive
dermatoses of the scalp.
Betamethasone valerate is a mid-potency corticosteroid currently
marketed in the U.S. The unique foam formulation has been shown to liquefy when
applied to the body, enabling rapid penetration of active dermatologic agent.
This formulation is designed to be easier to apply and less messy than currently
marketed scalp lotions and gels. In addition, the ease of use and patient
acceptability may enhance patient compliance.
Psoriasis and other Scalp Dermatoses. Psoriasis, a chronic, recurrent
dermatologic disease characterized by inflammation and thickening of the skin,
is estimated to affect six million people in the United States. Scalp psoriasis,
a distinct manifestation of psoriasis, is a serious problem for more than sixty
percent of psoriatics. Patients with scalp psoriasis suffer from various degrees
of erythema, scaling and itching associated with the disease, and the disease
course typically involves periods of remission followed by acute exacerbations.
Luxiq is also suitable for treating other dermatoses of the scalp, including
eczema and seborrheic dermatitis.
OLUX(TM). Following its development progress with Luxiq, in January
1998, the Company entered into an agreement with Soltec Research Pty Ltd., and
exercised an option to exclusively develop and market clobetasol propionate, a
super high-potency corticosteroid currently marketed in the United States in
other formulations. The foam formulation is expected to be sold under Connetics'
trademark "OLUX." OLUX uses a foam formulation similar to Luxiq, whereby it
remains a foam at room temperature and then liquefies when applied to the body,
facilitating the delivery of the active dermatologic agent.
During the quarter ended September 30, 1998, the Company completed
treatment in a Phase III clinical trial of OLUX intended for the treatment of
severe scalp psoriasis and other corticosteroid-responsive dermatoses of the
scalp. The Phase III trial was a multicenter, randomized, double-blind study of
approximately 190 scalp psoriasis patients which compared OLUX to a currently
approved clobetasol solution and to placebo during a two week
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treatment regimen. Endpoints for the trial included changes in the clinical
signs of psoriasis: plaque thickness, scaling, erythema (redness), and the
global response to treatment as judged by the investigator. Decreases in itching
and the patient's assessment of improvement were also evaluated. In November
1998, the Company announced that the outcome of the trial was positive and that
the Company anticipates filing an NDA in 1999.
If the Company were unable to commence clinical trials as planned,
complete the clinical trials or demonstrate the safety and efficacy of its
products, the Company's business, financial condition and results of operations
would be materially and adversely affected. Even if a product from the Company's
research and development programs or any other therapeutic product is
successfully developed according to plans, there can be no assurance it will be
approved by the FDA on a timely basis or at all.
RIDAURA
Ridaura(R). In December 1996, the Company acquired the exclusive U.S.
and Canadian rights to Ridaura (auranofin), from SmithKline Beecham Corporation
and affiliated entities ("SmithKline"). Ridaura is an oral formulation of a gold
salt (auranofin). Ridaura, which is classified as a disease-modifying
antirheumatic drug ("DMARD"), is an established therapy for rheumatoid
arthritis. Ridaura has been shown to slow joint destruction and the progression
of rheumatoid arthritis. The drug is currently indicated for adults with active
rheumatoid arthritis who are not responsive to, or are intolerant of, treatment
with non-steroidal anti-inflammatory drugs. The primary patents for Ridaura
expired in 1989 and 1992; the absence of patent protection for Ridaura means
that the Company will be unable to assert patent infringement claims against a
third party marketing the same product under a different trade name, which could
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Rheumatoid arthritis. Rheumatoid arthritis is a chronic autoimmune
disease in which the body's immune system attacks the connective tissue in the
joints, resulting in progressive, systemic and painful inflammation and erosion
of the joints. In advanced phases of the disease, symptoms include severe pain,
body disfigurement and loss of mobility. It is estimated that between one and
two percent of the worldwide adult population, including over two million
individuals in the United States, suffer from rheumatoid arthritis and about
one-half of these will progress to severe disease. Women are three times more
susceptible than men. Current treatment for rheumatoid arthritis uses a
combination of drugs and physical and occupational therapy in an attempt to
prevent further joint damage. No current therapy cures the disease and often its
progression cannot be stopped. Rheumatoid arthritis is primarily treated by
rheumatologists.
Connetics began marketing Ridaura through its own sales force in
mid-1997. Through agreements with SmithKline, customer orders and distribution
for the product was managed by SmithKline through 1997 and SmithKline will
manufacture and supply Ridaura (in final finished package form) to the Company
through December 2001. The Company has an agreement with
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CORD Logistics, Inc. ("CORD"), based in Nashville, Tennessee, to manage the
distribution of Ridaura.
In December 1997, the Company sold the Canadian rights to Ridaura to,
and entered a supply agreement with, Pharmascience, Inc., a Canadian
corporation, for a net consideration of $1,300,000.
T-CELL RECEPTOR ("TCR") PROGRAM
Autoimmune Disorders. Connective tissue can be destroyed by various
T cell-mediated autoimmune diseases. Autoimmune diseases are generally believed
to result from an inappropriate response of the immune system. The immune system
is the body's major biological defense mechanism, first distinguishing antigens
(foreign substances) from the body's tissue and then eliminating a wide variety
of disease-causing pathogens, such as bacteria and viruses. A major component of
this system is T cells. In many autoimmune diseases, these T cells go awry and
attack the body's healthy tissues. There is mounting evidence that these
disease-causing T cells are concentrated at the disease site, where they
initiate signals leading to tissue destruction. The mechanism responsible for
causing these T cells to attack healthy tissue has, for the most part, not been
identified. Autoimmune diseases can attack virtually any tissue or organ of the
body, are often debilitating and can be fatal.
The Company holds certain patents to a TCR vaccine technology for the
treatment of autoimmune diseases. TCR vaccines are being developed to help the
body elicit an immune response against disease-causing agents. Specifically, TCR
vaccines are injected into the patient to elicit a heightened immune response
against the T-cells thought to cause autoimmune disease. These vaccines elicit a
"regulatory immune response" by increasing the number of regulatory T-cells that
produce anti-inflammatory cytokines. While the results of pilot clinical studies
using TCR vaccines for the treatment of rheumatoid arthritis and multiple
sclerosis were encouraging, the Company has suspended most of its activity with
respect to TCR, to permit it to focus its resources on products closer to
market.
XOMA. In June 1994, Connetics entered into an agreement with Xoma
pursuant to which the Company acquired additional TCR vaccine technology and
patent rights. This agreement obligates the Company to make certain milestone
payments and to pay certain royalties on sales of TCR vaccine products. The
Company's failure to meet certain milestones may result in the acquisition by
XOMA of a co-exclusive royalty-free license to the TCR vaccine technology or in
certain circumstances the reversion of the asset to Xoma.
Arthur A. Vandenbark, Ph.D. (Veterans Administration Medical Center,
Portland, Oregon). In July 1994, the Company entered into a Research
Collaboration and Assignment Agreement with Dr. Vandenbark, the inventor of the
patent rights acquired from XOMA, to establish a framework for a scientific
collaboration relating to the development of the TCR Peptide vaccines. The
agreement, which has been extended through March 31, 2000, provides that the
Company continue to fund the collaborative research, gives the Company access to
future inventions and know-how, and obligates the Company to make certain
royalty payments on sales
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of products not already covered by the XOMA Agreement. In addition, the Company
entered into consulting agreements with Dr. Vandenbark and Dr. Halina Offner,
which have also been extended, and in connection with the agreements granted
each of them options to purchase the Company's Common Stock, which vest upon the
achievement of certain milestones.
Molecular Medicine Research Institute ("MMRI"). In October 1996, the
Company entered into a Laboratory Services Agreement with MMRI directed research
relating to relaxin and TCR peptides. The agreement provides funding for MMRI to
conduct the research on behalf of the Company and also has provisions covering
intellectual property arising from the directed research and other discoveries
relating to the Company's areas of interest. The current agreement expires in
June 1999.
INTERFERON GAMMA
Interferon gamma. Interferon gamma-1b is one of a family of proteins
involved in the regulation of the immune system and has been shown to reduce the
frequency and severity of certain infections. Interferon gamma is approved by
the FDA for the reduction in frequency and severity of infections associated
with a rare immune disease, known as chronic granulomatous disease ("CGD"). In
December 1995, Genentech and Connetics entered into an agreement with respect to
interferon gamma pursuant to which the Company acquired exclusive development
and marketing rights in the United States for dermatologic indications. In May
1998, Genentech and the Company terminated the agreement and entered into a new
license agreement (the "Genentech Gamma License") that granted the Company an
exclusive license under certain patent rights and know-how to ACTIMMUNE(R)
(interferon gamma-1b) for the treatment of infections in CGD and several
additional indications (non-cancer dermatological diseases; infectious diseases;
infections in osteopetrosis; pulmonary fibrosis; and asthma) in the United
States. The parties also entered into a Supply Agreement under which Genentech
will manufacture and supply interferon gamma, in bulk product or finished
product form.
The Company has formed a subsidiary corporation, InterMune
Pharmaceuticals, Inc. to further develop and commercialize interferon gamma.
Clinical studies are underway evaluating interferon gamma's role as a potential
therapy for infections associated with osteopetrosis, for atypical mycobacterial
infections, and as a treatment for multiple-drug resistant tuberculosis.
Osteopetrosis. Osteopetrosis is a life-threatening, congenital disorder
in which overgrowth of bony structures leads to blindness, deafness and
increased susceptibility to infection. There are currently no effective
treatments for this disease. InterMune is in discussions with the FDA about
whether a BLA can be filed on existing data generated in the course of a
physician-sponsored Phase II study, or whether the FDA would request results
from the ongoing Phase III study. Depending on the outcome of those discussions,
a BLA could be submitted as early as the third quarter of 1999.
Multiple Drug-Resistant Tuberculosis. Results from a recent, open-label
trial in five patients with severe, advanced mycobacterium tuberculosis (MDR-TB)
showed that treatment with aerosolized interferon-gamma was well tolerated and
provided encouraging results. An open-label pilot
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study, conducted under a physician-sponsored IND has been completed. A
multi-center Phase II trial sponsored by the NIH is ongoing. InterMune
anticipates initiating a Phase III trial in 1999.
Other Potential Indications. In ongoing clinical studies conducted at
the NIH, and in other preclinical studies, interferon gamma has shown
preliminary results of efficacy for treatment of non-HIV immunocompromised
patients with mycobacterial infection, and in the treatment of a wide range of
fungal diseases.
Early-stage clinical trials conducted by independent investigators in
collaboration with Genentech showed preliminary results indicating that
interferon gamma may be efficacious in the treatment of keloids, which are
unsightly, painful, elevated scars resulting from collagen overproduction. The
Company has concluded a Phase II clinical trial for the treatment of keloids,
with inconclusive results, and the Company is not presently pursuing development
of interferon gamma for dermatological indications. In addition, in August 1997,
the Company announced results from a Phase III trial of interferon gamma for the
treatment of atopic dermatitis that indicated that the product did not show an
acceptable therapeutic response with respect to the primary clinical endpoint,
and the Company suspended plans to submit a BLA for the treatment of atopic
dermatitis.
COLLABORATIVE RELATIONSHIPS: RELAXIN
As part of its business strategy, the Company has entered into and
continues to explore strategic collaborative relationships (including licensing
agreements) and consulting agreements with leading researchers and institutions
working in its fields of interest, to complement its internal research efforts
and provide access to technologies that may expand its existing portfolio.
Genentech. In September 1993, Genentech and Connetics entered into a
license agreement (the "September 1993 Agreement") pursuant to which Connetics
obtained exclusive worldwide rights to relaxin (excluding reproductive
indications and the territories of Japan, Korea and the Republic of China). The
September 1993 Agreement was amended in July 1994 to modify the Company's right
to sublicense the relaxin technology and to expand the Company's rights to
include reproductive indications on a co-exclusive basis with Genentech. In
April 1996, the Company acquired rights to Japan, Korea and the Republic of
China from Genentech, thereby giving the Company worldwide rights to the
technology. The September 1993 Agreement with its amendments is referred to as
the "Genentech Relaxin License."
Under the Genentech Relaxin License, Connetics also has rights to future
developments regarding relaxin, and the Company is obligated to pay royalties on
licensed product sales. In addition, Genentech received an equity position in
the Company. The September 1993 Agreement also includes certain technology
transfer, supply, and intellectual property provisions, and includes provisions
requiring the Company to meet certain milestones and make payments for supplies.
Failure to timely achieve designated milestones may result in termination of the
Genentech Relaxin License by Genentech and a license on a non-exclusive basis to
Genentech of relaxin technology developed by the Company.
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Florey Institute. The Genentech Relaxin License includes rights licensed
to Genentech from the Howard Florey Institute of Experimental Physiology and
Medicine in Melbourne, Australia (the "Florey Institute"). In January 1998, the
Company negotiated an agreement with the Florey Institute that will provide for
the Company to pay royalties directly to the Florey Institute (rather than
through Genentech) and for such royalty payments to be restructured. Under the
agreement, the Company would provide approximately $125,000 of annual research
funding to the Florey Institute for a five-year period (which could terminate
earlier upon the date of the first sale of a relaxin product by Connetics or its
partner), and the Florey Institute would receive a royalty on Connetics' sales
of relaxin products and a portion of revenues received from corporate partners.
Medeva. In January 1999, Connetics entered into a development,
commercialization and supply agreement for ConXn(R) with Medeva PLC of the
United Kingdom. Under the terms of the agreement, Medeva will pay certain fees,
development support and milestone payments. Medeva will be responsible for all
development and commercialization activities in Europe and will pay royalties on
sales in Europe. Medeva paid $8.0 million upon closing, including a $4.0 million
development fee and a $4.0 million equity investment, and will pay up to $17.0
million of milestone payments based upon development progress in the U.S. and
Europe, and $5 million for the development and approval of each indication in
Europe in addition to scleroderma. In addition, Medeva will pay half of the U.S.
development costs up to $1.0 million per quarter (for an estimated total of
$10.0 million) and share U.S. co-promotion rights with Connetics for up to five
years. Medeva will purchase relaxin materials from Connetics.
Suntory. In April 1998, Connetics entered into a license agreement with
Suntory Pharmaceuticals for the development and marketing of ConXn in Japan.
Under the terms of the agreement, Suntory agreed to pay approximately $14
million in license fees and milestone payments. Suntory will be responsible for
all development and commercialization expenses in Japan and will pay royalties
on sales in Japan for the treatment of scleroderma. The deal included a $1.6
million license fee and future potential milestone payments based upon
development progress in the U.S. and Japan. Suntory will purchase relaxin
materials from Connetics. Connetics retained the rights to all other indications
in Japan.
Medical University of South Carolina (Christian Schwabe, Ph.D.). In
April 1995, the Company entered into a Collaborative Research Agreement with the
Medical University of South Carolina to establish a collaborative research
program expanding upon an existing consulting relationship with Dr. Christian
Schwabe in the area of relaxin research, including the biology, receptors,
synthesis and activities of relaxin, the genes encoding relaxin, relaxin
peptides, analogs and related compounds. The agreement provides funding for
collaborative research, gives the Company access to future inventions and
know-how, and obligates the Company to make certain royalty payments on sales of
products covered by licensed patents. The Company declined to renew the
Agreement in 1998 but continues to make payments in connection with the
intellectual property rights.
10
<PAGE> 12
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on the ability of Connetics
and its licensors to obtain patent protection for the Company's products and
processes, to preserve its trade secrets, and to operate without infringing the
proprietary rights of third parties. The Company owns, controls or has
exclusively licensed pending applications and/or issued patents worldwide
relating to the technology of all three of its major programs as well as
technology in the earlier stages of research.
The Company's relaxin patent portfolio covers the composition of matter
(proteins and DNA), analogs and closely related compositions, formulations,
methods of manufacture and methods of treatment, including issued patents in the
U.S, and various international equivalents and pending applications. The issued
relaxin patents will expire at various times between 2003 and 2012. The
Company's TCR vaccine patent portfolio also includes pending applications in the
U.S., and corresponding international patents and applications, relating to
compositions of matter (peptides, peptide analogs, peptide fragments, and
antibodies), formulations, methods of treatment, diagnostic methods, and methods
of preparing/isolating protective T cells, most of which expire in 2010, with
one issued U.S. patent expiring in 2014. The Company's interferon gamma patent
portfolio includes issued U.S. patents and other pending applications relating
to the composition of matter, formulations and methods of treatment, which do
not begin to expire until 2009.
There has been increasing litigation in the biomedical, biotechnology
and pharmaceutical industries with respect to the manufacture, use and sale of
new therapeutic products that are the subject of conflicting patent rights. The
validity and breadth of claims in biomedical/pharmaceutical/biotechnology
patents involve complex factual and legal issues for which no consistent policy
has emerged, and therefore are highly uncertain. Moreover, the patent laws of
foreign countries differ from those of the U.S. and the degree of protection, if
any, afforded by foreign patents may be different. In Europe, a third party
appeal is pending from an opposition to a patent application concerning relaxin
DNA; the original opposition was successfully defended by the Company's
licensor. No assurance can be given that any of the Company's or its licensors'
patent applications will issue as patents or that any such issued patents will
provide competitive advantage to the Company or will not be successfully
challenged or circumvented by its competitors. In addition, others may hold or
receive patents or file patent applications that contain claims having a scope
that covers products or processes made, used or sold by the Company. If any
claims of third-party patents were upheld as valid and enforceable with respect
to a product or process made, used or sold by the Company, Connetics could be
prevented from practicing the subject matter claimed in such patents or could be
required to obtain licenses or redesign its products or processes to avoid
infringement and could be liable to pay damages. There can be no assurance that
such licenses would be available or, if available, would be on commercially
reasonable terms, or that the Company would be successful in any attempt to
redesign its products or processes to avoid infringement.
Connetics has been awarded a U.S. patent covering its proprietary TCR
vaccine technology. The Company is aware that third parties have also obtained
patents relating to TCR
11
<PAGE> 13
vaccines technology, including U.S. patents issued to Immune Response
Corporation in 1997 and 1998. With regard to such patents as are known to the
Company and its patent counsel, the Company believes such patents' claims would
be found either invalid or not infringed if asserted against the Company's
proposed TCR vaccines. The Company has filed an opposition to a European patent
claiming compositions for use in treating multiple sclerosis, covering certain
TCR V beta peptides disclosed for treating multiple sclerosis in the Company's
own, earlier-filed application; another opposition has been filed against this
patent by an independent party. The Company has been advised that a separate
opposition has been filed to one of the Company's European patents. The Company
is also aware of other pending third party patent applications which, if issued,
might be asserted against the Company's TCR vaccines and products or processes
as planned to be made, used or sold by the Company. Even if the Company's patent
counsel render advice that the Company's products and processes do not infringe
any valid claim under third party patents relating to the TCR vaccines
technology, neither they nor the Company can assure that no third party will
commence litigation to enforce such patents, or that the Company will not incur
substantial expenses or that it will prevail in any patent litigation. A
judgment adverse to the Company in any such patent interference, litigation or
other proceeding could materially adversely affect the Company's business,
financial condition and results of operations with respect to the TCR
development program, and its expense may be substantial whether or not the
Company is successful.
Connetics also relies on trade secrets and proprietary know-how. The
Company requires each of its employees, consultants and advisors to execute a
confidentiality agreement providing that all proprietary information developed
or made known to the individual during the course of the relationship will be
kept confidential and not used or disclosed to third parties except in specified
circumstances. The agreements also provide that all inventions conceived by an
employee (or consultant or advisor to the extent appropriate for the services
provided) during the course of the relationship shall be the exclusive property
of the Company, other than inventions unrelated to the Company and developed
entirely on the individual's own time. There can be no assurance, however, that
these agreements will provide meaningful protection or adequate remedies for
misappropriation of the Company's trade secrets in the event of unauthorized use
or disclosure of such information.
MARKETING AND SALES
The Company's business strategy is to retain marketing rights for
products in the areas of dermatology and rheumatology in the United States. The
Company believes that a large, general sales and marketing infrastructure is not
required to effectively and successfully maximize the commercial potential of
products directed toward focused, specialty markets. The Company is targeting
its initial commercial activities at dermatologists and rheumatologists, which
can be served by a focused and specialized marketing organization. As of
March 26, 1999, the Company had a marketing and sales operation comprising 47
people, of whom 40 are sales representatives. The Company expects to expand the
sales force as it prepares to launch additional products. Outside the United
States, the Company's strategy is to establish development, marketing and
distribution agreements with pharmaceutical companies.
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<PAGE> 14
MANUFACTURING
The Company currently has no manufacturing facilities for clinical or
commercial production of any of its products, nor does the Company intend to
develop such capabilities in the near future. The Company contracts with
independent sources to manufacture its products, which enables the Company to
focus on product and clinical development strengths, minimize fixed costs and
capital expenditures, and gain access to advanced manufacturing process
capabilities. TCR vaccines are manufactured for the Company by American Peptide
Company and Multiple Peptide Systems. Ridaura is manufactured by SmithKline (in
final finished package form) under an agreement with an initial term through
December 2001. Luxiq and OLUX are currently manufactured for Connetics by CCL
Pharmaceuticals. Interferon gamma is manufactured by Genentech and Parke-Davis.
Relaxin has been manufactured for Connetics under contract with four
outside vendors: BASF Bioresearch Corp. for fermentation, Scios, Inc. for
purification, Chesapeake Biological Laboratory for filling and Tektagen, Inc.
for testing. Effective December 1, 1998, the Company entered into a long-term
agreement with Boehringer Ingelheim Austria GmbH (formerly Bender + Co. GmbH)
for the scale-up and manufacture of relaxin for clinical and commercial uses.
The Company's strategy is to continue to use manufacturing agreements
for the production of its current and future products. If the Company were
unable to contract for manufacturing capabilities on acceptable terms, the
Company's ability to conduct preclinical and human clinical testing would be
adversely affected, resulting in the delay of submission of products for
regulatory approval and initiation of new development programs, which in turn
could impair materially the Company's competitive position and the possibility
of the Company achieving profitability. In addition, some materials used in the
Company's products may be available only from sole suppliers. Although neither
the Company nor its contract manufacturers has experienced difficulty acquiring
materials for the manufacture of its products for clinical trials, no assurance
can be given that interruptions in supplies will not occur in the future, which
could have a material adverse effect on the Company's ability to manufacture its
products.
COMPETITION
The biopharmaceutical industry is highly competitive. Other products and
therapies currently exist on the market or are under development that could
compete directly with some of the products that the Company is marketing, or
seeking to develop and market. The Company believes that there are numerous
pharmaceutical and biotechnology companies and academic research groups
throughout the world engaged in research and development efforts with respect to
therapeutic products targeted at diseases or conditions addressed by the
Company. Connetics believes that competitive factors in its industry include
scientific and technological expertise, managerial competence in identifying and
pursuing product in-licensing and acquisition opportunities, operational
competence in developing, protecting, manufacturing and marketing products and
obtaining timely regulatory agency approvals, and financial resources.
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<PAGE> 15
The Company intends to compete on the basis of the quality and
exclusivity of its products, combined with the effectiveness of its marketing
and sales efforts. Competing successfully will depend on the Company's continued
ability to attract and retain skilled and experienced personnel, to develop and
secure the rights to pharmaceutical products and compounds and to exploit these
products and compounds commercially prior to the development of competitive
products by others. The Company expects that there will be continued competition
for highly qualified scientific, technical and managerial personnel.
There can be no assurance that the Company's products, even if
successfully tested and developed, will be adopted by physicians over such other
products, or that the Company's products will offer an economically feasible
alternative to existing modes of therapy where they exist. In addition, a number
of companies have received FDA approval in 1998 for new products and therapies
to address diseases involving connective tissue, particularly in the field of
rheumatoid arthritis, and the number of the Company's competitors in these
markets could increase. It is uncertain what impact, if any, the introduction of
new products will have on the Company's existing or future product revenues. The
Company intends to compete on the basis of the effectiveness, quality and
exclusivity of its products, combined with the effectiveness of its marketing
and sales efforts. There can be no assurance that other products and therapies
will not be developed that will either render the Company's proposed products
obsolete or will have advantages outweighing those of the products and therapies
that the Company is seeking to develop.
With regard to Ridaura, there are numerous products on the market, and
under development, for the treatment of rheumatoid arthritis. There can be no
assurance that Ridaura will continue to be utilized by physicians over other
rheumatoid arthritis products, or that Ridaura will continue to offer a
cost-effective alternative to competing therapies. In addition, although the
Company believes that there will be a continued role for products such as
Ridaura, the market for rheumatoid arthritis will likely change based upon new
product introductions, which could have a material adverse effect on the
Company's sales of Ridaura.
Many of the Company's existing or potential competitors, particularly
large pharmaceutical companies, have substantially greater financial, technical
and human resources than the Company. In addition, many of these competitors
have more collective experience than the Company in undertaking preclinical
testing and human clinical trials of new pharmaceutical products and obtaining
regulatory approvals for therapeutic products. Accordingly, the Company's
competitors may succeed in obtaining FDA approval for products more rapidly than
the Company. See "Government Regulation."
GOVERNMENT REGULATION
FDA Regulation and Product Approval. The biotech industry is subject to
regulation by the FDA under the Food Drug and Cosmetic Act and by similar
agencies outside of the United States. It is expected that all of the Company's
pharmaceutical products 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
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<PAGE> 16
other approval procedures by the FDA in the United States and similar health
authorities in foreign countries. Labeling and promotional activities are
subject to scrutiny by the FDA. 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.
Noncompliance with applicable requirements can result in, among other things,
warning letters, fines, injunctions, penalties, recall or seizure of products,
total or partial suspension of production, denial or withdrawal of approval, and
criminal prosecution. Accordingly, ongoing 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 the Company has or
may develop. 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.
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
the target indication for which approval is sought. The results from preclinical
studies and early clinical trials may not be predictive of results that will be
obtained in later-stage testing and there can be no assurance that the Company's
future clinical trials will demonstrate the safety and efficacy of any products
or will result in approval to market products. A number of companies in the
biotechnology industry have suffered significant setbacks in advanced clinical
trials, even after promising results from earlier trials.
Generally, in order to obtain FDA approval for a new therapeutic agent,
a company first must conduct preclinical studies in the laboratory and in animal
model systems to gain preliminary information on the agent's efficacy and to
identify any safety problems. "Preclinical" studies include toxicity,
pharmacokinetic and efficacy testing in vitro and in animals and chemical or
biological formulation work in preparation for submission of the necessary data
to comply with applicable regulations prior to the commencement of human
testing. The results of these studies are submitted as a part of an
investigational new drug application ("IND"), which the FDA must review before
human clinical trials of an investigational drug can start. The Company has
filed and will continue to be required to sponsor and file INDs 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 its
products.
Clinical trials are normally done in various phases and generally take
two to five years, but may take longer, to complete. The rate of completion of
the Company's clinical trials is dependent upon, among other factors, the rate
of patient enrollment. Patient enrollment is a function of many factors,
including the size of the patient population, the nature of the protocol, the
proximity of patients to clinical sites and the eligibility criteria for the
study. Delays in planned patient enrollment may result in increased costs and
delays, which could have a material adverse effect on the Company. "Phase I
trials" generally involve administration of a product to a small number of
persons to determine safety, tolerance and pharmacokinetic characteristics.
"Phase I/II trials" generally involve administration of a product to a small
number of persons who have the targeted disease to determine safety, tolerance
and pharmacokinetic characteristics
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<PAGE> 17
and/or to obtain preliminary evidence of efficacy. "Phase II trials" generally
involve administration of a product to a limited number of patients with a
particular disease to determine dosage, efficacy and safety. "Phase III trials"
generally examine the clinical efficacy and safety in an expanded patient
population at multiple clinical sites. At least one such trial is required (but
usually two are required) for FDA approval to market a drug.
After completion of clinical trials of a product, the Company will be
required to file an NDA, if the product is classified as a new drug, or a BLA,
if the product is classified as a biologic, and receive FDA approval before
commercial marketing of the product. 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 and BLAs can take between one and
two years to be reviewed by the FDA, and can take longer if significant
questions arise during the review process. While recent legislative and
regulatory initiatives have focused on the need to reduce FDA review and
approval times, the ultimate impact of such initiatives on the Company's
products cannot be certain. In addition, delays or rejections may be encountered
based upon changes in FDA policy during the period of product development and
FDA regulatory review of each submitted new drug application or biologic license
application. Similar delays may also be encountered in other countries. There
can be no assurance that even after such time and expenditures, regulatory
approval will be obtained for any products developed by the Company. If
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed.
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, recalls, seizures, injunctions or criminal sanctions. For marketing
outside the United States, the Company will also be subject to foreign
regulatory requirements governing human clinical trials, manufacturing 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.
Third Party Reimbursement and Health Care Reform. The commercial success
of the Company's products will be substantially dependent upon the availability
of government or private third-party reimbursement for the use of such products.
There can be no assurance that Medicare, Medicaid, health maintenance
organizations and other third-party payers will authorize or otherwise budget
such reimbursement. Such governmental and third party payers are increasingly
challenging the prices charged for medical products and services. There can be
no assurance that the Company's products, once marketed, will be viewed as
cost-effective or that reimbursement will be available to consumers or will be
sufficient to allow the Company's products to be marketed on a competitive
basis. Furthermore, federal and state regulations govern or influence the
reimbursement to health care providers of fees and capital equipment costs in
connection with medical treatment of certain patients. The Company cannot
predict the likelihood of passage of federal and state legislation related to
health care reform or lowering pharmaceutical costs. To the extent that these or
other proposals or reforms have a material adverse effect on the Company's
ability to secure funding for its development or on the business,
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<PAGE> 18
financial condition and profitability of other companies that are prospective
collaborators for certain of the Company's product candidates, the Company's
ability to develop or commercialize its product candidates may be adversely
affected. In certain foreign markets pricing of prescription pharmaceuticals is
already subject to government control. Continued significant changes in the U.S.
or foreign health care systems could have a material adverse effect on the
Company's business.
Environmental Regulation. The Company's research and development
activities involve the controlled use of hazardous materials, chemicals and
various radioactive materials. The Company is subject to federal, state and
local laws and regulations governing the use, storage, handling and disposal of
such materials and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply with
the standards prescribed by state, federal, and local laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any liability could exceed the
resources of the Company. The Company could be required to incur significant
costs to comply with environmental laws and regulations as its research
activities are increased, and if that were to happen there can be no assurance
that the Company's operations, business and future profitability will not be
adversely affected.
INDUSTRY ADVISORS
Connetics uses various advisors to provide expertise and critical review
of its programs. For advice on and review of its current and long-term
scientific planning, research and development, the Company has contracts with a
number of distinguished scientists and clinicians with expertise in biologic
processes and diseases that involve the connective tissues of the body. The list
of scientific advisors includes the following individuals, all of whom are
recognized as leading authorities in their fields:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Edward P. Amento, M.D. Consultant, Molecular Medicine Research, Inc.
Eugene A. Bauer, M.D. Dean, Stanford University School of Medicine
Yueh-Hsiu Chien, Ph.D. Assistant Professor, Stanford University School of Medicine
Arthur Z. Eisen, M.D Professor, Washington University School of Medicine, Barnes
Hospital
Philip C. Hanawalt, M.D. Professor of Biological Sciences and Dermatology, Stanford
University and Stanford University School of Medicine
Gerald T. Nepom, M.D., Ph.D. Director, Virginia Mason Research Center Professor,
University of Washington School of Medicine, Seattle
Brian Seed, Ph.D. Professor, Harvard Medical School
(Massachusetts General Hospital)
</TABLE>
Each advisor has entered into an agreement with the Company covering the
terms of his position. Each advisor provides services on an as-needed basis.
Three of the advisors have
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<PAGE> 19
entered into separate agreements with the Company covering additional
consultation above and beyond their activities as advisors. Certain advisors
hold options to purchase or have purchased Common Stock of the Company. In
addition, scientific advisors receive a fee for attending any advisory board
meeting and are reimbursed for out-of-pocket expenses incurred in attending each
meeting. All of the scientific advisors are employed by institutions other than
the Company and may have commitments to, or consulting or advisory agreements
with, other entities that may limit their availability to the Company.
For its preclinical and clinical development programs the Company has
established relationships with several contract research organizations and
practicing physicians.
PRODUCT LIABILITY AND INSURANCE
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its technology or potential
products is alleged to have resulted in adverse effects. Such claims, even if
successfully defended by the Company, could injure the Company's reputation.
While the Company has taken, and intends to continue to take, what it believes
are appropriate precautions to minimize exposure to product liability claims,
there can be no assurance that it will avoid liability. The Company believes
that it possesses product liability and general liability and certain other
types of insurance customarily obtained by business organizations of its type.
The Company intends to maintain insurance against product liability risks
associated with the testing, manufacturing and marketing of its products.
However, there can be no assurance that it will be able to obtain such insurance
in the future, or that if obtained, such insurance will be sufficient.
Consequently, a product liability claim or other claims with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the business or financial condition of the Company.
POTENTIAL EFFECTS OF GUARANTEE OF VALUE OF SHARES ISSUED TO GENENTECH
Pursuant to the Genentech Gamma License, the Company issued Genentech
380,048 shares of common stock valued at $2.0 million in May 1998. Pursuant to a
December 1998 amendment to the Genentech Gamma License, the total value of the
shares issued to Genentech is required to be $4.0 million on or before December
15, 1999. The Company has the right to issue additional shares to Genentech at
any time before December 15, 1999, in order to meet this obligation. If the
future value of such shares is less than $4.0 million at December 15, 1999, and
the Company has not yet issued additional shares to Genentech, the Company would
have to either issue additional shares or pay cash to Genentech to make up the
difference. In addition, pursuant to the Genentech Relaxin License, the Company
is entitled to pay certain amounts in cash or equity at the Company's choice. A
payment of $683,500, originally due in September 1998, has been extended to
April 1, 1999, and it is the Company's current intention to issue stock to
Genentech to cover that obligation.
If the Company is required to issue additional shares to Genentech, that
issuance will have a dilutive impact on the other stockholders of the Company.
As a result, the market price of
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<PAGE> 20
the Company's Common Stock could be adversely affected, and if the Company
becomes profitable, the Company net income per share could be decreased in
future periods.
IMPACT OF YEAR 2000
Certain currently installed computer systems and software programs were
written to accept only two digit entries in the date fields rather than four
digit entries. In particular, some of the Company's older computer programs were
written using two digits rather than four to define the applicable year and as a
result, those computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates or they could cause a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities. As a result, during
the next year, computer systems and/or software used by many companies,
including Connetics, may need to be upgraded to comply with such "Year 2000"
requirements. The Company presently believes that with modifications or
replacement of existing software and certain hardware, the Year 2000 Issue can
be mitigated. However, if such modifications and upgrades are not made, or are
not completed by the end of 1999, the Year 2000 Issue could have a material
impact on the operations of the Company.
In particular, if the Company does not complete any additional phases,
the progress of the Company's research and development projects could be
delayed. In addition, disruptions in the economy generally resulting from Year
2000 issues may also have a material adverse effect on the Company's results of
operations, and the amount of potential liability and lost revenue cannot be
reasonably estimated at this time. For more information on the Company's plans
to address the Year 2000 issue, see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Impact of Year
2000."
The Company currently has no contingency plan in place in the event it
does not complete all phases of the Year 2000 program. The Company plans to
evaluate the status of completion in March 1999 and determine whether such a
plan is necessary.
EMPLOYEES
The Company is dependent on the principal members of its scientific and
management staffs (including Thomas G. Wiggans, President and Chief Executive
Officer), the loss of whose services might impede the achievement of development
objectives. The Company does not maintain "key person" insurance on any of these
individuals. In addition, the Company's potentially rapid growth and expansion
into areas and activities requiring additional expertise, such as clinical
trials, governmental approvals, manufacturing, sales and marketing, will
increase burdens on the Company's management, operational and financial
resources. These demands are expected to require an increase in management and
scientific personnel and the development of additional expertise by existing
management personnel. Recruiting and retaining management, operational personnel
and qualified scientific personnel to perform research and development work in
the future will be critical to the Company's success. Although the Company
believes it
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<PAGE> 21
will continue to be successful in attracting and retaining skilled and
experienced management and operational and scientific personnel, there can be no
assurance that the Company will be able to attract and retain such personnel on
acceptable terms given the competition for such personnel among numerous
pharmaceutical and biotechnology companies, universities and other institutions.
As of December 31, 1998, the Company had 84 full-time employees. Of the
full-time employees, 31 were engaged in, or directly support, the Company's
research and development activities, and 48 were in general administrative and
marketing and sales positions. InterMune had an additional five full-time
employees at December 31, 1998. The Company and InterMune also use the services
of various consultants. The Company considers relations with its employees to be
good. None of the Company's employees is covered by a collective bargaining
agreement.
ITEM 2. PROPERTIES
Connetics currently leases approximately 23,500 square feet of
laboratory and office space at 3400 West Bayshore Road in Palo Alto, California.
The Company leases this space under a master lease agreement that commenced in
August 1996 and which will expire in July 1999 with a renewal option that, if
exercised, would extend the term of the lease to the year 2001. The Company
currently pays base monthly rent of $48,670 for this space and has the right to
use this space for laboratory research and development, storage and
distribution, offices, marketing and other related uses. Effective January 1,
1999, the Company leases an additional 13,464 square feet of office space at
3294 West Bayshore Road in Palo Alto, California. Beginning February 1, 1999,
the Company will pay a base monthly rent for this space of approximately $16,605
for two months, and $24,908 for the next ten months, increasing to approximately
$26,255 thereafter. In addition, through March 31, 1999, the Company leases
approximately 3,100 square feet of office space at 2483 East Bayshore Road, in
Palo Alto, California at a base monthly rent of $9,576. The Company does not
intend to renew the East Bayshore lease. The Company believes that its existing
facilities are adequate to meet its requirements for the near term and that
additional space will be available on commercially reasonable terms if needed.
ITEM 3. LEGAL PROCEEDINGS
Connetics knows of no material litigation or proceeding pending or
threatened to which the Company is, or may become, a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "CNCT." The following table sets forth for the periods indicated the
low and high closing sale prices for the Company's Common Stock.
<TABLE>
<CAPTION>
1997 1998
---------------- ---------------
High Low High Low
----- ----- ------ -----
<S> <C> <C> <C> <C>
First Quarter $8.00 $6.63 $5.313 $3.00
Second Quarter $7.88 $6.00 $6.00 $3.375
Third Quarter $9.50 $3.50 $4.375 $2.75
Fourth Quarter $4.25 $2.56 $5.875 $2.25
</TABLE>
On February 26, 1999, the last reported sale price of the Common Stock
on the Nasdaq National Market was $9.125 per share. As of that date, there were
approximately 215 stockholders of record of the Common Stock.
The Company has never declared or paid cash dividends on its Common
Stock. The Company currently intends to retain all available funds for use in
its business, and does not anticipate paying any cash dividends in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from
the Company's audited consolidated financial statements. This historical data
should be read in conjunction with the Company's consolidated Financial
Statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing in Item 7
of this Form 10-K.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) Years Ended December 31,
---------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product revenues $ 7,473 $ 6,803 $ 428 $ -- $ --
License revenues 1,648 -- -- -- --
-------- -------- -------- -------- -------
Total revenues 9,121 6,803 428 -- --
Operating costs and expenses:
Cost of product revenues 1,374 1,149 -- -- --
License amortization 6,720 7,124 594
Research and development 11,446 17,162 13,161 8,271 6,436
Selling, general and administrative 11,680 8,966 5,434 2,113 1,317
Charge for pre-FDA approved product rights 4,000 -- -- -- --
-------- -------- -------- -------- -------
Total operating costs and expenses 35,220 34,401 19,189 10,384 7,753
Loss from operations (26,099) (27,598) (18,761) (10,384) (7,753)
Gain on sale of license rights -- 525 -- -- --
Interest income (expense), net (496) (862) 247 12 (97)
-------- -------- -------- -------- -------
Net loss $(26,595) $(27,935) $(18,514) $(10,372) $(7,850)
======== ======== ======== ======== =======
Basic and diluted net loss per share(1) $ (1.61) $ (2.69) $ (2.71) $ (2.34) --
Shares used to calculate basic and diluted
net loss per share(1) 16,533 10,412 6,825 4,434 --
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 23,020 $ 14,346 $ 24,554 $ 9,023 $ 1,287
Working capital 12,464 6,687 14,904 5,844 (979)
Total assets 31,394 31,068 47,922 11,796 2,901
Current portion of capital lease obligations,
capital loans and long-term debt 582 2,746 2,408 1,259 233
Current portion of notes payable and other liabilities 6,822 2,884 -- -- --
Non-current portion of capital lease obligations,
capital loans and long-term debt 4,002 649 3,062 4,933 829
Other long-term liabilities and notes payable(2) 3,781 9,666 10,858 3,467 2,643
Redeemable convertible preferred stock -- 600 2,000 -- --
Total stockholders' equity (net capital deficiency) 12,452 10,809 21,800 63 (2,919)
</TABLE>
- -----------------------------
(1) Earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128) and Staff Accounting Bulletin No. 98 ("SAB 98"). See
Notes 1 and 13 of Notes to Consolidated Financial Statements.
(2) See Note 5 of Notes to Consolidated Financial Statements for a description
of the Company's other long-term liabilities.
22
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes filed with this Report.
OVERVIEW
The Company acquires, develops and markets products in the areas of
rheumatology and dermatology. The Company acquired the U.S. and Canadian rights
to Ridaura(R) (auranofin), a treatment for rheumatoid arthritis, from SmithKline
Beecham Corporation and related entities ("SmithKline") in December 1996, and in
December 1997 the Company re-sold its Canadian rights to Ridaura. In March 1999,
the Company received marketing clearance from the U.S. Food and Drug
Administration ("FDA") to sell Luxiq(TM) (betamethasone valerate) Foam, 0.12%,
for the treatment of scalp dermatoses. The Company's products under development
include OLUX(TM) (clobetasol propionate 0.05%) for the treatment of severe scalp
dermatoses; ConXn(R) (relaxin) for the treatment of scleroderma, infertility and
organ fibrosis; interferon gamma for the treatment of certain congenital,
infectious and other diseases; and T-cell receptor ("TCR") peptide vaccines for
the treatment of multiple sclerosis and rheumatoid arthritis. There can be no
assurance that any of the Company's potential products will be successfully
developed, receive the necessary regulatory approvals or be successfully
commercialized.
The Company has financed its operations primarily through the sale and
issuance of equity securities. Additional cash has been received in connection
with product revenue, license agreements and certain credit financing
arrangements. In January 1999, the Company entered into a collaborative
arrangement with a corporate partner whereby the Company was paid $4.0 million
in cash and received $4.0 million in equity investment upon closing of the
agreement, and will receive future payments based on milestones and development
activities (see Note 15 of Notes to Consolidated Financial Statements). To date,
while a majority of expenditures have been for research and development
activities, the Company has also increased its sales and marketing expenditures
due to the promotion efforts of Ridaura. The Company has incurred operating
losses since its inception and had an accumulated deficit of $92.5 million at
December 31, 1998. The Company will require additional funds to continue the
development of its products and to fund operating losses that are expected for
the next few years. Ridaura is the only product the Company currently has on the
market.
RESULTS OF OPERATIONS
The Company's product revenues, derived from the sales of Ridaura, were
$7.5 million, $6.8 million and $0.4 million for the years ended December 31,
1998, 1997 and 1996, respectively. In December 1997, the Company sold the
Canadian rights to Ridaura to Pharmascience, Inc., a Canadian corporation
("Pharmascience"). Revenue on a pro forma basis to reflect the disposition of
Ridaura rights in Canada for the year 1997 was $6.5 million. The $0.7 million
($1.0 million on a pro forma basis) increase in revenue in 1998 over 1997 was
the result of increased promotional efforts by the Company's sales and marketing
organization and a
23
<PAGE> 25
product price increase. The Company had no revenue for the first eleven months
in 1996 as all of its products were in the development stage. The $6.4 million
increase in revenue in 1997 over 1996 was the result of having one full year of
Ridaura sales. Although revenue from Ridaura increased from 1997 to 1998, there
can be no assurance that the Company will be able to market and sell Ridaura
successfully or that Ridaura revenues will equal or exceed those achieved in
1997 and 1998. In particular, increased competition from new products to treat
rheumatoid arthritis could impact Ridaura sales and, as a result, the Company's
financial condition and results of operations could be materially and adversely
affected.
In connection with an agreement with Suntory Pharmaceuticals, a division
of Suntory Limited of Osaka Japan, for ConXn for the treatment of scleroderma,
the Company also recorded $1.6 million in licensing revenue in 1998.
Pursuant to agreements between SmithKline and the Company, SmithKline
will manufacture and supply Ridaura in final package form through December 2001.
SmithKline also managed distribution of the product, with no additional
consideration, through December 1997, at which time CORD Logistics, Inc.
("CORD") began managing customer orders and distribution of Ridaura. The
Company's distribution costs are currently estimated to be approximately three
percent of net revenue.
The Company's cost of product sales includes the cost of Ridaura
purchases from SmithKline, a percentage royalty based on product sales, and
distribution costs from CORD. For the years ending December 31, 1998 and 1997,
the Company recorded $1.4 million and $1.1 million in cost of product sales, and
$6.7 million and $7.1 million in amortization expense associated with the
acquisition of product rights to Ridaura, respectively. The Company determined
the useful life of the asset to be three years based on information regarding
products in the Company's development pipeline, competitive products, the
off-patent position of Ridaura and expected future revenues from Ridaura sales.
The increase of $0.3 million in product cost in 1998 over 1997 was the direct
result of increased unit sales and the decrease of $0.4 million in amortization
expense was the result of the Company's sale of its Canadian rights to Ridaura
in 1997. No product costs were recorded for 1996 as the Company was still in
development stage without any revenue generating product and there was no cost
associated with the Ridaura revenue the Company recognized in December 1996.
Research and development expenses were $11.4 million, $17.2 million and
$13.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The $5.8 million decrease in research and development expenses in
1998 over 1997 was primarily due to lower clinical trial activity. In 1998, the
Company's clinical trial activities consisted of an open label trial of ConXn
for the treatment of scleroderma, a Phase II clinical trial of interferon gamma
for the treatment of keloids, a Phase III clinical trial of OLUX and contract
manufacturing scale-up expenses associated with Luxiq. The $4.0 million increase
in research and development expenses in 1997 over 1996 was primarily due to the
Phase III clinical trial of interferon gamma for the treatment of atopic
dermatitis, the Phase II clinical trial of ConXn for the treatment of
scleroderma, the Phase III clinical trial of Luxiq for the treatment of scalp
psoriasis, the Phase I/II clinical trial of TCR peptide vaccines for the
treatment of multiple sclerosis and the Phase II clinical trial of interferon
gamma for the treatment of keloids, all of which commenced after June 1996.
24
<PAGE> 26
Research and development expenses are expected to increase in future periods due
to the initiation of an expected pivotal trial of ConXn for the treatment of
scleroderma, commencement of relaxin manufacturing scale-up activities,
anticipated clinical trials of interferon gamma for the treatment of
osteopetrosis, multiple drug resistant tuberculosis and other indications, and
possible acquisition and development of new technologies and products.
Selling, general and administrative expenses were $11.7 million, $9.0
million and $5.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase of $2.7 million in expenses from 1998 over 1997 was
primarily due to increased activities of an established sales and marketing
organization including the hiring of additional sales staff in the third quarter
and costs associated with the promotion and marketing of Ridaura, increases in
business development expenses, and the hiring of additional personnel in the
general and administrative functions. The increase of $3.6 million in expenses
from 1997 over 1996 was primarily due to the establishment of a new sales and
marketing organization, costs associated with re-launching Ridaura, increases in
personnel in the general and administrative functions, and legal expenses
associated with operating as a public company. Selling, general and
administrative expenses are expected to continue to increase primarily due to
further staffing up of the sales organization, costs associated with marketing
Ridaura and potential commercialization of additional products.
Pursuant to the interferon gamma license agreement with Genentech in May
1998 (see Note 5 of Notes to Consolidated Financial Statements), the Company
recorded a $4.0 million non-cash license fee charge in 1998. The Company
determined that the realizability of the license is largely uncertain as it
relates to a pre-FDA approved product and is dependent on additional research
and development of interferon gamma, and as a result, has expensed the full
purchase amount. There were no license fee charges in 1997 or 1996.
In December 1997, the Company entered into an agreement with
Pharmascience, whereby the Company sold its Canadian rights to Ridaura for a net
consideration of $1.3 million. The book value of the Canadian rights to Ridaura
at December 31, 1997 was approximately $775,000 and accordingly, the Company
recognized a gain of $525,000 from the transaction. The Company had no similar
transactions in 1998 or 1996.
Interest income was $0.8 million, $0.9 million and $1.2 million for the
years ended December 31, 1998, 1997 and 1996, respectively. The decrease in
interest income in 1998 over 1997 was due to lower average cash and investment
balance resulting from cash used in operations, debt obligations and
approximately $3.6 million principal and interest payments to SmithKline for
rights to Ridaura, offset in part by two private placements that raised a total
of $22.7 million. The decrease in interest income in 1997 over 1996 was also the
result of lower cash and investment balances due to increases in operating
expenses and a $3.0 million payment to SmithKline for rights to Ridaura.
Interest earned in the future will depend on the Company's funding cycles and
prevailing interest rates. Interest expense was $1.3 million, $1.7 million and
$0.9 million for the years ended December 31, 1998, 1997 and 1996, respectively.
The decrease of $0.4 million in interest expense in 1998 from 1997 was due to
lower imputed interest expense ($519,000 in 1998 compared to $830,000 in 1997)
attributable to a non-interest bearing $11.0 million promissory note payable to
SmithKline as partial consideration for the rights to Ridaura,
25
<PAGE> 27
and lower interest expense associated with lower balances outstanding for
obligations under capital leases, loans and notes payable. The decrease was
offset in part by approximately $471,000 in accrued interest payable pursuant to
the amended repayment terms of the SmithKline note (see Note 5 of Notes to
Consolidated Financial Statements). The increase of $0.8 million in interest
expense in 1997 over 1996 was due to imputed interest expense of $1.1 million
attributable to the non-interest bearing $11.0 million promissory note payable
to SmithKline, offset in part by lower interest expense associated with lower
balances outstanding for obligations under capital leases and loans, and notes
payable.
The Company incurred net losses of $26.6 million, $27.9 million and
$18.5 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Other than the $4.0 million licensing charge in connection with
the license of interferon gamma (discussed above), the decrease of $1.3 million
in net losses in 1998 from 1997 was primarily due to a decrease of approximately
$5.8 million in development activities, lower amortization costs due to the sale
of Canadian rights to Ridaura, lower interest expense and an additional $1.6
million in licensing revenue in connection with the agreement with Suntory
Pharmaceuticals for ConXn. These decreases were offset in part by higher
selling, general and administrative expenses. The increase of $9.4 million in
net loss in 1997 over 1996 was primarily due to a higher level of product
development activities and Ridaura-related sales and marketing expenses,
amortization costs and imputed interest expenses, offset in part by revenues
generated from the sale of Ridaura. The Company expects to incur additional
losses over the next few years and losses are expected to fluctuate from period
to period based on timing of product revenues, clinical material purchases,
possible acquisitions of new products and technologies, scale-up activities and
clinical activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through
private sales of equity securities, proceeds from its initial public offering in
February 1996 and six self-managed financings, two in 1996, two in 1997 and two
in 1998. At December 31, 1998, cash, cash equivalents and short-term investments
totaled $23.0 million, an increase of $8.7 million from $14.3 million at
December 31, 1997. In 1998, the Company has generated cash of $24.2 million
through private sales of the Company's common stock ($22.7 million) and an
up-front license fee payment from Suntory Limited ($1.5 million, net of
international withholding tax). In January 1999, the Company received a $4.0
million up-front development fee and $4.0 million in equity investment from a
collaborative arrangement with a corporate partner (see Note 15 of Notes to
Consolidated Financial Statements).
Cash used in operations in 1998 was $12.0 million compared with $23.6
million in 1997 and $10.4 million in 1996. The 1998 net loss was affected by a
number of charges that did not use cash, including a $4.0 million charge for the
write-off of technology licensed in exchange for common stock, $6.7 million of
amortization expense and $0.5 million of imputed interest expense associated
with the acquisition of Ridaura. Cash outflow for the year was primarily for
operating activities and approximately $3.6 million in principal and interest
payments to SmithKline. The 1997 net loss was also affected by a number of
charges that did not use cash, including $7.1 million of amortization expense
and $1.1 million imputed interest expense
26
<PAGE> 28
associated with the acquisition of Ridaura that were offset in part by a $0.5
million gain recognized from the sale of Ridaura Canadian rights. In addition,
the increase in net loss of $9.4 million from 1997 over 1996 was due to higher
expenses associated with clinical trials and sales and marketing activities. The
cash outflow from operations also included a $3.0 million payment to SmithKline
for rights to Ridaura in January 1997, offset by $4.8 million cash generated
from Ridaura product sales (net of product costs). Other than non-cash
depreciation and deferred compensation expenses, cash outflow in 1996 was
primarily for operating activities. Receivables at December 31, 1998 were $0.5
million as compared with $1.5 million for the same period in 1997, attributable
to a shorter collection cycle as product sales in 1998 are made direct to
wholesalers with payment terms of 2% discount if paid in 30 days. In 1997, the
Company's sole customer was SmithKline, which in turn distributed Ridaura under
a Transitional Services Agreement with the Company. Payment terms under this
arrangement were on a quarterly basis.
Investing activities, other than changes in the Company's short-term
investments, consumed $0.5 million in cash during 1998, compared with $0.6
million during 1997 and $3.5 million during 1996. Cash outlays in 1998 included
$176,000 for equipment expenditures required for operations and $308,000 for
fulfillment of obligations under the equity and asset purchase agreements with
SmithKline (see Note 5 of Notes to Consolidated Financial Statements). Cash
outlays in 1997 included a $1.0 million payment to SmithKline and equipment and
leasehold improvements expenditures of $0.9 million due to headcount growth,
offset in part by $1.3 million cash generated from the sale of the Canadian
rights to Ridaura. Cash outlays in 1996 included a $3.0 million up-front payment
to SmithKline for the acquisition of Ridaura rights and $0.5 million in capital
expenditures.
Cash proceeds from financing activities in 1998 were $21.1 million
compared with $13.9 million in 1997 and $29.4 million in 1996. The Company
raised $22.7 million through private sales of its common stock and $4.0 million
in a bank loan in 1998. In 1997, the Company generated $16.1 million cash
primarily from sales of its common stock compared with $32.6 million cash
generated primarily from its initial public offering and a private financing in
1996. The Company also financed $0.3 million of its equipment expenditures
through a capital loan arrangement in 1997 and 1996. Cash proceeds in 1998, 1997
and 1996 were offset by $2.8 million, $2.5 million and $1.2 million in payments
on obligations under capital leases and loans, respectively, and principal
payments of $3.2 million to SmithKline in 1998.
Working capital increased by $5.8 million to $12.5 million at December
31, 1998 from $6.7 million at December 31, 1997. The increase was primarily due
to a higher cash balance as a result of the $22.7 million raised by the Company
through equity sales and $4.0 million bank loan, offset by the reclassification
of the note payable due to SmithKline in 1999 from long term to current
liabilities. In April 1998, the Company restructured its payment obligations
under the promissory note to SmithKline such that the note previously to be
fully paid by January 1999 is now due throughout 1999 and to be fully paid by
April 2000 (see Note 5 of Notes to Consolidated Financial Statements). The
decrease of working capital to $6.7 million at December 31, 1997 from $14.9
million at December 31, 1996 was the result of lower cash, cash equivalents and
short-term investments, the reclassification of long-term capital loans, debt
and note payable to current liabilities, offset in part by lower accounts
payable, lower accrued
27
<PAGE> 29
expenses and a higher receivable balance. The decrease in accounts payable and
accrued process development expenses of $3.3 million was partially due to
payments of $3.0 to SmithKline and $0.7 million for interferon gamma material
associated with the Phase III clinical trial.
At December 31, 1998, the Company had an aggregate of $15.2 million in
future obligations of principal payments under capital leases, loans, long-term
debt and other obligations, of which $7.4 million is to be paid before December
31, 1999.
The Company has an equity line agreement with an investor that may
potentially provide the Company access to capital through sales of its common
stock. The three-year equity line became available on June 26, 1998. During the
three year term, if the stock meets certain volume restrictions and trades above
$10.00, then up to $500,000 would be drawn against the equity line approximately
every three months in exchange for the sale of stock at an approximate minimum
price of $10.00 (see Note 6 of Notes to Consolidated Financial Statements).
The Company believes that its existing cash and cash equivalents,
short-term investments, cash generated from Ridaura revenues, and financings,
including cash received through the collaborative arrangements with a corporate
partner in January 1999, will be sufficient to fund the Company's operating
expenses, debt obligations and capital requirements through early 2000. The
Company's future capital uses and requirements depend on numerous factors,
including the progress of its research and development programs, the progress of
clinical testing, the time and costs involved in obtaining regulatory approvals,
the cost of filing, prosecuting, and enforcing patent claims and other
intellectual property rights, competing technological and market developments,
the ability of the Company to establish other collaborative arrangements, the
level of product revenues, the possible acquisition of new products and
technologies, and the development of commercialization activities. Therefore
such capital uses and requirements may increase in future periods. As a result,
the Company will require additional funds prior to reaching profitability and
may attempt to raise additional funds through equity or debt financings,
collaborative arrangements with corporate partners or from other sources. Other
than the equity line agreement discussed above, the Company currently has no
commitments for any additional financings, and there can be no assurance that
additional funding will be available for the Company to finance its ongoing
operations on acceptable terms, if at all. The inability to obtain sufficient
funds could require the Company to delay, scale back or eliminate some or all of
its research and product development programs, to limit the marketing of its
products or to license to third parties the rights to commercialize products or
technologies that the Company would otherwise seek to develop and market itself.
IMPACT OF YEAR 2000
Many computer systems and software applications were not designed to
handle dates beyond the year 1999, and therefore will need to be modified prior
to year 2000 in order to remain functional. As for many other companies, the
year 2000 issue poses a potential risk for Connetics and as a result, computer
systems and/or software used by many companies, including Connetics, may need to
be upgraded to comply with such "Year 2000" requirements.
28
<PAGE> 30
The Company has completed an assessment of its core business information
systems and related business processes used in its operations, most of which are
provided by outside suppliers. To date the Company has completed testing and
upgrading of approximately 74% of its information technology systems and expects
to have all remaining systems upgraded by March 31, 1999. The Company is
approximately 67% complete with the testing and upgrading of its operating
equipment and expects the process to be fully completed by June 30, 1999. The
Company has on-line access to its third party distribution service system that
includes customer orders, billing, shipping and inventory management. This
vendor has made its distribution system Year 2000 compliant, and the Company
converted to the compliant system in November, 1998.
The Company's reliance on key suppliers, and therefore on the proper
functioning of their information systems and software, is increasing, and there
can be no assurance that another company's failure to address year 2000 issues
might not have an adverse effect on the Company. The Company has initiated
formal communications with each of its significant suppliers and customers to
determine the extent of its vulnerability to those third parties' failure to
remediate their own Year 2000 issues. The Company has requested that third party
vendors represent their products and services to be Year 2000 compliant and that
they have a program to test for Year 2000 compliance. However, the response of
those third parties is beyond the Company's control.
Management of the Company is in the process of evaluating the need for
contingency plans with respect to Year 2000 requirements. The necessity of any
contingency plan must be evaluated on a case-by-case basis and will vary
considerably in nature depending on the Year 2000 issue it may need to address.
However, there can be no assurance that the Company may be able to solve all
potential Year 2000 issues, and if the Company fails to correct a material Year
2000 problem, its normal business activities and operations could be
interrupted. Such interruptions could have a material adverse affect on the
Company's results of operations, liquidity and financial condition. To date,
Year 2000 costs are not considered by the Company to be material to its
financial condition. The Company has incurred and expensed approximately $15,500
and currently estimates that, in order to complete Year 2000 compliance, the
Company will be required to incur total expenditures of approximately $50,000.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Act")
provides a safe harbor for forward-looking statements made by or on behalf of
the Company. This report contains statements that are "forward-looking." All
statements that express expectations, beliefs, intentions or future strategies,
including possible development or future market launching of therapeutic
products; ability to raise funds to finance ongoing operations; possible
acquisition of new products and technologies; and "Year 2000" compliance
efforts, are forward-looking statements within the meaning of the Act. These
statements are made on the basis of management's views and assumptions, as of
the time the statements are made, regarding future events and business
performance. There can be no assurance, however, that management's expectations
will necessarily come to pass.
29
<PAGE> 31
Factors that may affect forward-looking statements. A wide range of
factors could materially affect future developments and performance, including
the following:
o The Company is at an early stage of development and is subject to
uncertainties associated with product development and market acceptance.
Several of the Company's products are in clinical and preclinical
development or are pending approval by the FDA, and no revenues were
generated from products until December 1996. There can be no assurance that
products under development will be safe and effective, approved by the FDA,
produced in commercial quantities at reasonable costs or will gain
satisfactory market acceptance.
o The Company has a limited operating history and is subject to the
uncertainties and risks associated with any new business. The Company has
experienced operating losses every year since its incorporation and expects
to incur additional losses over the next few years. Losses are expected to
fluctuate from period to period based on timing of product revenues,
clinical material purchases, possible acquisitions of new products and
technologies, scale-up activities and clinical activities. The time for the
Company to reach profitability is uncertain and there can be no assurance
that the Company will ever be able to generate revenue from its products
now under development or achieve profitability on a sustained basis.
o There are risks related to the management of the marketing and sales of the
Company's products. The Company's success depends in part on its ability to
effectively manage the distribution of its products and to market and sell
its products successfully. Future revenues from sales are uncertain as the
Company is subject to patent risks and competition from new products.
o The Company's future capital uses and requirements depend on numerous
factors, including costs associated with the research, development,
clinical testing and obtaining regulatory approvals of products in its
pipeline; enforcing patent claims and intellectual property rights;
acquisition of new products and technologies; commercialization activities
and the ability to establish collaborative arrangements. Such requirements
may increase in the future and the Company may attempt to raise additional
funds through equity or debt financings, collaborative arrangements or from
other sources. Future financings could have a dilutive effect on the
Company's stockholders.
o A key element of the Company's strategy is to in-license or acquire
additional marketed or late-stage development products, which involve
risks. A portion of the funds needed to acquire, develop and market any new
products may come from the Company's existing cash which will result in
fewer resources available to its current products and clinical programs.
There can be no assurance that the Company will be able to raise additional
funding to finance such acquisitions. In addition, the Company may have to
recruit additional qualified employees to manage the development,
marketing, sale and distribution of newly acquired products. There can be
no assurance that newly acquired products will achieve the marketing or
therapeutic success expected of them by the Company, industry analysts or
others at the time of acquisition.
30
<PAGE> 32
o Clinical trials are inherently unpredictable and there can be no assurance
that the Company will be able to commence any future trials, successfully
complete them once started, meet development schedules or obtain product
approval by the FDA on a timely basis if at all. The Company has limited
experience in conducting preclinical and clinical trials, and delays in
planned patient enrollment may result in increased costs and delays, which
could have a material adverse effect on the Company's results of
operations.
o The Company's success will depend in part on its ability to preserve its
trade secrets, to operate without infringing the proprietary rights of
third parties, and to obtain patent protection for its products and
processes. Products or processes made, used or sold by the Company may be
covered by patents held by third parties that could prevent the Company
from practicing the subject matter, require it to obtain licenses or
redesign its products or processes to avoid infringement. The patent
positions can be highly uncertain and involve complex legal and factual
questions. Accordingly, the breadth of such claims cannot be predicted.
Patent disputes are frequent and the Company could in the future be
involved in material patent litigation.
o The Company's products for research, preclinical testing and sale have been
supplied by collaborators and contract manufacturing companies. The Company
currently has no manufacturing facilities nor does it intend to develop
such capabilities in the near future. The failure of any of the Company's
contract manufacturers to provide products for clinical testing or to
manufacture products on a commercial scale on a timely basis will have a
material adverse effect on the Company's results of operations.
This list of factors that may affect future performance and the accuracy
of forward-looking statements is illustrative, but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
31
<PAGE> 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has supply contracts with Boehringer Ingelheim Austria GmbH (for a
product under research and development) and CCL Pharmaceuticals Ltd. in the U.K.
(for a product to be marketed in 1999). As payments under these contracts are
payable in local currency, the Company's financial results could be affected by
changes in foreign currency exchange rates. The Company has a bank loan that is
sensitive to movement in interest rates. Interest income from the Company's
investments is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of its investments are in short-term
instruments. Due to the nature of its short-term investments, the Company has
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following Financial Statements are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................... 33
Consolidated Balance Sheets........................................... 34
Consolidated Statements of Operations................................. 35
Consolidated Statement of Stockholders' Equity........................ 36
Consolidated Statements of Cash Flows................................. 37
Notes to Consolidated Financial Statements............................ 38
</TABLE>
32
<PAGE> 34
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Connetics Corporation
We have audited the accompanying consolidated balance sheets of
Connetics Corporation as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material aspects, the consolidated financial position of
Connetics Corporation at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 13, 1999
33
<PAGE> 35
CONNETICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,708 $ 8,452
Short-term investments 8,312 5,894
Accounts receivable, net 485 1,527
Other current assets 118 158
--------- --------
Total current assets 23,623 16,031
Property and equipment, net 1,128 1,663
Notes receivable from related parties 379 333
Deposits and other assets 104 160
Licensed assets and product rights 6,160 12,881
--------- --------
$ 31,394 $ 31,068
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,229 $ 1,492
Accrued liabilities 879 1,100
Accrued process development expenses 644 586
Accrued payroll and related expenses 1,003 536
Current portion of notes payable and other liabilities 6,822 2,884
Current portion of capital lease obligations, capital loans and long-term debt 582 2,746
--------- --------
Total current liabilities 11,159 9,344
Non-current portion of capital lease obligations, capital loans and long-term debt 4,002 649
Other long-term liabilities 3,781 9,666
Redeemable convertible preferred stock, Series A -- 600
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value:
5,000,000 shares authorized; redeemable convertible preferred stock, Series A,
shares issued and outstanding: none in 1998 and 60 in 1997; and preferred stock,
none issued or outstanding in 1998 and 1997 -- --
Common stock, $0.001 par value, and additional paid-in capital:
50,000,000 shares authorized; shares issued and outstanding: 20,577,067 in 1998
and 13,244,164 in 1997 105,285 77,518
Notes receivable from stockholders (65) (75)
Deferred compensation, net (302) (763)
Accumulated deficit (92,469) (65,873)
Accumulated other comprehensive income 3 2
--------- --------
Total stockholders' equity 12,452 10,809
--------- --------
$ 31,394 $ 31,068
========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE> 36
CONNETICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Product $ 7,473 $ 6,803 $ 428
License 1,648 --
------------ ------------ -----------
Total revenues 9,121 6,803 428
Operating costs and expenses:
Cost of product revenues 1,374 1,149 --
License amortization 6,720 7,124 594
Research and development 11,446 17,162 13,161
Selling, general and administrative 11,680 8,966 5,434
Charge for pre-FDA approved product rights 4,000 -- --
------------ ------------ -----------
Total operating costs and expenses 35,220 34,401 19,189
Loss from operations (26,099) (27,598) (18,761)
Interest income 808 860 1,190
Gain on sale of license rights -- 525 --
Interest expense (1,304) (1,722) (943)
------------ ------------ -----------
Net loss $ (26,595) $ (27,935) $ (18,514)
============ ============ ===========
Basic and diluted net loss per share $ (1.61) $ (2.69) $ (2.71)
Shares used to calculate basic and diluted net loss
per share 16,532,544 10,412,039 6,824,668
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE> 37
CONNETICS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE COMMON STOCK AND
PREFERRED STOCK ADDITIONAL PAID IN CAPITAL NOTES
SHARES AMOUNT SHARES AMOUNT RECEIVABLE
------ ------ -------- --------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 3,965 $ 4 909 $ 21,426 $ (134)
Issuance of common stock at IPO, net -- -- 2,500 24,521 --
Conversion of preferred stock into common stock at IPO (3,965) (4) 3,965 4 --
Common stock issued under stock option and purchase plans -- -- 63 118 --
Issuance of common stock warrants -- -- 10 -- --
Common stock issued pursuant to private placement, net -- -- 972 5,930 --
Common stock issued to SmithKline for asset purchase -- -- 638 9,000 --
Payment of notes receivable -- -- -- -- 59
Deferred compensation from stock incentive program, net of amortization -- -- -- 8 --
Comprehensive loss:
Net loss -- -- -- -- --
Unrealized loss on investments -- -- -- -- --
Comprehensive loss -- -- -- -- --
------ -- -------- --------- --------
Balances at December 31, 1996 -- -- 9,057 61,007 (75)
------ -- -------- --------- --------
Common stock issued under stock option and purchase plans -- -- 185 187 --
Common stock issued pursuant to private placements, net -- -- 3,560 15,894 --
Conversion of Series A preferred stock and accrued dividends -- -- 442 1,521 --
Amendment to guaranteed market value of common -- -- -- (1,000) --
stock issued to SmithKline
Deferred compensation from stock incentive program, net of amortization -- -- -- (91) --
Comprehensive loss:
Net loss -- -- -- -- --
Unrealized loss on investments -- -- -- -- --
Comprehensive loss -- -- -- -- --
------ -- -------- --------- --------
Balances at December 31, 1997 -- -- 13,244 77,518 (75)
------ -- -------- --------- --------
Common stock issued under stock option and purchase plans -- -- 337 513 --
Conversion of Series A preferred stock and accrued dividends -- -- 251 604 --
Common stock issued pursuant to private placements, net -- -- 5,330 22,671 --
Issuance of common stock and amendment to guaranteed market value
of common stock issued to SmithKline -- -- 1,038 (308) --
Common stock issued pursuant to license agreements -- -- 382 4,010 --
Payment of notes receivable and repurchase of common stock -- -- (5) (14) 10
Deferred compensation from stock incentive program, net of amortization -- -- -- 291 --
Comprehensive loss:
Net loss -- -- -- -- --
Unrealized gain on investments -- -- -- -- --
Comprehensive loss -- -- -- -- --
------ -- -------- --------- --------
Balances at December 31, 1998 -- -- 20,577 $ 105,285 $ (65)
====== == ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
DEFERRED ACCUMULATED COMPREHENSIVE
COMPENSATION DEFICIT INCOME(LOSS) TOTAL
------------ ----------- ------------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1995 $(1,933) $(19,300) $ -- $ 63
Issuance of common stock at IPO, net -- -- -- 24,521
Conversion of preferred stock into common stock at IPO -- -- -- --
Common stock issued under stock option and purchase plans -- -- -- 118
Issuance of common stock warrants -- -- -- --
Common stock issued pursuant to private placement, net -- -- -- 5,930
Common stock issued to SmithKline for asset purchase -- -- -- 9,000
Payment of notes receivable -- -- -- 59
Deferred compensation from stock incentive program, net of amortization 618 -- -- 626
Comprehensive loss:
Net loss -- (18,514) -- (18,514)
Unrealized loss on investments -- -- (3) (3)
--------
Comprehensive loss -- -- -- (18,517)
------- -------- -------- --------
Balances at December 31, 1996 (1,315) (37,814) (3) 21,800
------- -------- -------- --------
Common stock issued under stock option and purchase plans -- -- -- 187
Common stock issued pursuant to private placements, net -- -- -- 15,894
Conversion of Series A preferred stock and accrued dividends -- (124) -- 1,397
Amendment to guaranteed market value of common -- -- -- (1,000)
stock issued to SmithKline
Deferred compensation from stock incentive program, net of amortization 552 -- -- 461
Comprehensive loss:
Net loss -- (27,935) -- (27,935)
Unrealized gain on investments -- -- 5 5
--------
Comprehensive loss -- -- -- (27,930)
------- -------- -------- --------
Balances at December 31, 1997 (763) (65,873) 2 10,809
------- -------- -------- --------
Common stock issued under stock option and purchase plans -- -- -- 513
Conversion of Series A preferred stock and accrued dividends -- (1) -- 603
Common stock issued pursuant to private placements, net -- -- -- 22,671
Issuance of common stock and amendment to guaranteed market value
of common stock issued to SmithKline -- -- -- (308)
Common stock issued pursuant to license agreements -- -- -- 4,010
Payment of notes receivable and repurchase of common stock -- -- -- (4)
Deferred compensation from stock incentive program, net of amortization 461 -- -- 752
Comprehensive loss:
Net loss -- (26,595) -- (26,595)
Unrealized gain on investments -- -- 1 1
--------
Comprehensive loss -- -- -- (26,594)
------- -------- -------- --------
Balances at December 31, 1998 $ (302) $(92,469) $ 3 $ 12,452
======= ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
36
<PAGE> 38
CONNETICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(26,595) $(27,935) $(18,514)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 7,488 7,911 1,237
Technology acquired in exchange for note payable and other
long-term liability 4,010 -- --
Amortization of deferred compensation 752 461 626
Accrued interest on notes payable 519 1,107 --
Gain on sale of Canadian rights to Ridaura -- (525) --
Changes in assets and liabilities:
Accounts receivable 1,042 (1,099) (428)
Current and other assets 18 (17) 690
Accounts payable (263) (2,687) 3,738
Accrued liabilities 1,038 (809) 2,203
-------- -------- --------
Net cash used by operating activities (11,991) (23,593) (10,448)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (10,969) (12,152) (21,650)
Sales and maturities of short-term investments 8,552 16,263 11,648
Capital expenditures (176) (865) (461)
Sale of Canadian rights to Ridaura -- 1,300 --
Payment for licensed assets and product rights (308) (1,000) (3,000)
-------- -------- --------
Net cash (used in) provided by investing activities (2,901) 3,546 (13,463)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) from bank loans 4,000 -- --
Payment of notes payable (3,200) -- (2,205)
Proceeds from capital loans and long-term debt -- 333 323
Payments on obligations under capital leases and capital loans (2,836) (2,470) (1,244)
Proceeds from issuance of redeemable preferred stock -- -- 2,000
Proceeds from issuance of preferred and common stock, net 23,184 16,081 30,569
-------- -------- --------
Net cash provided by financing activities 21,148 13,944 29,443
-------- -------- --------
Net change in cash and cash equivalents 6,256 (6,103) 5,532
Cash and cash equivalents at beginning of period 8,452 14,555 9,023
-------- -------- --------
Cash and cash equivalents at end of period $ 14,708 $ 8,452 $ 14,555
======== ======== ========
SUPPLEMENTARY INFORMATION:
Interest paid $ 698 $ 615 $ 1,062
INVESTING AND FINANCING ACTIVITIES:
Assets acquired under capital leases $ -- $ -- $ 199
Deferred compensation related to stock options, purchase rights and purchase plan $ 387 $ -- $ 145
Issuance of common stock for licensed assets and product rights $ 4,010 $ -- $ 9,000
Issuance of note payable for licensed assets and product rights $ -- $ -- $ 9,375
Preferred dividends on redeemable preferred stock, series A $ 1 $ 124 $ --
Conversion of redeemable preferred stock, series A and preferred dividend
into common stock $ 604 $ 1,521 $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Connetics Corporation (the "Company") was incorporated in the State of
Delaware on February 8, 1993. In May 1997, the Company's stockholders approved a
change of the Company's name from "Connective Therapeutics, Inc." to "Connetics
Corporation." References in this section to historical results include the
Company's results when it was known as "Connective Therapeutics, Inc." From its
inception the Company has principally been involved in research and development
of therapeutics for diseases that involve connective tissues of the body,
obtaining financing, recruiting personnel, securing operating facilities, and
pursuing business development opportunities. In December 1996, the Company
acquired exclusive U.S. and Canadian rights to Ridaura(R), a disease modifying
anti-rheumatic drug, from SmithKline Beecham Corporation and related entities
("SmithKline"). Ridaura is the first product the Company commercialized and it
signified the beginning of the Company's transition from purely product
development to a revenue based sales and marketing company. In December 1997,
the Company submitted a New Drug Application (an "NDA") with the FDA to market
Luxiq(TM) (a foam formulation of the dermatologic drug, betamethasone valerate)
in North America. In 1998, the Company formed a wholly-owned subsidiary
corporation, InterMune Pharmaceuticals, Inc., to further develop and market
certain patent rights and know-how to interferon gamma in the United States
through an exclusive license from Genentech, Inc. (see Note 5). As of December
31, 1998, the Company had no products from its development programs available
for sale. There can be no assurance that any of the Company's potential products
will be successfully developed, receive the necessary regulatory approvals or be
successfully commercialized. Accordingly, the Company's ability to continue its
research and development activities is dependent upon the ability of management
to obtain substantial additional financing.
Liquidity and Financial Viability
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue for the next few
years. The Company's future capital uses and requirements depend on numerous
factors, including the progress of its research and development programs, the
progress of clinical and advanced-stage clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting, and
enforcing patent claims and other intellectual property rights, competing
technological and market developments, the ability of the Company to establish
collaborative arrangements, the level of product revenues, the possible
acquisition of new products and technologies, and the development of
commercialization activities. Therefore, such capital uses and requirements may
increase in future periods. As a result, the Company will require substantial
additional funds prior to reaching profitability and plans to continue to
finance its operating activities with a combination of stock sales, payments
from corporate partnering arrangements, product revenue, bank loans and/or debt
financing. The inability to obtain sufficient funds may require the
38
<PAGE> 40
Company to delay, scale back or eliminate some or all of its research and
product development programs, limit the marketing of its products, or license to
third parties the rights to commercialize products or technologies that the
Company would otherwise seek to develop and market itself.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary corporation, InterMune Pharmaceuticals,
Inc. Material intercompany balances and transactions have been eliminated.
Cash, Cash Equivalents and Short-term Investments
Cash and cash equivalents consist of cash on deposit with banks and
money market instruments with original maturity of 90 days or less. Investments
with maturities beyond three months at the date of acquisition and that mature
within one year from the balance sheet date are considered to be short-term
investments. Cash equivalents and short-term investments are carried at fair
value, with unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. The cost of securities sold is based on the
specific identification method.
Management of the Company believes it has established guidelines for
investment of its excess cash relative to diversification and maturities that
maintain safety and liquidity.
Fair Value of Financial Instruments
The carrying amount of cash, cash equivalents and short-term
investments, accounts receivable, notes receivable from related parties, current
liabilities, notes payable, and long-term lease obligations, loans and debt are
considered to be representative of their respective fair values.
Property and Equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over the useful lives of the assets, generally three to
five years. Assets acquired under capital lease arrangements are amortized over
the shorter of the estimated useful lives or the lease term.
Research and Development
Research and development costs are charged to expense as incurred.
Revenue Recognition
Revenues from product sales are recognized upon shipment, net of
allowances for estimated returns, rebates and chargebacks. The Company is
obligated to accept from customers the return of pharmaceuticals that have
reached their expiration date. The Company has not experienced significant
returns of expired product since its acquisition of U.S. and Canadian
39
<PAGE> 41
rights to Ridaura in December 1996. License revenue under collaborative
agreements is recognized when earned under the terms of the agreement and when
performance obligations have been met and related payments are receivable and
non-refundable.
Income Taxes
Income taxes are accounted for under the asset and liability method
where deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
Net Loss Per Share
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). This statement requires the
presentation of basic and diluted net income or loss per share. Basic net loss
per common share is computed using the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed using the
weighted average of common and diluted equivalent shares outstanding during the
period. All historical earnings per share amounts have been restated to conform
to the provisions of this statement (see Note 13).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Disclosure about Segments of an Enterprise and Related Information
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 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. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS 131 is effective beginning in the
Company's year ended December 31, 1998. The Company operates solely in one
segment, the development and commercialization of therapeutics for diseases that
involve connective tissues of the body, and therefore there is no impact to the
Company's financial statements of adopting SFAS 131. For the year ended December
31, 1998, all of the Company's sales were to customers in the United States. For
the year ended December 31, 1997, sales to customers outside the United States
(principally in Canada) were $353,000.
40
<PAGE> 42
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale investments (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Loss Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds $ 4,017 $ 3 $ (3) $ 4,017
Commercial paper 15,638 3 -- 15,641
Certificate of deposits 520 -- -- 520
Money market funds 391 -- -- 391
-------- --- ---- --------
Total 20,566 6 (3) 20,569
Less amount classified as cash equivalents (12,255) (2) -- (12,257)
-------- --- ---- --------
Total short-term investments $ 8,311 $ 4 $ (3) $ 8,312
======== === ==== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Loss Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds $ 3,824 $ 1 $-- $ 3,825
Commercial paper 1,947 -- -- 1,947
Certificate of deposits 2,068 1 -- 2,069
Money market funds 3,582 -- -- 3,582
-------- --- ---- --------
Total 11,421 2 -- 11,423
Less amount classified as cash equivalents (5,529) -- -- (5,529)
-------- --- ---- --------
Total short-term investments $ 5,892 $ 2 $-- $ 5,894
======== === ==== ========
</TABLE>
The net unrealized holding gain (loss) on available-for-sale investments
included as a separate component of stockholders' equity at December 31, 1998
and 1997 totaled $1,000 and $2,000, respectively. The gross realized gains on
sales of available-for-sale investments for the years ended December 31, 1998
and 1997 totaled $398,000 and $442,000, respectively, and gross realized losses
for the same periods totaled $53,000 and $78,000, respectively. Realized gains
and losses were calculated based on the specific identification method.
41
<PAGE> 43
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1997
------- -------
<S> <C> <C>
Laboratory equipment $ 1,889 $ 1,779
Computer equipment 546 501
Furniture and fixtures 417 397
Leasehold improvements 730 729
------- -------
3,582 3,406
Less accumulated depreciation and amortization (2,454) (1,743)
------- -------
Property and equipment, net $ 1,128 $ 1,663
======= =======
</TABLE>
Property and equipment includes assets under capitalized leases at
December 31, 1998 and 1997 of approximately $1,005,000. Accumulated amortization
related to leased assets was approximately $945,000 and $831,000 at December 31,
1998 and 1997, respectively. There were no new capitalized leases for the year
ended December 31, 1998.
4. NOTES RECEIVABLE FROM RELATED PARTIES
At December 31, 1998 and 1997, the Company held notes receivable from
officers of the Company totaling $379,000 and $333,000, respectively. These
notes, which bear interest at rates ranging from 5.5% to 8.5% annually, are
collateralized by certain personal assets of the officers and are generally due
and payable within three to five years.
5. RESEARCH AND LICENSE AGREEMENTS
Product Rights
In December 1996, the Company entered into an agreement with SmithKline
under which the Company acquired exclusive United States and Canadian rights to
Ridaura, a disease modifying antirheumatic drug. That agreement was amended on
November 13, 1997, December 18, 1997, and April 29, 1998. The agreement,
together with its amendments, is referred to as the "SKB Agreement." Under the
SKB Agreement, the Company paid $3.0 million in cash in January 1997, issued a
non-interest bearing $11.0 million promissory note payable due in two
installments ($6.0 million and $5.0 million in January 1998 and January 1999,
respectively), issued 637,733 shares of common stock with a guaranteed value of
$9.0 million at December 31, 1997, and is obligated to pay up to $6.0 million in
royalty payments based on future product sales, for a potential aggregate
consideration of up to $29.0 million. The $11.0 million promissory note was
discounted at inception using an imputed interest rate of 11% and total imputed
interest expense attributable to these payments is $1.6 million. The original
amount of the discounted note, $9.4 million, has been included in current and
other long-term liabilities with imputed interest being amortized over the
original term of the note. The Company determined the useful life of this asset
to be three years and has recorded amortization expense of $6.7 million, $7.1
million and $0.6 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Accumulated amortization at December 31, 1998 and 1997 were $14.4
42
<PAGE> 44
million and $7.7 million, respectively. In December 1997, the Company sold its
Canadian rights to Ridaura to Pharmascience, Inc., a Canadian corporation
("Pharmascience"), for a net consideration of $1.3 million. The original total
purchase price of $21.4 million that has been capitalized was adjusted by the
book value of the Canadian rights of approximately $775,000 to $20.6 million.
The SKB Agreement allows the Company to defer the principal payments of
$11.0 million (originally due in January 1998 and January 1999 as discussed
above) to SmithKline as follows:
<TABLE>
<CAPTION>
Due Date Amount Due Date Amount
-------- ------ -------- -------
<S> <C> <C> <C>
April 1, 1998 $1,000,000 April 1, 1999 $ 800,000
July 1, 1998 $1,100,000 July 1, 1999 $ 800,000
October 1, 1998 $1,100,000 October 1, 1999 $ 700,000
January 4, 1999 $2,500,000 January 3, 2000 $1,500,000
April 1, 2000 $1,500,000
</TABLE>
The Company is required to pay interest at prime rate plus 2% per year
on the principal amount outstanding of $5.7 million from January 1, 1998 through
January 4, 1999, and interest at prime rate plus 3% per year on the principal
amount outstanding of $5.3 million from January 5, 1999 through April 1, 2000.
The Company paid SmithKline $3.6 million in principal and interest in 1998 and
$2.6 million in principal and interest on January 4, 1999. As of December 31,
1998, the Company has classified principal and accrued interest on this note of
$4.9 million in the current portion of notes payable and other liabilities and
$3.0 million in other long-term liabilities.
Pursuant to the SKB Agreement as amended, the guaranteed value of the
common stock was revised from $9.0 million to $8.0 million based on the fair
market value of the Company's common stock on April 1, 1998, with a maximum of
1,675,512 shares to be issued in total. In consideration of the amendment, the
Company paid SmithKline $1.0 million on December 31, 1997. As of April 1, 1998,
the aggregate fair market value of the shares previously issued under the
agreement was less than $8.0 million and, as a result, the Company issued
1,037,779 shares of its common stock and additional cash consideration of
approximately $308,000 to SmithKline in fulfillment of the Company's obligation
to issue equity to SmithKline under the SKB Agreement.
Under a related Supply Agreement, SmithKline will manufacture and supply
Ridaura, in final package form, to the Company for an initial term through
December 2001. Under the Supply Agreement with Pharmascience, the Company,
through its relationship with SmithKline or other future vendors, will supply
Ridaura exclusively in Canada to Pharmascience.
License Agreements
In September 1993, the Company entered into an agreement with Genentech,
Inc. ("Genentech"), which was subsequently amended in July 1994, for an
exclusive right to make, use and sell certain products arising from recombinant
human relaxin ("relaxin") in a defined
43
<PAGE> 45
field and territory in exchange for Series A preferred stock that was issued in
September 1994. The Company charged the value of the preferred stock to research
and development expense in 1993. In addition, the Company charged $684,000 to
expense in 1994 for the purchase of research materials and payment of technology
transfer costs under the agreement. This amount, payable in the form of cash or
equity, was originally due on September 30, 1998, but by letter agreement dated
September 22, 1998, was amended to be due on April 1, 1999, and has been
included in the current portion of notes payable and other liabilities. The
Company is required to pay interest on the amount outstanding at an annual rate
of 7.5% and will also pay to Genentech royalties on sales of products arising
from relaxin, if any. In April 1996, the Company acquired worldwide rights to
relaxin from Genentech.
In June 1996, the Company entered into an exclusive License Agreement
with Soltec Research Pty Ltd. ("Soltec"), to develop and market a foam
formulation of the dermatologic drug, betamethasone valerate, in North America.
Under the terms of the Agreement, the Company will pay $75,000, of which $35,000
was paid in 1996, $22,500 was paid in January 1998, and the balance upon FDA
approval, in licensing fees to the Soltec (based on certain milestones) plus
royalties on future sales of products, if any, arising from the licensed
technology. The Company also has an exclusive option on Soltec's foam
formulation for the delivery of other compounds.
In December 1995, the Company entered into a license agreement with
Genentech to acquire exclusive development and marketing rights to interferon
gamma in the United States for dermatologic indications. In May 1998, Genentech
and the Company amended the agreement in its entirety, entering into a new
license agreement that granted the Company an exclusive license under certain
patent rights and know-how to ACTIMMUNE(R) (interferon gamma) for the treatment
of chronic granulomatous disease ("CGD") and several additional indications
(non-cancer dermatological diseases, infectious diseases, osteopetrosis,
pulmonary fibrosis and asthma) in the United States. Under the terms of the
agreement, the Company issued Genentech 380,048 shares of its common stock
valued at $2.0 million at the time of closing with a guaranteed value of $4.0
million at the second closing date, originally set as December 28, 1998. In the
event that the value of the initial shares issued is less than $4.0 million, the
Company will either issue additional shares or pay cash to Genentech. On
December 28, 1998, the Company amended the second closing date to any time on or
before December 15, 1999. The Company will also be required to pay Genentech
certain development and commercialization milestones and royalties on sales. The
parties also entered into a Supply Agreement under which Genentech will
manufacture and supply interferon gamma, in bulk product or finished product,
with a termination date on the earlier of May 5, 2001 or the date on which a
third party manufacturer, approved by the parties, enters into a supply
agreement with the Company. Because the realizability of the license is largely
uncertain as it relates to a pre-FDA approved product and is dependent on
additional research and development related to interferon gamma, the Company
recorded a $4.0 million non-cash license fee charge.
Agreement with Xoma
In June 1994, the Company entered into a Technology Acquisition
Agreement with Xoma Corporation to purchase all rights to TCR vaccines
technology and for the exclusive right to
44
<PAGE> 46
make, use and sell certain products pursuant to a sublicense agreement in
exchange for the issuance of two promissory notes totaling $2.2 million which
were repaid in February 1996. In addition to this note, the Company has accrued
additional consideration of $500,000 (included in other long-term liabilities),
which is payable by the Company upon the earlier of the achievement of
commencement of Phase III clinical trials for a product involving the licensed
technology, or six years from the date of the agreement. An additional
$1,000,000 will be payable by the Company upon FDA approval of a product
involving the licensed technology, and including royalties based on future
product sales. However, while the results of pilot clinical studies using TCR
vaccines for the treatment of rheumatoid arthritis and multiple sclerosis were
encouraging, the Company has suspended most of its activity in 1998 with respect
to TCR, to permit it to focus its resources on products closer to market. The
Company is evaluating its options, and intends to reach a decision regarding the
TCR program before the due date of the additional $500,000.
Development, Commercialization and Supply Agreement
In April 1998, the Company entered into a development, commercialization
and supply agreement with Suntory Pharmaceuticals, a division of Suntory Limited
of Osaka, Japan, for ConXn(R) for the treatment of scleroderma. Under the terms
of the agreement, Suntory will pay approximately $14.0 million in license fees
and milestone payments to the Company, be responsible for all development and
commercialization expenses in Japan, and pay royalties on sales in Japan for the
treatment of scleroderma. The Company has retained rights to all other
indications in Japan for ConXn. Suntory will purchase relaxin materials from the
Company and make milestone payments based upon development progress in the
United States and Japan. On April 30, 1998, Suntory paid an up-front license fee
of $1.5 million (net of $165,000 international withholding tax) to the Company.
6. FINANCING ARRANGEMENTS
Long-Term Debt
On December 21, 1995, the Company entered into a term Loan and Security
Agreement (the "First Term Loan") with a bank consortium (the "Lenders") under
which the Company borrowed $5.0 million at the interest rate of 13% per year. In
connection with the First Term Loan, the Company issued a warrant to purchase
73,071 shares of Common Stock at an exercise price of $5.78 per share,
exercisable at any time through December 2002. In conjunction with the First
Term Loan, the Company granted the Lenders a first security interest in its
corporate assets. At December 31, 1998, the loan was paid in full.
On September 24, 1998, the Company entered into a term Loan and Security
Agreement (the "Second Term Loan") with a bank (the "Lender"), which was
modified on December 22, 1998, under which the Company borrowed $4.0 million.
The Second Term Loan bears interest at prime rate plus 1.25% with interest only
payments for the first twelve months (through September 23, 1999), and to be
repaid thereafter in forty-eight (48) equal monthly installments of principal
plus accrued interest. On the first anniversary of the loan, the Company has the
right to elect whether the aggregate Second Term Loan outstanding will bear
interest at (i) a floating rate
45
<PAGE> 47
equal to prime rate plus 1.25% or (ii) a fixed rate equal to 4.5 percentage
points above the yield of the 48 month Treasury Bill (fixed at the time of
election). In conjunction with the Second Term Loan, the Company granted the
Lender a first priority security interest in its presently existing intellectual
property collateral, as defined in the loan documents. Covenants governing the
Second Term Loan require the maintenance of certain financial ratios, and if the
Company does not meet the covenants during the loan period, a restricted cash
pledge must be made against 100% of the outstanding loan balance.
Structured Equity Line Flexible Financing
On December 2, 1996, the Company entered into a Structured Equity Line
Flexible Financing Agreement (the "Equity Line") with Kepler Capital LLC
("Kepler") that allows the Company to access up to $25 million through sales of
its Common Stock. The Equity Line, originally to be made available on or before
December 1, 1997, became available on June 26, 1998 and will remain open until
June 2001. During any 90-day period within the three year term, if the Company's
stock meets certain volume restrictions and trades above $10.00, then up to
$500,000 would be drawn against the Equity Line in exchange for the sale of
stock at an approximate minimum price of $10.00. The purchase price will be
subject to a maximum discount of 15%. As a commitment fee to Kepler for keeping
the equity line available, the Company has issued a warrant to purchase 250,000
shares of Common Stock (see Note 11). To date, the Company has not drawn down
any amount against the Equity Line.
7. CAPITAL LEASE OBLIGATIONS AND CAPITAL LOANS
The Company has capital lease and capital loan credit lines outstanding
totaling $1,364,000 at December 31, 1998. Under the terms of a master lease
agreement, ownership of the leased equipment reverts to the Company at the end
of the lease term.
As of December 31, 1998, future minimum lease payments under capital
leases and principal payments on capital loans are as follows:
<TABLE>
<CAPTION>
CAPITAL CAPITAL
LEASES LOANS
------- -------
(IN THOUSANDS)
<S> <C> <C>
Year ending December 31:
1999..................................................... $ 79 $225
2000..................................................... 54 168
2001..................................................... 39 --
Thereafter .............................................. -- --
---- ----
Total minimum lease and principal payments, respectively... 172 $393
Less amount representing interest ......................... 22
----
Present value of future payments .......................... 150
Less current portion of capital lease obligations ......... 66
----
Non-current portion of capital lease obligations .......... $ 84
====
</TABLE>
The obligations under the capital leases and loans are secured by the
leasehold improvements and equipment financed, bear interest at fixed rates of
approximately 8% to 19% and are payable in monthly installments through
September 2001.
46
<PAGE> 48
8. OPERATING LEASES
The Company leases two facilities under non-cancelable operating leases,
which expire in July 1999, with an option to extend the term of the lease for
one additional period of two years, and in March 1999, respectively. The Company
does not intend to extend the term of the lease expiring in March 1999. In
November 1998, the Company entered into a non-cancelable operating lease on a
third facility with a lease commencement date of January 1, 1999 and expiration
date of January 31, 2002. The future minimum rental payments under the leases
are as follows (in thousands):
<TABLE>
<S> <C>
Years ending December 31:
1999 ......................................................... $ 627
2000 ......................................................... 314
2001 ......................................................... 315
2002 ......................................................... 26
------
$1,282
======
</TABLE>
The Company recognizes rent expenses on a straight-line basis over the
term of each lease. Rent expense under operating leases was approximately
$687,000, $639,000 and $425,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
9. NOTES RECEIVABLE FROM STOCKHOLDERS
At December 31, 1998 and 1997, the Company held $65,000 and $75,000,
respectively, in notes receivable from certain stockholders for the purchase of
the Company's common stock. These notes bear interest at rates ranging from 6%
to 7% annually and are secured by the shares of common stock held by the
borrowers. The notes are due and payable, together with any unpaid interest, no
later than either the fourth or fifth anniversary of the note, or, for certain
of these notes, within 30 days of termination of employment with the Company. In
June 1998, one note was paid in full including accrued interest.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 1996, the Company issued 200 shares of 7% Series A
Redeemable Convertible Preferred Stock ("Series A Redeemable Preferred Stock"),
par value $0.001 per share, in a Regulation S offering at a per share price of
$10,000 with a mandatory redemption date of December 4, 1999. The Series A
Redeemable Preferred Stock had provisions for dividends and principal to be
converted into common stock according to a formula. As of January 31, 1998, all
200 shares of Series A Redeemable Preferred Stock plus accrued dividends of
$125,000 had been converted to 693,393 shares of common stock with a value of
$2,125,000.
11. STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of shares, common stock
(Common Stock) and preferred stock (Preferred Stock), each with par value of
$0.001 per share. Prior to the Company's initial public offering, two series of
Preferred Stock, Series A and B were issued.
47
<PAGE> 49
In connection with the initial public offering of the Company's common stock in
February 1996, each previously outstanding share of preferred stock (an
aggregate of 3,965,137 shares) was converted into one share of common stock and
all previously authorized preferred stock was eliminated. The Company's
Certificate of Incorporation was restated to delete all references to Series A
and B of Preferred Stock, and to authorize a new class of 5,000,000 shares of
Preferred Stock.
Warrants
In July 1995, the Company issued warrants to purchase 18,395 shares of
Series B Preferred Stock at an exercise price of $4.89 per share pursuant to a
capital lease and capital loan agreement. Each such warrant was converted into a
warrant for the purchase of one share of common stock and such warrants are
exercisable any time through July 2002.
In connection with a Master Bridge Loan Agreement with certain
stockholders of the Company in December 1995, the Company issued warrants that
expire in December 2000 to purchase a total of 22,727 shares of common stock at
an exercise price of $11.00 per share. Also in December 1995, in connection with
a loan and security agreement with a bank consortium, the Company issued
warrants, which expire in December 2002, to purchase 73,071 shares of common
stock at an exercise price of $5.78 per share.
In conjunction with the Company's issuance of 200 shares of Series A
Redeemable Preferred Stock in December 1996 (see Note 10), warrants were issued
that allow the holders to purchase up to 20,000 shares of the Company's common
stock at an exercise price of $7.43 per share, with an expiration date of
December 4, 2001.
In conjunction with the Equity Line (see Note 6), the Company issued a
warrant on January 2, 1997 to purchase 250,000 shares of common stock at an
exercise price of $8.25 per share. The warrant is exercisable over a period of 5
years from date of issuance. On each of the first, second and third
anniversaries of the beginning of the commitment period, the Company will issue
an additional five-year warrant exercisable for a number of shares based on the
amount of equity line still available to the Company.
In conjunction with the Company's issuance of 1,810,000 shares in May
1997 to certain private investors, warrants were issued to purchase 905,000
shares of the Company's common stock at an exercise price of $9.08 per share.
These warrants will expire May 15, 2001.
In January 1998, the Company issued a warrant to a third party to
purchase 6,000 shares of common stock at an exercise price of $6.00 per share as
partial compensation for services rendered to the Company in connection with a
private placement of the Company's Common Stock on December 15, 1997.
Common Stock
The Company has the right to repurchase, at the original issue price per
share, certain shares of common stock issued to employees, consultants,
investors and founders. This right generally expires ratably over a period of
time not greater than five years, in accordance with
48
<PAGE> 50
terms determined by the Board of Directors. At December 31, 1998 and 1997,
outstanding shares of 389 and 36,202, respectively, were subject to repurchase
at an original issue price of $0.45 per share, including shares issued pursuant
to stock purchase rights under the 1994 Stock Plan (see Note 12).
Dividend Restrictions
The Company's loan agreement with a bank lender prohibits the Company
from declaring or paying a dividend without the bank's prior written consent.
Common Shares Reserved for Future Issuance
The Company has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
1994 Stock Plan ........................ 2,150,495 1,706,467
1995 Employee Stock Purchase Plan ...... 289,538 46,147
1995 Directors Stock Option Plan ....... 250,000 150,000
1998 Supplemental Stock Plan ........... 500,000 --
Non-plan stock options outstanding ..... 38,863 38,863
Common stock warrants .................. 1,295,193 1,289,193
--------- ---------
4,524,089 3,230,670
========= =========
</TABLE>
12. STOCK PLANS
1994 Stock Plan
The Company's 1994 Stock Plan (the "Plan") authorizes the Company's
Board of Directors (the "Board") to grant incentive stock options, non-statutory
stock options, and stock purchase rights for up to 2,600,000 shares of common
stock.
The options under this Plan expire no later than ten years from the date
of grant. The exercise price of the incentive stock options, non-statutory stock
options and options granted to 10% shareholders shall be at least 100%, 85%, and
110%, respectively, of the fair value of the stock subject to the option on the
grant date. The price for shares purchased pursuant to stock purchase rights by
10% shareholders shall be at least 100% of the fair market value of the stock on
the date of grant.
The options generally become exercisable at such times as determined by
the Board, but in no event at a rate of less than 20% per year for a period of
five (5) years from date of grant. Shares granted under the Plan pursuant to
stock purchase rights are generally subject to repurchase by the Company at the
original issue price per share. The Company's right to repurchase these shares
generally expires ratably over a period of time not greater than five years.
49
<PAGE> 51
1995 Director Stock Option Plan
The 1995 Director Stock Option Plan (the "Directors' Plan") was adopted
by the Board in December 1995. A total of 250,000 shares of Common Stock have
been reserved for issuance under the Directors' Plan. The Directors' Plan
provides for the grant of non-statutory stock options to non-employee directors
of the Company.
The Directors' Plan provides that each person who first becomes a
non-employee director of the Company shall be granted a non-statutory stock
option to purchase 30,000 shares of Common Stock (the "First Option") on the
date on which the optionee first becomes a non-employee director of the Company.
Thereafter, on the date of each annual meeting of the Company's stockholders,
each non-employee director shall be granted an additional option to purchase
7,500 shares of Common Stock (a "Subsequent Option") if, on such date, he or she
has served on the Board for at least six months.
The Directors' Plan provides that the First Option shall become
exercisable in installments as to 25% of the total number of shares subject to
the First Option on each of the first, second, third and fourth anniversaries of
the date of grant of the First Option; each Subsequent Option shall become
exercisable in full on the first anniversary of the date of grant of that
Subsequent Option. The exercise price of all stock options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option. Options granted under
the Directors' Plan have a term of ten years. At December 31, 1998, 165,000
shares had been granted under the Directors' Plan and outstanding at a weighted
average price of $6.07, with 85,000 shares available for future grants.
1998 Supplemental Stock Plan
On November 5, 1998, the Board approved a new 1998 Supplemental Stock
Plan (the "Supplemental Plan") that provides the Board the authority to grant
non-statutory stock options to employees and consultants for up to 500,000
shares of common stock. Officers and directors of the Company are not eligible
for grants under the Supplemental Plan.
The options under this Plan expire no later than ten years from the date
of grant. The exercise price of the non-statutory stock options shall be at
least 100% of the fair value of the stock subject to the option on the grant
date. The options generally become exercisable at such times as determined by
the Board, but in no event at a rate of less than 20% per year for a period of
five (5) years from date of grant.
Non-Plan Stock Options
The Company may from time to time grant options outside one of its
qualified plans ("Non Plan Stock Options"). As of December 31, 1998, a total of
64,612 Non Plan Stock Options were granted. At December 31, 1998, 38,863 shares
were outstanding at a weighted average price of $4.74 per share.
Activity under the Plan, the Directors' Plan, Supplemental Stock Plan
and Non-Plan Stock Options is summarized as follows:
50
<PAGE> 52
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------
SHARES WEIGHTED
AVAILABLE FOR NUMBER OF AVG. PRICE
GRANT SHARES PER SHARE
------------- --------- ----------
<S> <C> <C> <C>
Balance, December 31, 1995 ........... 297,841 956,102 $ 0.71
Additional shares authorized ....... 300,989 -- --
Options granted .................... (196,540) 196,540 $ 8.76
Options exercised .................. -- (62,302) $ 0.45
Shares repurchased ................. 10,717 -- $ 0.45
Options canceled ................... 57,154 (57,154) $ 0.45
------- ---------
Balance, December 31, 1996 ........... 470,161 1,033,186 $ 2.04
Additional shares authorized ....... 500,000 -- --
Options granted .................... (865,023) 904,635 $ 6.15
Options exercised .................. -- (147,629) $ 0.67
Shares repurchased ................. -- -- --
Options canceled ................... 58,349 (58,349) $ 4.64
------- ---------
Balance, December 31, 1997 ........... 163,487 1,731,843 $ 4.33
Additional shares authorized ....... 1,225,000 -- --
Options granted .................... (1,033,000) 1,033,000 $ 3.68
Options exercised .................. -- (185,328) $ 0.80
Shares repurchased ................. 4,356 -- $ 0.44
Options canceled ................... 247,135 (247,135) $ 5.27
------- ---------
Balance, December 31, 1998 ........... 606,978 2,332,380 $ 4.22
======= =========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED-
AVG.
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVG. AVG.
RANGE OF NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE SHARES YEARS) PRICE SHARES PRICE
-------------- ---------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.44 - $ 2.22 480,502 6.73 $0.62 353,725 $0.66
$2.56 - $ 3.88 672,250 6.36 $3.51 28,547 $3.63
$4.00 - $ 4.31 477,563 8.99 $4.11 71,071 $4.23
$4.50 - $ 7.13 516,275 8.30 $6.74 233,696 $7.02
$7.50 - $11.00 185,790 7.55 $9.34 115,612 $9.60
---------- ---- ----- ------- -----
$0.44 - $11.00 2,332,380 7.50 $4.22 802,651 $4.22
</TABLE>
For the years ended December 31, 1998 and 1997, the Company recorded
deferred compensation expense for the difference between the exercise price and
the deemed fair value of the Company's common stock, related to shares issued
pursuant to stock purchase rights and options granted in 1996 and 1995. These
options were granted to provide additional incentives to retain management and
key employees. This deferred compensation expense is being amortized over the
related vesting period, generally a 48-month period.
51
<PAGE> 53
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board in December 1995. A total of 500,000 shares of Common
Stock has been reserved for issuance under the Purchase Plan. The Purchase Plan
is administered by the Compensation Committee of the Board. Employees (including
officers and employee directors) of the Company, or of any majority owned
subsidiary designated by the Board, are eligible to participate if they are
employed by the Company or any such subsidiary for at least 20 hours per week
and more than 5 months per year. The Purchase Plan permits eligible employees to
purchase Common Stock through payroll deductions, which may not exceed 15% of an
employee's compensation, at a price equal to the lower of 85% of the fair market
value of the Company's Common Stock at the beginning or end of the offering
period. During 1998 and 1997, 156,609 and 53,853 shares, respectively, had been
issued under the plan and 289,538 shares were reserved for future issuance as of
December 31, 1998.
Pro Forma Information
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), in 1996. In accordance
with the provisions of SFAS 123, the Company applies APB Opinion No. 25 and
related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date and including stock purchases under the Purchase Plan as prescribed
by SFAS 123, net loss and net loss per share would have been increased to the
pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss - as reported ................. $ (26,595) $ (27,935) $ (18,514)
Net loss - pro forma ................... $ (27,964) $ (29,287) $ (19,339)
Net loss per share - as reported........ $ (1.61) $ (2.69) $ (2.71)
Net loss per share - pro forma.......... $ (1.69) $ (2.81) $ (2.83)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Stock Option Plans Stock Purchase Plan
------------------------- -------------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Expected stock price volatility.... 90.0% 60.0% 60.0% 76.6% 60.0% 60.0%
Risk-free interest rate ............. 4.74% 5.77% 5.91% 5.05% 5.63% 5.48%
Expected life (in years) ............ 3.8 4.1 3.6 0.5 0.5 0.5
Expected dividend yield ............. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
52
<PAGE> 54
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of its options. The weighted average fair value of
options granted during 1998 and 1997 was $2.44 and $3.12 per share,
respectively.
The effects on pro forma disclosures of applying SFAS 123 are not likely
to be representative of the effects on pro forma disclosures of future years.
1997 Stockholder Rights Plan
In May 1997, the Company adopted a stockholder rights plan (the "Rights
Plan") that provides existing stockholders with the right to purchase one
one-thousandth of a share of the Company's Series B Participating Preferred
Stock, $0.001 par value, at an exercise price of $49 per one one-thousandth of a
preferred share in the event of certain changes in the Company's ownership. The
Company will be entitled to redeem the rights at $0.01 per right at any time on
or before the tenth day following acquisition by a person or group of 15% or
more of the Company's common stock. The Rights Plan may serve as a deterrent to
certain abusive takeover tactics that are not in the best interest of
stockholders. At December 31, 1998, 90,000 shares were designated under the
Rights Plan and no shares were issued and outstanding.
53
<PAGE> 55
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net loss $(26,595) $(27,935) $(18,514)
Preferred stock dividends (1) (124) --
-------- -------- --------
Numerator for basic and diluted earnings per share --
loss to common stockholders (26,596) (28,059) (18,514)
Denominator:
Denominator for basic and diluted earnings per share --
weighted-average shares 16,533 10,412 6,825
Basic and diluted net loss per share $ (1.61) $ (2.69) $ (2.71)
======== ======== ========
</TABLE>
Options to purchase 2,332,380 shares of common stock at exercise prices ranging
from $0.44 to $11.00 and warrants to purchase 1,295,193 shares of common stock
at exercise prices ranging from $4.89 to $11.00 were outstanding during 1998 but
were not included in the computation of diluted earnings per share as their
effect would be antidilutive.
14. INCOME TAXES
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $75,700,000 and $14,900,000, respectively.
The Company also had federal and California research and development tax credit
carryforwards of approximately $2,400,000 and $1,400,000, respectively. The
federal net operating loss and credit carryforwards will expire at various dates
beginning in the year 2008 through 2018, if not utilized. The state of
California net operating losses will expire at various dates beginning in 1999
through 2003, if not utilized.
Utilization of the Company's net operating loss carryforwards and
credits may be subject to an annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets for financial reporting and
the amount used for income tax purposes.
54
<PAGE> 56
Significant components of the Company's deferred tax assets for federal
and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward .......... $ 26,600 $ 21,000
Capitalized research and development ..... 3,100 2,400
Research credit .......................... 3,300 1,900
Other - Net .............................. 2,500 600
-------- --------
Total Deferred Tax Assets ................ 35,500 25,900
Valuation allowance ...................... (35,500) (25,900)
-------- --------
Net deferred tax assets .................... $ -- $ --
======== ========
</TABLE>
Due to the Company's lack of earnings history, the net deferred tax
assets have been fully offset by a valuation allowance. The net valuation
allowance increased by $9,600,000 and $11,400,000 for the fiscal years ended
December 31, 1998 and 1997, respectively.
15. SUBSEQUENT EVENT
In January 1999, the Company entered into a development,
commercialization and supply agreement with Medeva PLC of the United Kingdom
("Medeva") for certain therapeutic indications pertaining to relaxin. Under the
terms of the agreement, Medeva paid $8.0 million upon closing which included a
$4.0 million development fee and a $4.0 million equity investment, and will pay
$17.0 million of milestone payments based upon development progress in the U.S.
and Europe and $5.0 million for the development and approval of each indication
in Europe in addition to scleroderma. Medeva is responsible for all development
and commercialization activities in Europe and is required to pay royalties on
sales in Europe. Medeva will reimburse the Company for 50% of its product
development costs in the U.S. up to a maximum of $1.0 million per quarter for an
estimated total of $10.0 million. Medeva also agreed to share U.S. co-promotion
rights with the Company for up to five years, and will also purchase relaxin
materials from the Company.
16. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT
In February 1999, the Board approved, and recommended that the Company's
stockholders approve, a new 2000 Stock Plan (the "2000 Plan"). Initially, an
amount equal to three percent (3%) of shares issued and outstanding on December
31, 1999 will be authorized and available for future grants under the 2000 Plan.
Each year thereafter, on the first day of each new calendar year, the number of
shares available shall be increased (with no further action needed by the Board
or the stockholders) by a number of shares equal to the lesser of 3% of the
number of shares of common stock outstanding on the last preceding business day,
or an amount determined by the Board. Upon adoption by the stockholders of the
2000 Plan, the 1994 Plan and the Supplemental Plan will be terminated.
On March 2, 1999, the Company announced that the Food and Drug
Administration granted marketing clearance to Luxiq(TM) (betamethasone valerate)
Foam, 0.12%, a novel foam formulation for relief of the inflammatory and
pruritic manifestations of corticosteroid-responsive dermatoses of the scalp.
55
<PAGE> 57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no disagreements with the independent public accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF CONNETICS
The information required by this Item 10 regarding directors of the
Company is incorporated into this item by reference to the information set forth
under "Election of Directors" and "Further Information Concerning the Board of
Directors" in the Company's definitive Proxy Statement ("1999 Proxy Statement")
to be filed with the Securities and Exchange Commission and relating to the
Company's annual meeting of stockholders to be held May 19, 1999.
The officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas G. Wiggans 47 President, Chief Executive Officer and Director
W. Scott Harkonen, M.D 47 Sr. Vice President, Product Development and
Operations
Robert G. Lederer 54 Sr. Vice President, Commercial Operations
John L. Higgins 29 Vice President, Finance and Administration and
Chief Financial Officer
Katrina J. Church 37 Vice President, Legal Affairs, Corporate
Counsel and Secretary
Ernst H. Rinderknecht, Ph.D. 51 Vice President, Process Science and
Manufacturing
</TABLE>
Thomas G. Wiggans has served as President, Chief Executive Officer and as a
director of the Company since July 1994. From February 1992 to April 1994, Mr.
Wiggans served as President and Chief Operating Officer of CytoTherapeutics, a
biotechnology company. From 1980 to February 1992, Mr. Wiggans served in various
positions at Ares-Serono Group, a pharmaceutical company, including President of
its U.S. pharmaceutical operations and Managing Director of its U.K.
pharmaceutical operations. From 1976 to 1980 he held various sales and marketing
positions with Eli Lilly & Co., a pharmaceutical company. He is currently a
director of the Biotechnology Industry Organization, and Chairman of its
Emerging Company Section. He was also President of the Board of Directors of the
Association of Biotechnology Companies. Mr.
56
<PAGE> 58
Wiggans received his B.S. degree in Pharmacy from the University of Kansas and
his M.B.A. from Southern Methodist University.
W. Scott Harkonen has served as Senior Vice President, Product Development and
Operations of the Company since September 1995, and as President of InterMune
Pharmaceuticals, Inc., a wholly-owned subsidiary of the Company, since June
1998. From March 1991 to August 1995, Dr. Harkonen served as Vice President of
medical and regulatory affairs at Univax Biologics, Inc., a biotechnology
company. From May 1989 to February 1991, he served as Vice President, medical
and regulatory affairs at Scios Nova, Inc., a biotechnology company. He is
currently a director of Planet Biotechnology, a privately-owned
biopharmaceutical company. He received his B.A. and M.D. from the University of
Minnesota and M.B.A. from the University of California, Berkeley.
Robert G. Lederer joined the Company as Senior Vice President, Marketing and
Sales in July 1998, and his title was changed to Senior Vice President,
Commercial Operations in January 1999. Before joining the Company, Mr. Lederer
spent 15 years with Serono Laboratories, most recently as the Executive Vice
President for Business Operations. He joined Serono in 1983, and held various
positions within the sales organization, including Executive Vice President of
Serono's Infertility Business Unit from 1994 to 1997. Before joining Serono, Mr.
Lederer held sales and management positions with Becton Dickinson and Genovese
Drugs. Mr. Lederer received his B.A. from St. John's University in New York.
John L. Higgins has served as Vice President, Finance and Administration and
Chief Financial Officer since September 1997. From August 1994 to September
1997, he was a member of the management team at BioCryst Pharmaceuticals, Inc.,
a pharmaceutical company, serving most recently as Executive Vice President of
Corporate Development. From July 1992 to July 1994, Mr. Higgins was a member of
the health care banking team of Dillon, Read & Co. Inc., an investment banking
firm. While at Dillon, Read, he focused on financing and advisory assignments
for biotechnology and managed care companies. He received his A.B. in Economics
from Colgate University.
Katrina J. Church has served as Vice President, Legal Affairs and Corporate
Counsel since June 1998, and as Secretary since September 1998. Prior to joining
the Company, Ms. Church served as Vice President, General Counsel of VISX,
Incorporated, a medical device company, from January 1995 through June 22, 1998,
as Corporate Counsel from June 1991 through December 1994, and as Secretary from
May 1994 until June 22, 1998. Before joining VISX in 1991, Ms. Church practiced
law with the firm Hopkins & Carley in San Jose, California. Ms. Church received
her J.D. from the New York University School of Law, and her A.B. from Duke
University.
Ernst H. Rinderknecht has served as Vice President, Process Sciences and
Manufacturing of the Company since September 1994. From 1980 to September 1994,
Dr. Rinderknecht worked at Genentech in various positions, since 1987 as Staff
Scientist. He received his M.S. from the Swiss Federal Institute of Technology
(ETH) and Ph.D. in Biochemistry from the University of Zurich, Switzerland.
57
<PAGE> 59
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 regarding compensation of Connetics'
directors and executive officers is incorporated into this item by reference
(except to the extent allowed by Item 402(a)(8) of Regulation S-K) to the 1999
Proxy Statement section entitled "Executive Compensation and Related
Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 regarding beneficial ownership of the
Common Stock by certain beneficial owners and by management of the Company is
incorporated into this item by reference to the 1999 Proxy Statement section
entitled "Common Stock Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 regarding certain relationships and
related transactions with management of the Company is incorporated into this
item by reference to the 1999 Proxy Statement section entitled "Certain
Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. Financial Statements. See Index to Consolidated Financial
Statements at Item 8 on Page 32 of this Report.
2. Financial Statement Schedules. Financial statement schedules are
omitted because they are not applicable or are not required as
the information required to be set forth therein is included in
the financial statements or notes thereto.
3. The Exhibits filed as a part of this Report are listed in the
Index to Exhibits.
(B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fourth
quarter of 1998.
(C) EXHIBITS. See Index to Exhibits.
(D) FINANCIAL STATEMENT SCHEDULES. See Item 14(a)(2), above.
58
<PAGE> 60
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.
Connetics Corporation
a Delaware corporation
By: /s/ JOHN L. HIGGINS
----------------------------------
John L. Higgins
Vice President, Finance and
Administration and Chief Financial
Officer
Date: March 30, 1999
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Thomas G. Wiggans and John L. Higgins, and each of them, his attorneys-in-fact,
each with the power of substitution, for him in any and all capacities, to sign
any amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, granting to said attorneys-in-fact, or his substitute or
substitutes, the power and authority to perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ THOMAS G. WIGGANS President, Chief Executive Officer March 30, 1999
- ------------------------------- and Director
Thomas G. Wiggans
</TABLE>
59
<PAGE> 61
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:
/s/ JOHN L. HIGGINS Vice President, Finance and March 30, 1999
- ------------------------------- Administration and Chief Financial
John L. Higgins Officer
CHAIRMAN OF THE BOARD:
/s/ G. KIRK RAAB Director March 30, 1999
- -------------------------------
G. Kirk Raab
ADDITIONAL DIRECTORS:
/s/ ALEXANDER E. BARKAS Director March 30, 1999
- -------------------------------
Alexander E. Barkas
/s/ EUGENE A. BAUER Director March 30, 1999
- -------------------------------
Eugene A. Bauer
/s/ BRIAN H. DOVEY Director March 30, 1999
- -------------------------------
Brian H. Dovey
/s/ JOHN C. KANE Director March 30, 1999
- -------------------------------
John C. Kane
/s/ THOMAS D. KILEY Director March 30, 1999
- -------------------------------
Thomas D. Kiley
/s/ KENNETH B. PLUMLEE Director March 30, 1999
- -----------------------------
Kenneth B. Plumlee
/s/ JOSEPH J. RUVANE, JR. Director March 30, 1999
- -----------------------------
Joseph J. Ruvane, Jr.
</TABLE>
60
<PAGE> 62
CONNETICS CORPORATION
INDEX TO EXHIBITS
[Item 14(c)]
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1* Form of Amended and Restated Certificate of Incorporation
(previously filed as an exhibit to the Company's Form S-1
Registration Statement No. 33-80261)
3.2* Form of Bylaws (previously filed as an exhibit to the Company's
Form S-1 Registration Statement No. 33-80261)
3.3* Certificate of Designation of 7% Redeemable Convertible Preferred
Stock, Series A of Connective Therapeutics, Inc., as filed with the
Delaware Secretary of State on December 4, 1996 (previously filed
as an exhibit to the Company's Report on Form 8-K dated December 4,
1996)
3.4* Amendment to the Company's Amended and Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State on May
15, 1997, changing the Company's name to Connetics Corporation
(previously filed as an exhibit to the Company's Report on Form 8-K
dated May 23, 1997)
3.5* Certificate of Designation of Rights, Preferences and Privileges of
Series B Participating Preferred Stock, as filed with the Delaware
Secretary of State on May 15, 1997. Reference is made to Exhibit
4.2.
4.1 Form of Common Stock Certificate
4.2* Preferred Shares Rights Agreement, dated as of May 20, 1997,
between the Company and U.S. Stock Transfer Corporation, including
the Certificate of Designation of Rights, Preferences and
Privileges of Series B Participating Preferred Stock, the form of
Rights Certificate and the Summary of Rights attached thereto as
Exhibits A, B and C, respectively (previously filed as an exhibit
to the Company's Registration Statement on Form 8-A filed on May
23, 1997)
10.1* Form of Indemnification Agreement with the Company's directors and
officers (previously filed as an exhibit to the Company's Form S-1
Registration Statement No. 33-80261)
10.2(M)* 1994 Stock Plan, as amended, and form of Option Agreement
(previously filed as an exhibit to Post-Effective Amendment No. 1
to the Company's Form S-8 Registration Statement No. 333-04985)
10.3(M)* 1995 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement (previously filed as an exhibit to
Post-Effective Amendment No. 1 to the Company's Form S-8
Registration Statement No. 333-04985)
10.4(M)* 1995 Directors' Stock Option Plan and form of Option Agreement
(previously filed as an exhibit to the Company's Form S-1
Registration Statement No. 33-80261)
10.5* Third Amended and Restated Registration Rights Agreement dated
February 14, 1995 among the registrant and certain security holders
of the registrant and Amendments Nos. 1 and 2 thereto dated May 31,
1995 and September 28, 1995 (previously filed as an exhibit to the
Company's Form S-1 Registration Statement No. 33-80261)
10.6+* License Agreement dated September 27, 1993, between Genentech, Inc.
and the Company, Amendment dated July 14, 1994, and side letter
agreement dated November 17, 1994 (previously filed as an exhibit
to the Company's Form S-1 Registration Statement No. 33-80261)
10.7* Assignment and Assumption Agreement, dated June 3, 1994, by and
between the Company and XOMA Corporation (previously filed as an
exhibit to the Company's Form S-1 Registration Statement No.
33-80261)
</TABLE>
61
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.8+* Technology Acquisition Agreement dated June 3, 1994 by and between
the Company and XOMA Corporation, and License Agreement dated
February 27, 1990 by and between Arthur A. Vandenbark, Ph.D. and
XOMA Corporation (previously filed as an exhibit to the Company's
Form S-1 Registration Statement No. 33-80261)
10.9+* Agreement on Interferon Gamma-1B dated December 8, 1995 by and
between the Company and Genentech, Inc. (previously filed as an
exhibit to the Company's Form S-1 Registration Statement No.
33-80261)
10.11* Business Loan Agreement, dated July 18, 1995, between the Company,
Silicon Valley Bank and MMC/GATX Partnership No. 1 (previously
filed as an exhibit to the Company's Form S-1 Registration
Statement No. 33-80261)
10.12+* Research Collaboration and Assignment Agreement, dated July 1,
1994, between the Company and Dr. Arthur A. Vandenbark (previously
filed as an exhibit to the Company's Form S-1 Registration
Statement No. 33-80261)
10.13* Consulting Agreement dated November 17, 1993 between the Company
and Brian Seed (previously filed as an exhibit to the Company's
Form S-1 Registration Statement No. 33-80261)
10.14* Consulting Agreement dated November 17, 1993 between the Company
and Eugene Bauer (previously filed as an exhibit to the Company's
Form S-1 Registration Statement No. 33-80261)
10.15(M)* Employment Agreement dated June 9, 1994 between the Company and
Thomas Wiggans (previously filed as an exhibit to the Company's
Form S-1 Registration Statement No. 33-80261)
10.16(M)* Loan Agreements between the Company and Thomas Wiggans dated July
15, 1994 and August 1, 1994 (previously filed as an exhibit to the
Company's Form S-1 Registration Statement No. 33-80261)
10.17(M)* Letter Agreement with G. Kirk Raab dated October 1, 1995
(previously filed as an exhibit to the Company's Form S-1
Registration Statement No. 33-80261)
10.18* Facility Master Lease between the Company and Renault & Handley
dated February 9, 1994 (previously filed as an exhibit to the
Company's Form S-1 Registration Statement No. 33-80261)
10.19* Loan and Security Agreement dated December 21, 1995 by and among
the Company, Silicon Valley Bank and MMC/GATX Partnership No. 1
(previously filed as an exhibit to the Company's Form S-1
Registration Statement No. 33-80261)
10.20+* Agreement on Relaxin Rights in Asia dated April 1, 1996 between the
Company and Mitsubishi Chemical Corporation (previously filed as an
exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996)
10.21+* Soltec License Agreement dated June 14, 1996 (previously filed as
an exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1996)
10.22(M)* Form of Directors and Officers Change in Control Agreement
(previously filed as an exhibit to the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended September 30, 1996)
10.23* Common Stock Purchase Agreement, dated December 4, 1996 by and
among the Company and certain investors (previously filed as an
exhibit to the Company's Report on Form 8-K dated December 4, 1996)
10.24* Registration Rights Agreement, dated December 4, 1996 by and among
the Company and certain investors (previously filed as an exhibit
to the Company's Report on Form 8-K dated December 4, 1996)
</TABLE>
62
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.25* Securities Purchase Agreement, dated December 4, 1996 by and among
the Company and a certain purchaser (previously filed as an exhibit
to the Company's Report on Form 8-K dated December 4, 1996)
10.26* Warrant, dated December 4, 1996 between the Company and a certain
purchaser (previously filed as an exhibit to the Company's Report
on Form 8-K dated December 4, 1996)
10.27+* Asset Purchase Agreement dated December 2, 1996 between the
Company, SmithKline Beecham Corporation, SmithKline Beecham Pharma
Inc., SmithKline Beecham Properties, Inc. and SmithKline Beecham
Inter-American Corporation (previously filed as an exhibit to the
Company's Report on Form 8-K dated January 15, 1997)
10.28* Stock Issuance Agreement dated December 31, 1996 between the
Company and SmithKline Beecham Properties, Inc (previously filed as
an exhibit to the Company's Report on Form 8-K dated January 15,
1997)
10.29* Secured Promissory Note dated December 31, 1996 issued to
SmithKline Beecham Corporation (previously filed as an exhibit to
the Company's Report on Form 8-K dated January 15, 1997)
10.30* Security Agreement dated December 31, 1996 between the Company and
SmithKline Beecham Corporation (previously filed as an exhibit to
the Company's Report on Form 8-K dated January 15, 1997)
10.31+* Supply Agreement dated December 31, 1996 between the Company and
SmithKline Beecham Corporation (previously filed as an exhibit to
the Company's Report on Form 8-K dated January 15, 1997)
10.32* Structured Equity Line Flexible Financing Agreement dated January
2, 1997 between the Company and Kepler Capital LLC (previously
filed as an exhibit to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996)
10.33* Registration Rights Agreement dated January 2, 1997 between the
Company and Kepler Capital LLC (previously filed as an exhibit to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996)
10.34(M)* Form of Notice of Stock Option Grant to G. Kirk Raab for stock
option issued in January 1997 (previously filed as an exhibit to
Post-Effective Amendment No. 1 to the Company's Form S-8
Registration Statement No. 333-04985)
10.35* Common Stock and Warrant Purchase Agreement dated May 15, 1997 by
and among the Company, Genentech, Inc. and certain investors
(previously filed as an exhibit to the Company's Form S-3
Registration Statement No. 333-21941)
10.36* Registration Rights agreement dated May 15, 1997 by and among the
Company and certain investors (previously filed as an exhibit to
the Company's Form S-3 Registration Statement No. 333-21941)
10.37* Form of Common Stock Purchase Warrant issued to certain investors
on May 15, 1997 (previously filed as an exhibit to the Company's
Form S-3 Registration Statement No. 333-21941)
10.38(M)* Secured Loan Agreement dated October 30, 1997 between the Company
and W. Scott Harkonen (previously filed as an exhibit to the
Company's Form S-1 Registration Statement No. 333-41195)
10.39* Amendment dated November 13, 1997 to Secured Promissory Note dated
December 31, 1996 issued to SmithKline Beecham Corporation
(previously filed as an exhibit to the Company's Form S-1
Registration Statement No. 333-41195)
10.40* Letter Agreement dated November 26, 1997 between the Company and
Gerard Klauer Mattison & Co., Inc. (previously filed as an exhibit
to the Company's Form S-1 Registration Statement No. 333-41195)
</TABLE>
63
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.41* Omnibus Agreement with SmithKline Beecham Corporation and related
entities dated December 18, 1997 (previously filed as an exhibit to
the Company's Form S-1 Registration Statement No. 333-41195)
10.42* Canadian Asset Purchase Agreement with Pharmascience, Inc. dated
December 19, 1997 (previously filed as an exhibit to the Company's
Form S-1 Registration Statement No. 333-41195)
10.43* Supply Agreement with Pharmascience, Inc. dated December 19, 1997
(previously filed as an exhibit to the Company's Form S-1
Registration Statement No. 333-41195)
10.44*+ License Agreement dated January 1, 1998 between the Company and
Soltec Research Pty Limited (previously filed as an exhibit to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997)
10.45+* Agreement on Relaxin dated January 19, 1998 by and between the
Company and Howard Florey Institute of Experimental Physiology and
Medicine (previously filed as an exhibit to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997)
10.46* Common Stock Purchase Agreement dated April 10, 1998 by and among
the Company and certain investors (previously filed as Exhibit 10.1
to the Company's Report on Form 8-K dated May 6, 1998)
10.47* Registration Rights Agreement dated April 10, 1998 by and among the
Company and certain investors (previously filed as an exhibit to
the Company's Report on Form 8-K dated May 6, 1998)
10.48*+ Agreement dated as of April 23, 1998 between the Company and
Suntory Limited (previously filed as Exhibit 10.1 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1998)
10.49*+ Second Omnibus Agreement with SmithKline Beecham Corporation and
related entities dated April 28, 1998 (previously filed as an
exhibit to the Company's Current Report on Form 8-K filed May 6,
1998)
10.50*+ License Agreement dated as of May 5, 1998 between the Company and
Genentech, Inc. (previously filed as Exhibit 10.2 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1998)
10.51*+ Supply Agreement dated as of May 5, 1998 between the Company and
Genentech, Inc. (previously filed as Exhibit 10.3 to the Company's
Report on Form 10-Q for the quarter ended June 30, 1998)
10.52* Stock Purchase Agreement dated May 5, 1998 between the Company and
Genentech, Inc. (previously filed as Exhibit 10.4 to the Company's
Form S-3 Registration Statement No. 333-69055)
10.53* Common Stock Purchase Agreement dated November 20, 1998 by and
among the Company and certain investors (previously filed as
Exhibit 10.1 to the Company's Form S-3 Registration Statement No.
333-69055)
10.54* Registration Rights Agreement dated November 20, 1998 by and among
the Company and certain investors (previously filed as Exhibit 10.2
to the Company's Form S-3 Registration Statement No. 333-69055)
10.55(M) Secured Loan Agreement and associated documents dated January 9,
1998, between the Company and John L. Higgins
10.56(M) Letter of Employment dated July 1, 1998 from the Company to Robert
G. Lederer
10.57(M) Loan Agreement and associated documents dated August 21, 1998,
between the Company and Robert G. Lederer
10.58 Loan and Security Agreement between Silicon Valley Bank and the
Company dated September 24, 1998, as modified December 22, 1998
pursuant to a Loan Modification Agreement
</TABLE>
64
<PAGE> 66
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.59(M) Restricted Common Stock Purchase Agreement dated November 5, 1998
between the Company and Kirk Raab
10.60(M) 1998 Supplemental Stock Plan
10.61 Industrial Building Lease dated November 20, 1998, by and between
the Company and West Bayshore Associates, a general partnership, et
al.
10.62(C) Relaxin Scale-up and Bulk Supply Agreement effective as of December
1, 1998, by and between the Company and Bender + Co. Ges.m.b.H.
10.63 Amendment No. One to License Agreement, effective December 28,
1998, between the Company and Genentech
10.64 Amendment No. One to Stock Purchase Agreement, effective December
28, 1998, between the Company and Genentech
10.65(C) Relaxin Development, Commercialization and License Agreement dated
January 11, 1999 by and between the Company and Medeva
Pharmaceuticals, Inc.
10.66 Common Stock Purchase Agreement, dated January 11, 1999, by and
between the Company and Medeva PLC
10.67 Registration Rights Agreement, dated January 11, 1999 by and
between the Company and Medeva PLC
21.1 Subsidiaries
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 60-)
27.1 Financial Data Schedule (EDGAR filed version only)
</TABLE>
- --------
* Previously filed.
(M) This item is a management compensatory plan or arrangement required to be
listed as an exhibit to this form pursuant to Item 601(a)(10)(iii) of
Regulation S-K.
(C) The Company has omitted certain portions of this Exhibit and has requested
confidential treatment of such portions from the SEC.
+ Confidential treatment has been requested and granted for certain portions
of this Exhibit.
65
<PAGE> 1
COMMON STOCK COMMON STOCK
NUMBER SHARES
CONNETICS
CORPORATION
THIS CERTIFICATE IS INCORPORATED UNDER THE LAWS OF SEE REVERSE SIDE
TRANSFERABLE IN THE STATE OF DELAWARE FOR CERTAIN
BOSTON, MA OR DEFINITIONS
NEW YORK, NY
THIS CERTIFIES THAT
SPECIMEN
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.001 PER SHARE, OF
CONNETICS CORPORATION
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation
and the facsimile signatures of its duly authorized officers.
Dated:
[SEAL]
Secretary President and Chief
Executive Officer
COUNTERSIGNED AND REGISTERED
BANKBOSTON, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 1
Exhibit 10.55
CONNETICS CORPORATION
SECURED LOAN AGREEMENT
This Secured Loan Agreement is made as of January 9, 1998 by and
between Connetics Corporation, a Delaware corporation (the "Company") and John
L. Higgins ("Borrower").
RECITALS
Borrower desires to borrow, and the Company desires to lend to Borrower
up to an aggregate of $18,000 (the "Borrowed Amount"). The parties desire that
such loan shall be secured pursuant to a Security Agreement of even date
herewith (the "Security Agreement") by an aggregate of 110,000 shares of the
Company's Common Stock (as adjusted for subsequent stock splits, reverse stock
splits and recapitalization) (the "Shares") issuable upon the exercise of
options to purchase Common Stock held by Borrower (the "Options") while any
Borrowed Amount is outstanding on the terms and conditions contained herein and
in the Security Agreement.
AGREEMENT
In consideration of the foregoing, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties agree as
follows:
1. AGREEMENT TO LEND. Subject to the terms and conditions contained in
this Agreement and upon execution of this Agreement, the Company agrees to issue
to Borrower a check or other readily available funds in the Borrowed Amount upon
the date of this Agreement.
2. PROMISSORY NOTE. In consideration of the Company's delivery of the
Borrowed Amount, Borrower will execute a secured promissory note in the form
attached hereto as Exhibit A (the "Note"), in the principal amount of such
Borrowed Amount and bearing interest at a rate of 8.5% per annum, compounded
annually.
3. SECURITY AGREEMENT. Borrower will additionally execute the Security
Agreement in the form attached hereto as Exhibit B as security for Borrower's
obligation to repay the Borrowed Amount, and, upon any exercise of the Options,
will deliver, or cause to be delivered, all certificates representing Shares to
the Company or its designee as pledgeholder of the Shares, together with such
other documents of assignment and other documents as may be reasonably requested
by the Company. The Shares will be held by the Company or its designee as
pledgeholder and shall be released in accordance with the terms of the Security
Agreement.
4. NO EMPLOYMENT RIGHTS. Nothing in this Agreement or the Note is
intended or shall be construed to confer upon Borrower any right to employment
or continued employment with the Company, or shall alter in any way the nature
of Borrower's employment with the Company.
<PAGE> 2
5. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
(b) GOVERNING LAW. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of California, without giving effect to principles of conflicts of
law.
(c) NOTICES. Any notice required or permitted by this
Agreement shall be in writing and shall be deemed sufficient upon receipt, when
delivered personally or by a nationally-recognized delivery service (such as
Federal Express or UPS) or confirmed facsimile, or forty-eight (48) hours after
being deposited in the U.S. mail as certified or registered mail with postage
prepaid, if such notice is addressed to the party to be notified at such party's
address or facsimile number as set forth below, or as subsequently modified by
written notice.
(d) SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(i) such provision shall be excluded from this Agreement, (ii) the balance of
the Agreement shall be interpreted as if such provision were so excluded and
(iii) the balance of the Agreement shall be enforceable in accordance with its
terms.
(e) ADVICE OF LEGAL COUNSEL. Each party acknowledges and
represents that, in executing this Agreement, it has had the opportunity to seek
advice as to its legal rights from legal counsel and that the person signing on
its behalf has read and understood all of the terms and provisions of this
Agreement. This Agreement shall not be construed against any party by reason of
the drafting or preparation thereof.
-2-
<PAGE> 3
The parties hereto have executed this Secured Loan Agreement as of the
day and year first above written.
JOHN L. HIGGINS
/s/ John L. Higgins
-------------------------------------
(Signature)
Address: 1788 Oak Creek Drive
----------------------------
#208
-------------------------------------
Palo Alto, CA 94304
-------------------------------------
CONNETICS CORPORATION
By: /s/ Thomas G. Wiggans
---------------------------------
Title: President and Chief Executive
Officer
------------------------------
Address: 3400 West Bayshore Road
Palo Alto, CA 94303
-3-
<PAGE> 4
SECURED PROMISSORY NOTE
$18,000 Palo Alto, California
JANUARY 9, 1998
FOR VALUE RECEIVED, John L. Higgins ("Borrower") promises to pay to
Connetics Corporation, a Delaware corporation (the "Company"), the principal sum
of Eighteen Thousand Dollars ($18,000), together with interest on the unpaid
principal hereof from the date hereof at the rate of 8.5% per annum, compounded
annually.
All principal and accrued interest shall be due and payable in full on
the earliest of (a) January 9, 2001 or (b) the termination of Borrower's
employment or consulting relationship with the Company for any reason (or for no
reason). Payments of principal and interest shall be made in lawful money of the
United States of America and shall be credited first to the accrued interest,
with the remainder applied to principal.
Borrower may at any time prepay all or any portion of the principal or
interest owing hereunder.
This Note is subject to the terms of a Secured Loan Agreement, dated as
of January 9, by and between the Company and Borrower, and is secured by a
pledge of Common Stock of the Company issuable upon exercise of options held by
Borrower under the terms of a Security Agreement dated January 9, 1998 and is
subject to all the provisions thereof.
Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by
Borrower.
The holder of this Note shall have full recourse against Borrower, and
shall not be required to proceed against the collateral securing this Note in
the event of default.
/s/ JOHN L. HIGGINS
-------------------------
John L. Higgins
<PAGE> 5
SECURITY AGREEMENT
This Security Agreement is made as of January 9, 1998 by and between
Connetics Corporation, a Delaware corporation ("Pledgee"), and John L. Higgins
("Pledgor").
RECITALS
Pledgee has loaned to Pledgor, and Pledgor has borrowed from Pledgee,
an aggregate of $18,000, which loan is or shall be evidenced by a promissory
note (the "Note") and is to be secured by Pledgor's community property interest
in up to an aggregate of 110,000 shares of Pledgee's Common Stock (the "Shares")
(as adjusted for subsequent stock splits, reverse stock splits and
recapitalization) issuable upon exercise of options held or hereafter acquired
by Pledgee (the "Options").
AGREEMENT
In consideration of the foregoing, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties to this
Agreement agree as follows:
1. CREATION AND DESCRIPTION OF SECURITY INTEREST; TRANSFERABILITY;
ESCROW.
(a) In consideration of the loan to Pledgor, Pledgor, pursuant
to the Commercial Code of the State of California, hereby pledges the Shares
(sometimes referred to in this Agreement as the "Collateral"). If any of the
Options are exercised, the certificates representing the Shares shall be
delivered immediately, duly endorsed in blank or with executed stock powers, to
the Secretary of Pledgee (the "Pledgeholder"), who shall hold said certificates
subject to the terms and conditions of this Security Agreement.
(b) The pledged stock (together with an executed blank stock
assignment for use in transferring all or a portion of the Shares to Pledgee if,
as and when required pursuant to this Security Agreement) shall be held by the
Pledgeholder as security for the repayment of the Note, and any extensions or
renewals thereof, to be executed by Pledgor pursuant to the terms of the Secured
Loan Agreement.
(c) Except as required to enable Pledgee to exercise its
rights as a secured party, neither the Shares pledged under this Section 1 nor
the Options may be sold, transferred, pledged, hypothecated or otherwise
disposed of by Pledgor.
(d) To ensure the ability of Pledgee to exercise its rights as
a secured party hereunder, Pledgor shall, upon any exercise of the Option,
deliver and deposit with the Secretary of Pledgee, or such other person
designated by Pledgee, the share certificates representing the Shares, together
with a stock power, duly endorsed in blank, in the form attached hereto as
Exhibit B-1. The Shares and stock power(s) shall be held by Pledgee in escrow,
until such time as the Note shall have been paid in full. As a further
inducement to Pledgee to loan to Pledgor the
-4-
<PAGE> 6
funds represented by the Note, the spouse of Pledgor, if any, shall execute and
deliver to Pledgee a Consent of Spouse in the form attached hereto as Exhibit
B-2.
(d) [sic] To the extent that Pledgor's spouse owns any
community property interest in the Shares under California law, the portion of
the Shares subject to such community property interest shall not be pledged
under this Agreement nor be considered part of the Collateral.
2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) PAYMENT OF INDEBTEDNESS. Pledgor will pay the principal
sum of the Note secured hereby, together with interest thereon, at the time and
in the manner provided in the Note.
(b) ENCUMBRANCES. All Shares now or hereafter pledged under
this Agreement are and shall be free of all other encumbrances, defenses and
liens, and Pledgor will not further encumber the Shares without the prior
written consent of Pledgee.
3. VOTING RIGHTS. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.
4. STOCK ADJUSTMENTS. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgeholder under the terms of this Security
Agreement in the same manner as the Shares originally pledged hereunder. In the
event of substitution of such securities, Pledgor, Pledgee and Pledgeholder
shall cooperate and execute such documents as are reasonable so as to provide
for the substitution of such Collateral and, upon such substitution, references
to "Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgee held by Pledgor as a result thereof.
5. WARRANTS AND RIGHTS. In the event that, during the term of this
pledge, subscription warrants or other rights or options shall be issued in
connection with the pledged Shares, such rights, warrants and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. DEFAULT. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be
delinquent for a period of 10 days or more; or
-5-
<PAGE> 7
(b) Pledgor fails to perform any of the covenants contained in
this Security Agreement for a period of 10 days after written notice thereof
from Pledgee.
7. REMEDIES IN THE EVENT OF DEFAULT. In the case of an event of
default, as set forth above, Pledgee shall have the right to accelerate payment
of the Note upon notice to Pledgor, and shall thereafter be entitled to pursue
any or all of its remedies under applicable law, including, without limitation,
(a) offsetting from Pledgor's salary, bonuses, vacation pay or other amounts due
to Pledgor from the Pledgee, any amount due and payable by Pledgor under the
Note, and/or (b) proceeding against the Collateral in accordance with the
California Commercial Code.
8. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
9. TERM. The pledge of Shares shall continue until the payment of all
indebtedness secured hereby, at which time the remaining pledged stock shall be
promptly delivered to Pledgor.
10. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against Pledgor, or if a receiver is appointed
for the property of Pledgor, or if Pledgor makes an assignment for the benefit
of creditors, the entire amount unpaid on the Note shall become immediately due
and payable, and Pledgee may proceed as provided in the case of default.
11 PLEDGEHOLDER LIABILITY. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his acts,
or omissions to act, as Pledgeholder.
12. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
(b) GOVERNING LAW. This Agreement and all acts and
transactions pursuant hereto and the rights and obligations of the parties
hereto shall be governed, construed and interpreted in accordance with the laws
of the State of California, without giving effect to principles of conflicts of
law.
(c) NOTICES. Any notice required or permitted by this
Agreement shall be in writing and shall be deemed sufficient upon receipt, when
delivered personally or by a nationally-recognized delivery service (such as
Federal Express or UPS) or confirmed facsimile, or forty-eight (48) hours after
being deposited in the U.S. mail as certified or registered mail with postage
-6-
<PAGE> 8
prepaid, if such notice is addressed to the party to be notified at such party's
address or facsimile number as set forth below, or as subsequently modified by
written notice.
(d) SEVERABILITY. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, the parties agree to
renegotiate such provision in good faith. In the event that the parties cannot
reach a mutually agreeable and enforceable replacement for such provision, then
(i) such provision shall be excluded from this Agreement, (ii) the balance of
the Agreement shall be interpreted as if such provision were so excluded and
(iii) the balance of the Agreement shall be enforceable in accordance with its
terms.
(e) ADVICE OF LEGAL COUNSEL. Each party acknowledges and
represents that, in executing this Agreement, it has had the opportunity to seek
advice as to its legal rights from legal counsel and that the person signing on
its behalf has read and understood all of the terms and provisions of this
Agreement. This Agreement shall not be construed against any party by reason of
the drafting or preparation thereof.
The parties hereto have executed this Security Agreement as of the day
and year first above written.
JOHN L. HIGGINS
/s/ John L. Higgins
-------------------------------------
(Signature)
Address: 1788 Oak Creek Drive
----------------------------
#208
-------------------------------------
Palo Alto, CA 94304
-------------------------------------
CONNETICS CORPORATION
By: /s/ Thomas G. Wiggans
---------------------------------
Title: President and Chief Executive
Officer
------------------------------
Address: 3400 West Bayshore Road
Palo Alto, CA 94303
-7-
<PAGE> 1
Exhibit 10.56
[CONNETICS LETTERHEAD]
July 1, 1998
Robert G. Lederer
115 River Street
Norwell, MA 02061
Dear Bob,
On behalf of Connetics Corporation (the "Company"), I am pleased to offer
you the position of Senior Vice President, Sales and Marketing. Speaking for the
Board, as well as the other members of the Company's management team, we are all
very impressed with your achievements to date and your approach to building
successful organizations. We all look forward to a mutually profitable and
enjoyable relationship as we build Connetics Sales and Marketing into a premier
biopharmaceutical company together.
The terms of your employment relationship with the Company will be as set
forth below:
1. POSITION: You will become the Senior Vice President, Sales and
Marketing. As such, you will have overall responsibility for directing the sales
and marketing activities of the Company toward the achievement of its business
objectives as developed by the senior management team. In addition, as a member
of the Senior Management Team, you will help set the overall direction and
strategy for the company, and measure progress against our goals.
2. COMPENSATION:
a. BASE SALARY. You will be paid a base annual salary of $225,000,
payable in two equal payments per month pursuant to the Company's
regular payroll policy.
b. PERFORMANCE BONUS. You will be eligible to receive a target
performance bonus of approximately 30% of your base salary. You
and I will design a bonus plan that will provide you, and your
sales and marketing team, with significant bonus upside for
exceeding corporate sales goals. The amount of bonus you actually
receive will be based on achievement of mutually acceptable
quarterly milestones to be agreed to by you and me, and approved
by the Compensation Committee of the Board of Directors. As a
member of senior management you will also be responsible for
reviewing performance bonuses in future years and implementing
bonus plans that recruit and reward employees based on
achievement of objectives.
<PAGE> 2
c. ANNUAL REVIEW. Your base salary will be reviewed at the end of
each calendar year as part of the Company's normal salary review
process for officers.
3. STOCK OPTIONS:
a. STOCK PURCHASE. The Board of Directors has granted you an
opportunity to purchase 110,000 shares ("Shares") of the
Company's Common Stock at the fair market value of $3.75 the date
of your employment. Such shares will vest at the rate of 1/8th of
the original number of shares on your eighth-month anniversary of
your employment date and 1/48th of the original number of shares
on each month thereafter (total vesting in 48 months). Vesting
will, of course, depend on your continued employment with the
Company.
b. ACCELERATION OF VESTING. 100% of your unvested stock will vest in
the event of any sale or merger in which control of the Company
is transferred.
4. RELOCATION EXPENSES:
a. EXPENSE REIMBURSEMENT. The Company will reimburse you for actual
out-of-pocket expenses for relocation, including legal expenses,
expenses incurred in connection with the sale of your home (such
as brokerage fees and closing costs), expenses incurred in
purchasing a home (such as loan fees), travel expenses from
Boston to San Francisco for you and your wife (a maximum of two
trips each, coach class) and moving expenses.
b. LOANS. The Company will grant you a loan of $36,000 within 180
days of your employment with the Company and an additional loan
of an identical amount on the first anniversary of the loan.
These loans are intended to cover interest payments on the
increased mortgage costs to which you will be subject by
purchasing a home in California. These loans will bear interest
at the lowest rate allowed by applicable law. The loans will be
secured by your Company Common Stock. Each loan will have a
three-year term. Interest will accrue and be payable at the end
of the term of the loan. The Board of Directors will consider
forgiveness of these loans and accrued interest as they become
due. If you prefer a straight monthly housing allowance, we can
structure it this way.
c. SIGN-ON BONUS. The Company will pay you a one-time sign on bonus
of $25,000, less applicable taxes, to cover miscellaneous moving
expenses, payable thirty days after employment. An additional
bonus of $10,000, less applicable taxes, payable upon employment.
<PAGE> 3
5. BENEFITS: The Company will also make available to you standard
vacation, medical, and dental insurance benefits. In addition, the Company
currently indemnifies all officers and directors to the maximum extent permitted
by law, in which you will be included. The Company will commit contractually to
advance any expenses for which indemnification is available to the extent
allowed by applicable law.
6. SEVERANCE AGREEMENT: In the event of termination of your employment
with the Company other than for cause, you will be entitled to receive
continuation of salary and benefits for six months following your termination
date. In addition, you will be entitled to continue all vesting with respect to
Company stock during such six-month period.
7. START DATE: Your employment with the Company will commence on June 5,
1998. You will initially begin as a part time employee through August 31. During
this period, you will be paid at 1/2 your salary.
8. MISCELLANEOUS: Except as described above, your employment with the
Company will be on an "at will" basis, meaning that either you or the Company
may terminate your employment at any time for any reason or no reason. Like all
Company employees, you will be required to sign the Company's Standard Employee
Agreement relating to protection of the Company's proprietary and confidential
information and assignment of inventions, a copy of which is attached. As a
condition of your employment with Connetics, you will be required to provide
proof of US citizenship or that you are legally entitled to work in the United
States, and to execute and be bound by the terms of the enclosed Proprietary
Information And Invention Agreement. In that regard, please be aware that
Company policy prohibits all employees from bringing to Connetics, or using in
performance of their responsibilities at Connetics, any confidential
information, trade secrets, or propriety material or processes of any previous
employer. Employment with the Company is at will, is not for any specific term
and can be terminated by you or the Company at any time for any reason with or
without cause.
Bob, we are all delighted to be able to extend you this offer and we
look forward to working together. Please indicate your acceptance by signing and
returning the enclosed copy of this letter.
Very truly yours,
/s/ TOM WIGGANS
- -------------------------------
Thomas G. Wiggans
President and CEO
UNDERSTOOD AND ACCEPTED:
/s/ ROBERT G. LEDERER
- --------------------------------
Robert G. Lederer Date
<PAGE> 1
Exhibit 10.57
CONNETICS CORPORATION
LOAN AGREEMENT
This Loan Agreement ("Agreement") is entered into as of August 21, 1998
by and between CONNETICS CORPORATION, a Delaware corporation (the "Company"),
and ROBERT G. LEDERER (the "Borrower").
R E C I T A L S
The Company and Borrower are parties to an employment agreement dated
July 1, 1998 which sets forth the terms of Borrower's employment by the Company.
Borrower desires to borrow and the Company is willing to lend Borrower up to
$72,000 on a secured basis under the terms and conditions of this Agreement.
NOW, THEREFORE, the Company and Borrower agree as follows:
AGREEMENT
1. THE LOAN. Subject to the terms and conditions contained in this
Agreement, and upon execution of this Agreement, the Company will make loans to
Borrower on or before December 31, 1999 up to an aggregate principal amount of
$72,000 (collectively, the "Loan"), provided that the Loan shall be advanced to
Borrower in principal amounts of no more than $36,000, or in such lesser amounts
as requested by Borrower, within 180 days of Borrower's employment with the
Company, and $36,000, or such lesser amounts as requested by Borrower, on or
after July 1, 1999. Borrower shall provide the Company with at least three (3)
business days prior notice of each requested advance.
2. THE NOTE. Each advance under the Loan shall be evidenced by a
promissory note executed and delivered by Borrower in favor of the Company
substantially in the form attached as EXHIBIT A to this Agreement (each a "Note"
and together the "Notes"), bearing interest at the minimum allowable federal
rate per annum, compounded annually, with unpaid principal and interest due on
the third anniversary of the date of each Note, except as otherwise set forth on
the Notes or in this Agreement.
3. SECURITY AGREEMENT. The Borrower will also execute and deliver the
Security Agreement in the form attached as EXHIBIT B to this Agreement (the
"Security Agreement") as security for the Borrower's obligation to repay the
Loan.
4. ACCELERATION OF LOAN. The principal and interest under the Loan
shall immediately become due and payable in full upon the earliest to occur of
the following: (a) as provided in the Security Agreement or (b) within thirty
(30) days after the voluntary termination of Borrower's employment with the
Company or the termination of such employment for Cause (as defined below).
For purposes of this Agreement, termination shall be made for "Cause"
if it is made: (i) because of any act or failure to act by Borrower which, in
the reasonable, good faith opinion of
<PAGE> 2
the Company's Board of Directors, is in bad faith and to the material detriment
of the Company; (ii) because, in the reasonable opinion of the Company's Board
of Directors, Borrower refuses to act materially in accordance with any express,
good faith direction of the Company's Board of Directors, which refusal is not
cured within ten (10) days following written notice thereof to Borrower; (iii)
because Borrower exhibits, in the reasonable, good faith opinion of the
Company's Board of Directors, misconduct, dishonesty, habitual neglect, or gross
incompetence in the discharge of his duties as an employee of the Company; or
(iv) because Borrower is convicted of a felony.
5. FORGIVENESS OF THE LOAN. The Company may, at its option, forgive the
outstanding principal and interest owing under the Loan, or a portion thereof,
upon the due date of each Note under the Loan.
6. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement or in any
of the attachments or exhibits to this Agreement is intended or shall be
construed to confer upon the Borrower any rights to employment or continued
employment with the Company, or shall alter in any way the nature of Borrower's
current employment with the Company.
7. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
the respective heirs, personal representatives, successors and assigns of the
parties to this Agreement.
8. GOVERNING LAW. This Agreement, all acts and transactions pursuant to
this Agreement, and the rights and obligations of the parties to this Agreement
shall be governed, construed and interpreted in accordance with the laws of the
State of California.
9. DISPUTE RESOLUTION. All actions or proceedings relating to this
Agreement shall be maintained in a court located in Santa Clara County, State of
California, and the parties hereto expressly consent to (a) the personal
jurisdiction of the federal and state courts within Santa Clara County,
California, and (b) service of process being effected upon them by registered
mail sent to the address set forth below.
10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter of this Agreement and
supersedes all prior agreements and understandings related to such subject
matter.
11. MODIFICATION. This Agreement shall not be amended without the
written consent of both parties to this Agreement.
12. SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect as
though written without said provision.
13. TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
14. NOTICES. Any notice required or permitted by this Agreement shall
be in writing and shall be personally delivered or sent by prepaid registered or
certified mail, return receipt
-2-
<PAGE> 3
requested, addressed to the other party at the address shown below or at such
other address for which such party gives notice hereunder.
15. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
16. FURTHER ACTS. Each party to this Agreement agrees to execute,
acknowledge and deliver or to cause to have executed, acknowledged and
delivered, such other and further instruments and documents as may reasonably be
requested by the other to carry out the purposes of this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
"BORROWER" "COMPANY"
CONNETICS CORPORATION,
a Delaware corporation
/s/ Robert G. Lederer By: /s/ Thomas G. Wiggans
- ----------------------------- -------------------------------
ROBERT G. LEDERER Title: _____________________________
Address: ____________________ Address: 3400 West Bayshore Road
_____________________________ Palo Alto, CA 94303
-3-
<PAGE> 4
FULL RECOURSE PROMISSORY NOTE
$18,000 August 21, 1998
1. Obligation. For value received, ROBERT G. LEDERER (the "Borrower")
promises to pay to CONNETICS CORPORATION, a Delaware corporation (the
"Company"), the sum of $18,000, together with interest on the unpaid principal
hereof from the date hereof at the rate of 5.48% per annum, compounded annually
(the "Loan").
2. Payment. The Loan shall be due and payable on the third anniversary
of the date hereof. Prepayment of all or any portion of the principal or
interest owing under the Loan may be made at any time without penalty. Payments
of principal and interest shall be made in lawful money of the United States of
America and shall be credited first to the accrued interest, with the remainder
applied to principal.
3. Remedies on Default. Upon any default of the Borrower under this
Note, the Company shall have, in addition to its rights and remedies under the
Security Agreement, full recourse against any real, personal, tangible or
intangible assets of the undersigned, and may pursue any legal or equitable
remedies that are available to it.
4. Governing Law; Waiver. This Note shall be governed by and construed
in accordance with the laws of California, without reference to conflict of laws
principles. The Borrower waives presentment, notice of nonpayment, notice of
dishonor, protest, demand and diligence.
5. Attorneys' Fees. If suit is brought for collection of this Note, the
Borrower agrees to pay all reasonable expenses, including attorneys' fees,
incurred by the Company in connection therewith whether or not such suit is
prosecuted to judgment.
6. Loan and Security Agreements. This Note is subject to the terms of a
Loan Agreement and Security Agreement, each dated as of August 21, 1998.
IN WITNESS WHEREOF, the Borrower has caused this Note to be executed as
of the date and year first above written.
"BORROWER"
/s/ Robert G. Lederer
- ---------------------------
Robert G. Lederer
<PAGE> 5
SECURITY AGREEMENT
This Security Agreement is made as of August 21, 1998 between CONNETICS
CORPORATION, a Delaware corporation ("Pledgee"), and ROBERT G. LEDERER
("Pledgor").
R E C I T A L S
Pledgee has made loans to Pledgor, and Pledgor has borrowed from
Pledgee, up to an aggregate principal amount of $72,000, pursuant to a Loan
Agreement (the "Loan Agreement") between Pledgor and Pledgee dated as of the
date of this Security Agreement (collectively, the "Loan"). The Loan is
evidenced by one or more promissory notes (the "Notes"), each in the form
attached to the Loan Agreement as Exhibit A. The parties intend that the Notes
are to be secured by up to 110,000 shares of the Common Stock of Pledgee held or
to be held by Pledgor (the "Shares").
NOW, THEREFORE, it is agreed as follows:
AGREEMENT
1. CREATION AND DESCRIPTION OF SECURITY INTEREST; TRANSFERABILITY;
ESCROW.
(a) In consideration of the loan to Pledgor evidenced by the
Notes, Pledgor, pursuant to the Commercial Code of the State of California,
hereby pledges all of the Shares (sometimes referred to as the "Collateral") to
Pledgee, as security for the repayment of the Notes, and any extensions or
renewals of the Notes, executed by Pledgor.
(b) None of the Shares pledged under this Security Agreement
may be sold, transferred, pledged, hypothecated or otherwise disposed of by
Pledgor except as required to enable Pledgee to exercise its rights as a secured
party under this Security Agreement or any additional Security Agreement entered
or to be entered into between Pledgor and Pledgee and relating to the Shares (an
"Additional Security Agreement"), or as otherwise agreed to by Pledgor.
(c) To ensure the ability of Pledgee to exercise its rights as
a secured party hereunder, Pledgor shall, upon execution of this Agreement or
when and as requested by Pledgee, deliver and deposit with the Secretary of
Pledgee or such other person designated by Pledgee, ("Pledgeholder") the share
certificates representing the Shares currently held by Pledgor, and to do the
same in the future at such time as Pledgor may acquire additional certificates,
together with the stock power, duly endorsed in blank, in the form attached
hereto as ATTACHMENT A-1 to this Security Agreement for use in transferring all
or a portion of the Shares to Pledgee if, as and when required pursuant to this
Security Agreement; provided, however, that Borrower shall in no case be
obligated to deliver certificates to Pledgee for Collateral in excess of an
aggregate of 110,000 shares of the Pledgee's Common Stock (as adjusted for
subsequent stock splits, recapitalizations and the like) held by Pledgor. The
Shares and stock power(s) shall be held by Pledgeholder until such time as the
Notes, or any extensions or renewals of the Notes, shall be discharged. As a
<PAGE> 6
further inducement to Pledgee to loan to Pledgor the funds represented by the
Notes, the spouse of Pledgor, if any, shall execute and deliver to Pledgee the
Consent of Spouse attached as ATTACHMENT A-2 to this Security Agreement.
2. PLEDGOR'S REPRESENTATIONS AND COVENANTS. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal sum
under the Notes together with interest on the Notes, at the time and in the
manner provided in the Notes.
(b) Encumbrances. All shares now or hereafter pledged under
this Security Agreement are and shall be free of all other encumbrances,
defenses and liens, except for restrictions or liens created under a Common
Stock Purchase Agreement between Pledgor and Pledgee relating to the Shares and
as set forth in any Additional Security Agreement, and Pledgor will not further
encumber the Shares without the prior written consent of Pledgee.
3. VOTING RIGHTS. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Notes, Pledgor shall have the right to vote all of the Shares pledged
hereunder to the extent that they may be voted by their terms.
4. STOCK ADJUSTMENTS. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes declared or
made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by Pledgee under the terms of this Security Agreement in
the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted securities, as
applicable, held by Pledgor as a result thereof.
5. WARRANTS AND RIGHTS. In the event that, during the term of this
pledge, subscription warrants or other rights or options shall be issued in
connection with the pledged Shares, such rights, warrants and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.
6. DEFAULT. Pledgor shall be deemed to be in default of all of the
Notes under the Loan and of this Security Agreement in the event:
(a) Payment of principal or interest on any Note shall be
delinquent for a period of 10 days or more; or
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<PAGE> 7
(b) Pledgor fails to perform any of the covenants contained in
this Security Agreement or in the Loan Agreement for a period of 10 days after
written notice thereof from Pledgee.
In the event of any foreclosure of the security interest, the Pledgee
may sell the Shares at a private sale or may repurchase the Shares itself. The
parties agree that, prior to the establishment of a public market for the
Shares, the securities laws affecting sale of the Shares make a public sale of
the Shares commercially unreasonable. The parties further agree that the
repurchasing of said Shares by Pledgee, or by any person to whom the Pledgee may
have assigned its rights under this Security Agreement, is commercially
reasonable if made at a price determined by the Pledgee's Board of Directors in
its discretion, fairly exercised, representing what would be the fair market
value of the Shares reduced by any limitation on transferability, whether due to
the size of the block of Shares or the restrictions of applicable securities
laws. The proceeds of any sale shall be applied in the following order:
(a) To the extent necessary, proceeds shall be used to
pay all reasonable expenses of Pledgee in enforcing
this Security Agreement, including, without
limitation, reasonable attorney's fees and legal
expenses incurred by Pledgee.
(b) To the extent necessary, proceeds shall be used to
satisfy any remaining indebtedness under the Notes.
(c) Any remaining proceeds shall be delivered to Pledgor.
7. WITHDRAWAL OR SUBSTITUTION OF COLLATERAL. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.
8. TERM. The pledge of Shares shall continue until the payment of all
indebtedness secured hereby, at which time the remaining pledged Shares shall be
promptly delivered to Pledgor.
9. INSOLVENCY. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against Pledgor, or if a receiver is appointed
for the property of Pledgor, or if Pledgor makes an assignment for the benefit
of creditors, the entire amount unpaid on all of the Notes shall become
immediately due and payable, and Pledgee may proceed as provided in the case of
default.
10. PLEDGEHOLDER LIABILITY. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his or her
acts, or omissions to act, as Pledgeholder.
11. INVALIDITY OF PARTICULAR PROVISIONS. Pledgor and Pledgee agree that
the unenforceability or invalidity of any provision or provisions of this
Security Agreement shall not render any other provision or provisions herein
contained unenforceable or invalid.
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<PAGE> 8
12. SUCCESSORS OR ASSIGNS. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee" as used in this
Security Agreement shall be deemed to include, for all purposes, the respective
designees, successors, assigns, heirs, executors and administrators.
13. GOVERNING LAW. This Security Agreement shall be interpreted and
governed under the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
/s/ Robert G. Lederer
"PLEDGOR" ---------------------------------
ROBERT G. LEDERER
Address:
-------------------------
"PLEDGEE" CONNETICS CORPORATION
By: /s/ Thomas G. Wiggans
-------------------------------
Title:
----------------------------
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<PAGE> 1
Exhibit 10.58
================================================================================
CONNETICS CORPORATION
LOAN AND SECURITY AGREEMENT
================================================================================
<PAGE> 2
This LOAN AND SECURITY AGREEMENT is entered into as of September 24,
1998, by and between SILICON VALLEY BANK ("Bank") and CONNETICS CORPORATION
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1. Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Account Audit" means an audit of the Collateral,
Borrower's Accounts and/or Borrower's Books prepared by Bank in accordance with
generally accepted business and accounting practices in form and substance
acceptable to Bank.
"Advance" or "Advances" means a Term Advance.
"Affiliate" means, with respect to any Person, any Person
that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents (including fees and expenses
of appeal), whether or not suit is brought.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or liabilities,
the Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on Exhibit A
attached hereto.
"Committed Line" means One Million Five Hundred Thousand
Dollars ($1,500,000).
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"Contingent Obligation" means, as applied to any Person,
any direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Daily Balance" means the amount of the Obligations owed
at the end of a given day.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security
Act of 1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as
in effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed
money or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by
or against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended,
and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Liquidity" means, at any date of determination, the sum
of Borrower's cash, cash equivalents and short term investments, less any cash
and cash equivalent balances that are held in a sinking fund for
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<PAGE> 4
the retirement of debt or capital stock or that are held in pledge for another
creditor plus one half of Borrower's net, billed, accounts receivable.
"Loan Documents" means, collectively, this Agreement,
any note or notes executed by Borrower, and any other agreement entered into
between Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse effect
on (i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan Documents.
"Negotiable Collateral" means all of Borrower's present
and future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Net Cash Losses" means, with respect to any period of
determination, determined on a consolidated basis in accordance with GAAP for
Borrower and its consolidated Subsidiaries, the reduction in cash from
operations (excluding non-recurring charges) during the three months prior to
such date of determination is the last day of a fiscal quarter, during the
fiscal quarter then ending (or, if monthly reporting is required pursuant to
Section 6.3, during the three fiscal months ending prior to such date of
determination).
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising
under this Agreement or any other Loan Document;
(b) Indebtedness secured by a Lien described in Subsection
(c) of the definition of "Permitted Liens" below provided the principal amount
of such Indebtedness does not exceed the lesser of the cost or fair market value
of the Equipment financed;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the
ordinary course of business;
(e) other Indebtedness of Borrower, not exceeding $100,000
in the aggregate outstanding at any time;
(f) extensions, renewals, refundings, refinancings,
modifications, amendments and restatements of any of the items of Permitted
Indebtedness (a) through (e) above, provided that the principal amount thereof
is not increased or the terms thereof are not modified to impose more burdensome
terms upon Borrower.
"Permitted Investment" means:
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<PAGE> 5
(a) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within two (2) years from the date of acquisition
thereof;
(b) Corporate commercial paper, corporate notes and bonds,
master notes, medium term notes, bankers acceptances, certificates of deposit
and repurchase agreements which, if short-term, have a minimum credit rating of
A-1 or P-1 or, if long-term, have a minimum credit rating of A by Standard
Poor's or Moody's Investor Services; and non-diversified short duration mutual
funds with an average credit rating of at least A- and a duration not to exceed
1.5 years. Investments shall mature no more than two years from the date of
purchase by Borrower, individual investments shall not be greater than $3.0
million unless said investment is issued by the U.S. Government or its agencies
or is a repurchase agreement collateralized by same or unless said investment is
an approved money market fund;
(c) certificates of deposit maturing no more than one (1)
year from the date of investment therein issued by Bank;
(d) Extensions of credit in the nature of accounts
receivable or note receivable arising from the sale or lease of goods or
services in the ordinary course of business;
(e) Investments consisting of the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business;
(f) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers and
in settlement of delinquent obligations of, and other disputes with, customers
or suppliers arising in the ordinary course of business;
(g) Investments consisting of (i) compensation of
employees, officers and directors of Borrower so long as the Board of Directors
of Borrower determines that such compensation is in the best interests of
Borrower, (ii) travel advances, employee relocation loans and other employee
loans and advances in the ordinary course of business, (iii) loans to employees,
officers or directors relating to the purchase of equity securities of Borrower,
and (iv) other loans to officers and employees approved by the Board of
Directors;
(h) other Investments not described above aggregating not
in excess of $100,000 at any time.
"Permitted Liens" means:
(a) any Liens existing on the Closing Date and disclosed
in Schedule 2 or arising under the terms of this Agreement;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens on Equipment leased by Borrower or any
Subsidiary pursuant to an operating or capital lease in the ordinary course of
business (including proceeds thereof and accessions thereto) incurred solely for
the purpose of financing the lease of such Equipment (including Liens pursuant
to leases
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<PAGE> 6
permitted pursuant to Section 7.1 and Liens arising from UCC financing
statements regarding leases permitted by this Agreement);
(e) Leases or subleases and licenses and sublicenses
granted to others in the ordinary course of Borrower's business not interfering
in any material respect with the business of Borrower and its Subsidiaries taken
as a whole, and any interest or title of a lessor, licensor or under any lease
or license;
(f) Liens on assets (including the proceeds thereof and
accessions thereto) that existed at the time such assets were acquired by
Borrower or any Subsidiary (including Liens on assets of any corporation that
existed at the time it became or becomes a Subsidiary); provided such Liens are
not granted in contemplation of or in connection with the acquisition of such
asset by Borrower or a Subsidiary;
(g) Liens arising from judgments, decrees or attachments
in circumstances not constituting an Event of Default under Section 8.8;
(h) easements, reservations, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances affecting real property not constituting a Material Adverse Effect;
(i) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payments of customs duties in connection
with the importation of goods;
(j) Liens that are not prior to the Lien of Bank which
constitute rights of set-off of a customary nature or banker's Liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangement entered in to with banks in the
ordinary course of business; and
(k) earn-out and royalty obligations existing on the date
hereof or entered into in connection with an acquisition permitted by Section
7.3 that are not prior to the Lien of the Bank.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount
thereof shall be determined, the sum of : (i) unrestricted cash, (ii)
cash-equivalents, (iii) net, billed accounts receivable, and (iv) investments
with maturities not to exceed twelve (12) months, of Borrower determined in
accordance with GAAP.
"Remaining Months Liquidity" means, at the end of each
fiscal quarter, or if monthly reporting is required pursuant to Section 6.3, as
at the end of each fiscal month, the ratio of (i) Liquidity at such time to (ii)
the monthly average of Net Cash Losses.
"Responsible Officer" means each of the Chief Executive
Officer, the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached
hereto, if any.
"Subordinated Debt" means any debt incurred by Borrower
that is subordinated to the debt owing by Borrower to Bank on terms acceptable
to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of
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<PAGE> 7
Directors, managers or trustees of the entity shall, at the time as of which any
determination is being made, be owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the
amount thereof shall be determined, the consolidated total assets of Borrower
and its Subsidiaries minus, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, patents, trade and service marks and names, copyrights and
research and development expenses except prepaid expenses, and (c) all reserves
not already deducted from assets, and (ii) Total Liabilities.
"Term Advances" means cash advances made pursuant to
Section 2.1.
"Term Loan Facility" means the facility under which
Borrower may request Bank to issue cash advances, as specified in Section 2.1
hereof.
"Term Maturity Date" means the fifth anniversary of the
Closing Date.
"Total Liabilities" means, at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness.
"Unrestricted Cash Reserves" means, at any time of
determination, the sum of Borrower's (i) cash balance of deposit accounts and
investment accounts, plus (ii) market value of all readily marketable securities
beneficially owned by Borrower, minus (iii) cash value of any certificates of
deposit or securities encumbered and/or restricted by any Bank or any other
Persons.
1.2. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1. Term Loan.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank will make one (1) Term Advance to Borrower in an aggregate
amount not to exceed One Million Five Hundred Thousand Dollars ($1,500,000). The
Term Advance shall be used for general corporate purposes (including the
purchase of Equipment). Bank will credit the amount of the Term Advance to
Borrower's deposit account with Bank.
(b) Interest shall accrue on the Term Advance from the
date of such Advance at the rate specified in Section 2.3(a), and shall be
payable monthly on the twenty-third calendar day of each month through September
23, 1999. The aggregate Term Advances outstanding on September 23, 1999 shall be
repaid in forty eight (48) equal monthly installments of principal, plus accrued
interest, beginning October 23, 1999, and continuing on the twenty-third
calendar day of each month thereafter through the Term Maturity Date. All
outstanding obligations under this Agreement, including, but not limited to, any
accrued and unpaid interest and other unpaid charges or principal balances,
shall be payable on the Term Maturity Date.
2.2. Interest Rate Protection. Subject to the terms and
condition of this Agreement, Borrower may prepay the Term Advances, in whole or
in part, only upon payment in full of (i) all accrued but unpaid interest and
all outstanding obligations hereunder (or, if partial prepayment, an applicable
or proportionate amount of such obligations), and (ii), if Borrower has elected
the fixed rate option set forth in Section 2.3(a), a fee as shall be determined
by Bank in its reasonable discretion to provide for interest rate protection in
the event the then current Treasury Bill rate is different from the fixed
interest rate set forth in Section 2.3(a).
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2.3. Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section
2.3(b), prior to the first anniversary of the Closing Date the Term Advances
shall bear interest, on the average daily balance thereof, at a rate equal to
one and one-quarter (1.25) percentage points above the Prime Rate. Term Advances
outstanding after such date shall bear interest, at Borrower's option, either
(i) at a floating rate equal to the Prime Rate plus one and one-quarter percent
(1.25%) or (ii) at a fixed rate equal to four and one half (4.5) percentage
points above the yield of the 48 month Treasury Bill as reported in the Western
edition of The Wall Street Journal, which rate shall be fixed at the time of
Borrower's election. Borrower shall give written notice to Bank of its interest
rate election two (2) Business Days prior to such first anniversary. If Borrower
fails to give such notice, then the applicable rate shall be based on the 48
month Treasury Bill fixed rate described herein.
(b) Default Rate. All Obligations shall bear interest,
from and after the occurrence and during the continuance of an Event of Default,
at a rate equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default. If the Event of
Default is cured, the interest rate shall revert to the previously applicable
interest rate.
(c) Payments. Bank shall, at its option, charge such
interest and all Periodic Payments against any of Borrower's deposit accounts,
including Account Number 501733570 or against the Committed Line, in which case
those amounts shall thereafter accrue interest at the rate then applicable
hereunder. Any interest not paid when due shall be compounded by becoming a part
of the Obligations, and such interest shall thereafter accrue interest at the
rate then applicable hereunder. Bank Expenses will be billed to Borrower on an
invoice due within thirty (30) days.
(d) Computation. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective on the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.
2.4. Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5. Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A Facility Fee equal to Fifteen
Thousand Dollars ($15,000), which fee shall be due on the Closing Date and shall
be fully earned and nonrefundable;
(b) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents, which
shall be performed not more than two times per year, except upon the occurrence
and continuance of an Event of Default;
(c) Bank Expenses. Upon the date hereof, all Bank
Expenses incurred through the Closing Date, including reasonable attorneys' fees
and expenses, and, after the date hereof, all Bank Expenses, including
reasonable attorneys' fees and expenses, as and when they become due.
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2.6. Additional Costs. In case any change in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law), in each case after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect
to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error; provided, however, that Borrower shall
not be liable for any such amount attributable to any period prior to the date
of hundred eight (180) days prior to the date of such certificate.
2.7. Term. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect for a
term ending on the Term Maturity Date. Notwithstanding the foregoing, Bank shall
have the right to terminate its obligation to make Advances under this Agreement
immediately and without notice upon the occurrence and during the continuance of
an Event of Default. Notwithstanding termination, Bank's Lien on the Collateral
shall remain in effect for so long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1. Conditions Precedent to Initial Advance. The obligation of
Bank to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;
(c) financing statement (Form UCC-1);
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof; and
(f) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2. Conditions Precedent to all Advances. The obligation of
Bank to make each Advance, including the initial Advance, is further subject to
the following conditions:
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(a) timely receipt by Bank of the Payment/Advance Form
as provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Advance as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Advance. Except as
otherwise disclosed to Bank in writing, and approved by Bank, the making of each
Advance shall be deemed to be a representation and warranty by Borrower on the
date of such Advance as to the accuracy of the facts referred to in this Section
3.2(b).
4. CREATION OF SECURITY INTEREST
4.1. Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule of Exceptions and for Permitted Liens, such security interest
constitutes a valid, first priority security interest in the presently existing
Collateral, and will constitute a valid, first priority security interest in
Collateral acquired after the date hereof, subject to Permitted Liens.
4.2. Delivery of Additional Documentation Required. Borrower
shall from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3. Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, at its own expense (except during
the continuance of an Event of Default), upon reasonable prior notice, from time
to time during Borrower's usual business hours, to inspect Borrower's Books and
to make copies thereof and to check, test, and appraise the Collateral in order
to verify Borrower's financial condition or the amount, condition of, or any
other matter relating to, the Collateral.
4.4. Requirement for Cash Collateral. Upon Borrower's failure to
comply with the financial covenants in Sections 6.8, 6.9 and 6.10 Borrower shall
pledge cash in the form of a certificate of deposit at Bank, on terms reasonably
acceptable to Bank, in an amount equal to one hundred percent (100%) of the
outstanding loan balances, at which time Borrower shall be deemed to have cured
the default under Sections 6.8, 6.9 or 6.10. Notwithstanding the foregoing, Bank
shall have no obligation to release the cash pledged pursuant to this Section
4.4 unless and until Borrower achieves compliance with all the terms of the Loan
Documents, cures any Events of Default and complies with the financial covenants
set forth in Sections 6.8, 6.9 and 6.10.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1. Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the conduct of its business or its
ownership of property requires that it be so qualified.
5.2. Due Authorization; No Conflict. The execution, delivery,
and performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
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5.3. No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4. Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.5. Name; Location of Chief Executive Office. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.6. Litigation. Except as set forth in the Schedule, there are
no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision is
reasonably likely to have a Material Adverse Effect or a material adverse effect
on Borrower's interest or Bank's security interest in the Collateral. Borrower
does not have knowledge of any such pending or threatened actions or
proceedings.
5.7. No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.8. Solvency. The fair saleable value of Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement; and Borrower is solvent and able to
pay its debts (including trade debts) as they mature.
5.9. Regulatory Compliance. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.10. Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.11. Taxes. Borrower and each Subsidiary has filed or caused to
be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein.
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5.12. Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments, and except for those equity interests disclosed in any schedule
attached to this Agreement.
5.13. Government Consents. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted.
5.14. Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1. Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which is reasonably likely to
have a Material Adverse Effect.
6.2. Government Compliance.
(a) ERISA. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA.
(b) FDA. To the extent required by law, Borrower shall
cause its, and each of its Subsidiaries', manufacturing and quality control to
conform in all material respects to FDA Good Manufacturing Practices ("GMP")
regulations and such other regulations applicable to Borrower and its
Subsidiaries with respect to advertising, labeling and reporting, product
testing, design, safety and labeling of products except where the failure to so
conform is not reasonably likely to have a Material Adverse Effect. To the
extent necessary to the conduct of its and its Subsidiaries' business, Borrower
shall register, and shall cause each of its Subsidiaries to register, with the
Food and Drug Branch of the California Department of Health Services and the
FDA, and Borrower shall register its, and shall cause each of its Subsidiaries
to register their, manufacturing facilities in accordance with GMP regulations.
(c) Statutory Compliance. Borrower shall comply, and
shall cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which is reasonably likely to have a Material Adverse Effect, including without
limitation, compliance in all material respects with the Federal Food, Drug, and
Cosmetics Act, the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, and all other applicable
federal, state and local laws, orders and regulations.
(d) Adverse Information. Borrower shall immediately
notify Bank upon receipt of any information that indicates that (a) the FDA has
denied, or has stated that it is likely to deny, any of Borrower's, or its
Subsidiaries', Investigational New Drug Applications or New Product Application,
(b) Borrower or a Subsidiary has elected not to proceed with clinical trials for
any of Borrower's or Subsidiary's products for which Borrower or any Subsidiary
has filed an Investigational New Drug Application with the FDA, or (c) the FDA
or other governmental agency has advised Borrower that it found material
deficiencies in Borrower's or a Subsidiary's compliance with applicable
regulations.
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6.3. Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month (or after the end of each fiscal quarter when
Borrower is in compliance with Section 6.11), a company prepared consolidated
balance sheet and income statement covering Borrower's consolidated operations
during such period, certified by a Responsible Officer; (b) as soon as
available, but in any event within ninety (90) days after the end of Borrower's
fiscal year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified opinion
on such financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (c) within five (5) days upon becoming available,
copies of all statements, reports and notices sent or made available generally
by Borrower to its security holders or to any holders of Subordinated Debt and
all reports on Form 10-K and 10-Q filed with the Securities and Exchange
Commission; (d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand
Dollars ($100,000) or more; and (e) such budgets, sales projections, operating
plans or other financial information as Bank may reasonably request from time to
time.
Borrower shall deliver to Bank with the monthly financial statements (
or with the Form 10-Q and 10-K, when monthly financial statements are not
required) a Compliance Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months unless an Event of Default has occurred and
is continuing.
6.4. Inventory; Returns. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5. Taxes. Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6. Insurance.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as reasonably satisfactory to
Bank. All such policies of property insurance shall contain a lender's loss
payable endorsement, in a form satisfactory to Bank, showing Bank as an
additional loss payee thereof and all liability insurance policies shall show
the Bank as an additional insured, and shall specify that the insurer must give
at least twenty (20) days notice to Bank before canceling its policy for any
reason. Upon Bank's request, Borrower
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shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor. All proceeds payable under
any such policy shall, at the option of Bank, be payable to Bank to be applied
on account of the Obligations.
6.7. Principal Depository. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8. Debt-Tangible/Net Worth Ratio. Borrower shall maintain, as
of the last day of each calendar month, a ratio of Total Liabilities less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than
1.45 to 1.00.
6.9. Tangible Net Worth. Borrower shall maintain, as of the last
day of each calendar month, a Tangible Net Worth plus Subordinated Debt of not
less than Three Million Dollars ($3,000,000).
6.10. Minimum Liquidity. Borrower shall maintain, as of the last
day of each calendar month, a minimum Liquidity of (a) two (2) times the amount
of the outstanding Term Advance and (b) six months Remaining Months Liquidity.
6.11. Quarterly Compliance. If at any time and during such time
as Borrower's Liquidity is greater than nine (9) months Remaining Months
Liquidity and Borrower's Liquidity is greater than two and one half (2.5) times
the amount of the outstanding Term Advance for two (2) consecutive quarters,
Borrower shall comply with Sections 6.8, 6.9, and 6.10 as of the last day of
each fiscal quarter, rather than the last day of each calendar month.
6.12. Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following without consent of the Bank, which is
not to be unreasonably withheld:
7.1. Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and exclusive licenses with geographic or other limitations granted in
the ordinary course of business and similar arrangements for the use of the
property of Borrower or its Subsidiaries; (iii) Transfers of worn-out or
obsolete Equipment, provided that in each such case an Event of Default does not
exist before or after giving effect to such Transfer.
7.2. Change in Business. Engage in any business, or permit any
of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto). Borrower will not, without thirty (30)
days prior written notification to Bank, relocate its chief executive office.
7.3. Mergers or Acquisitions. Merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
7.4. Indebtedness. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
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7.5. Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6. Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock, other than payments made for the repurchase of stock
effected in connection with the termination of an employee, officer or director,
provided an Event of Default does not exist prior to the making of such
payments, and would not exist after giving effect to such payments.
7.7. Investments. Directly or indirectly acquire, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8. Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a non-affiliated Person.
7.9. Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10. Inventory. Store the Inventory with a bailee,
warehouseman, or similar party unless Bank has received a pledge of the
warehouse receipt covering such Inventory. Except for Inventory sold in the
ordinary course of business and except for such other locations as Bank may
approve in writing and described on Schedule 3, as amended from time to time,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11. Compliance. Become an "investment company" or become
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Advance for such
purpose. Fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur, fail
to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1. Payment Default. If Borrower fails to pay the principal of,
or any interest on, any Advances when due and payable; or fails to pay any
portion of any other Obligations not constituting such principal or interest;
8.2. Covenant Default. If Borrower fails to perform any
obligation under Sections 6.7, 6.8, 6.9, 6.10 or 6.11 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within ten (10)
days after Borrower receives notice thereof or any officer of Borrower becomes
aware thereof; provided, however, that if the default cannot by its nature be
cured within the ten (10) day period or
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cannot after diligent attempts by Borrower be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional reasonable period (which shall not in any case
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default;
8.3. Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4. Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within twenty (20) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within twenty (20)
days after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower;
8.5. Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within forty-five
(45) days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6. Other Agreements. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in the
exercise by such third party or parties, of a right to accelerate the maturity
of any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that is reasonably likely to have a Material Adverse Effect;
8.7. Subordinated Debt. If Borrower makes any payment on account
of Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8. Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least One Hundred
Thousand Dollars ($100,000) shall be rendered against Borrower and shall remain
unsatisfied and unstayed for a period of thirty (30) days;
8.9. FDA Determinations. If the FDA takes one or more of the
following actions with respect to all or substantially all of Borrower's or a
Subsidiary's products: (a) withdraws Investigational New Drug status for any
such product that is undergoing clinical trials as the result of a determination
by the FDA that such product exposes subjects or patients to an unacceptable
health risk; (b) suspends clinical trials of any such product as the result of a
determination that such product is not reasonably likely to be demonstrated to
be safe and efficacious; (c) withdraws product approval of any such product as
the result of any failure to comply with regulatory standards; or (d) determines
that such products are not safe or efficacious; or
8.10. Change of Control. If any "person" or "group" (within the
meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of a sufficient number of shares
of all classes of stock then outstanding of Borrower ordinarily entitled to vote
in the election of directors, empowering such "person" or "group" to elect a
majority of the Board of Directors of Borrower.
8.11. Misrepresentations. If, as of the date such representation
or warranty was made or such certificate delivered, any material
misrepresentation or material misstatement exists now or hereafter in any
warranty
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or representation set forth herein or in any certificate delivered to Bank by
any Responsible Officer pursuant to this Agreement or to induce Bank to enter
into this Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1. Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(d) Make such payments and do such acts as Bank
considers necessary or reasonable to protect its security interest in the
Collateral. Borrower agrees to assemble the Collateral if Bank so requires, and
to make the Collateral available to Bank as Bank may designate. Borrower
authorizes Bank to enter the premises where the Collateral is located, to take
and maintain possession of the Collateral, or any part of it, and to pay,
purchase, contest, or compromise any encumbrance, charge, or lien which in
Bank's determination appears to be prior or superior to its security interest
and to pay all expenses incurred in connection therewith. With respect to any of
Borrower's owned premises, Borrower hereby grants Bank a license to enter into
possession of such premises and to occupy the same, without charge, in order to
exercise any of Bank's rights or remedies provided herein, at law, in equity, or
otherwise;
(e) Apply to the Obligations any and all (i) balances
and deposits of Borrower held by Bank, or (ii) indebtedness at any time owing to
or for the credit or the account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit, except to the extent that such license would result in a breach of such
agreement;
(g) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale;
and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2. Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees)
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as Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; and (f) dispose of the
Collateral; provided Bank may exercise such power of attorney to sign the name
of Borrower on any of the documents described in Section 4.2 regardless of
whether an Event of Default has occurred. The appointment of Bank as Borrower's
attorney in fact, and each and every one of Bank's rights and powers, being
coupled with an interest, is irrevocable until all of the Obligations have been
fully repaid and performed and Bank's obligation to provide advances hereunder
is terminated.
9.3. Accounts Collection. At any time when an Event of Default
has occurred and is continuing, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4. Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5. Bank's Liability for Collateral. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6. Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7. Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be
17
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personally delivered or sent by a recognized overnight delivery service,
certified mail, postage prepaid, return receipt requested, or by telefacsimile
to Borrower or to Bank, as the case may be, at its addresses set forth below:
If to Borrower: Connetics Corporation
3400 West Bayshore Road
Palo Alto, CA 94303
Attn: Chief Financial Officer
FAX: (650) 843-2899
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Mr. Cliff White
FAX: (650) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1. Successors and Assigns. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that except as provided in Section 7.3,
neither this Agreement nor any rights hereunder may be assigned by Borrower
without Bank's prior written consent, which consent may be granted or withheld
in Bank's sole discretion. Bank shall have the right without the consent of or
notice to Borrower to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
hereunder.
12.2. Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3. Time of Essence. Time is of the essence for the
performance of all obligations set forth in this Agreement.
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<PAGE> 20
12.4. Severability of Provisions. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5. Amendments in Writing, Integration. This Agreement cannot
be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6. Counterparts. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.
12.7. Survival. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8. Confidentiality. In handling any confidential information
Bank, shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement, except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (ii) as required by law, regulations, rule or
order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and (v)
as Bank may deem appropriate in connection with the exercise of any remedies
hereunder. Confidential information hereunder shall not include information that
either: (a) is in the public domain, or becomes part of the public domain, after
disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a
third party, provided Bank does not have actual knowledge that such third party
is prohibited from disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
CONNETICS CORPORATION
By: /s/ JOHN L. HIGGINS
---------------------------------------
Title: VP Finance & Administration, CFO
------------------------------------
SILICON VALLEY BANK
By: /s/ CLIFF WHITE
---------------------------------------
Title: SVP
------------------------------------
19
<PAGE> 21
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of December 22,
1998, by and between Connetics Corporation ("Borrower") and Silicon Valley Bank
("Bank").
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may be
owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among other
documents, a Loan and Security Agreement, dated September 24, 1998, as may be
amended from time to time (the "Loan Agreement"). The Loan Agreement provided
for, among other things, a Committed Line in the original principal amount of
One Million Five Hundred Thousand Dollars ($1,500,000) (the "Term Loan
Facility"). Defined terms used but not otherwise defined herein shall have the
same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is
secured by the Collateral as described in the Loan Agreement and the
Intellectual Property Security Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS.
A. Modification(s) to Loan Agreement
1. The following term defined in Section 1.1 of the Loan
Agreement entitled "Definitions" is hereby amended to
read:
"Committed Line" means Four Million Dollars
($4,000,000).
2. Section 2.1 of the Loan Agreement entitled "Term Loan"
is hereby amended in part to provide that Bank will make
Term Advances to Borrower in an aggregate amount not to
exceed the Committed Line.
3. Section 6.9 of the Loan Agreement entitled "Tangible Net
Worth" is hereby amended to read:
Borrower shall maintain, as of the last day of each
calendar month, a Tangible Net Worth plus Subordinated
Debt of not less than Five Million Dollars ($5,000,000).
4. Notwithstanding anything to the contrary contained in
Section 7 of the Loan Agreement entitled "Negative
Covenants", Bank agrees to allow Borrower to continue to
make its regularly scheduled payments to SmithKline
Beecham Corporation ("SB"), provided, that an Event of
Default, as defined in the Loan Agreement, has not
occurred and is not continuing and would not exist
immediately after making such payment and, provided,
further, that Borrower notify Bank, in writing, promptly
after SB exercises any of its remedies under any
agreements between Borrower and SB.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever
necessary to reflect the changes described above.
5. PAYMENT OF LOAN FEE. Borrower shall pay to Bank a fee in the amount of Twelve
Thousand Five Hundred Dollars ($12,500) (the "Loan Fee") plus all out-of-pocket
expenses.
<PAGE> 22
6. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor signing
below) agrees that, as of the date hereof, it has no defenses against the
obligations to pay any amounts under the Indebtedness.
7. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing below)
understands and agrees that in modifying the existing Indebtedness, Bank is
relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
8. CONDITIONS. The effectiveness of this Loan Modification Agreement is
conditioned upon Borrower's payment of the Loan Fee.
This Loan Modification Agreement is executed as of the date first
written above.
BORROWER: BANK:
CONNETICS CORPORATION SILICON VALLEY BANK
By: /s/ THOMAS G. WIGGANS By: /s/ SAM THOMPSON FOR CLIFF WHITE
---------------------------- -------------------------------------
Name: Thomas G. Wiggans Name: Sam Thompson
--------------------------- -----------------------------------
Title: President & CEO Title: Credit Analyst
-------------------------- ----------------------------------
2
<PAGE> 1
Exhibit 10.59
CONNETICS CORPORATION
RESTRICTED COMMON STOCK PURCHASE AGREEMENT
NOVEMBER 5, 1998
This Common Stock Purchase Agreement (the "Agreement") is entered into
as of this 5th day of November, 1998, between Connetics Corporation, a Delaware
corporation (the "Company") and G. Kirk Raab, an individual ("Purchaser").
SECTION 1
SALE OF COMMON STOCK
1.1 Sale of Common Stock. Subject to the terms and conditions hereof, on
the Closing Date, as defined below, the Company will issue and sell to
Purchaser, and Purchaser will purchase from the Company, an aggregate of 25,000
shares of Common Stock, par value $0.001 per share, of the Company (the "Common
Stock"), for an aggregate purchase price of $2,500.
1.2 Closing Date. The closing (the "Closing") of the purchase and sale
of the Common Stock shall be held at the offices of the Company, 3400 West
Bayshore Road, Palo Alto, California at 10:00 a.m. on November 6, 1998 or at
such other time and place upon which the Company and Purchaser shall mutually
agree (the date of the Closing is referred to as the "Closing Date").
1.3 Delivery. At the Closing, the Company will deliver to Purchaser a
certificate or certificates representing the shares of Common Stock purchased by
Purchaser, against payment of the purchase price therefor, by wire transfer or
check drawn on a United States bank.
1.4 Legend. The certificate(s) for the Common Stock shall be subject to
a legend restricting transfer under the Securities Act of 1933, as amended (the
"SECURITIES ACT") and referring to restrictions on transfer herein, such legend
to be substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH
SALE OR DISPOSITION MAY BE EFFECTED WITHOUT (A) AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO, OR (B) AN OPINION OF COUNSEL FOR THE COMPANY THAT
SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR (C) FULL COMPLIANCE WITH THE PROVISIONS OF RULE 144 UNDER THE
ACT."
1.5 Removal of Legends. Any legend endorsed on a certificate pursuant to
SECTION 1.4 of this Agreement shall be removed (a) if the shares of the Common
Stock represented by such certificate shall have been effectively registered
under the Securities Act or otherwise lawfully
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<PAGE> 2
sold in a public transaction, (b) if such shares may be transferred in
compliance with Rule 144(k) promulgated under the Securities Act, or (c) if the
holder of such shares shall have provided the Company with an opinion of
counsel, in form and substance acceptable to the Company, stating that a public
sale, transfer or assignment of such shares may be made without registration.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Purchaser that:
2.1 Organization. The Company is a corporation duly organized and
validly existing under the laws of the State of Delaware and is in good standing
under such laws. The Company has requisite corporate power and authority to own,
lease and operate its properties and assets, and to carry on its business as
presently conducted.
2.2 Authorization. The Company has all corporate right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated by this Agreement. All corporate action on the part of the Company,
its directors and stockholders necessary for the authorization, execution,
delivery and performance of this Agreement by the Company, and the
authorization, sale, issuance and delivery of the Common Stock and the
performance of the Company's obligations under this Agreement has been taken.
This Agreement has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies, and to
limitations of public policy. There are no statutory, contractual or other
preemptive rights or rights of first refusal with respect to the issuance and
sale of the Common Stock.
2.3 Validity of Securities. The Common Stock, when issued, sold and
delivered by the Company in accordance with the terms of this Agreement, will be
duly and validly issued, fully-paid and nonassessable. Based in part upon the
representations of the Purchaser in this Agreement, the offer, sale and issuance
of the Common Stock will be made in compliance with all applicable federal and
state securities laws.
2.4 No Conflict. The execution and delivery of this Agreement does not,
and the sale of the Common Stock will not, conflict with, or result in any
violation of, or default (with or without notice or lapse of time, or both), or
give rise to a right of termination, cancellation or acceleration of any
obligation or to a loss of a material benefit, under, any provision of the
Certificate of Incorporation or Bylaws of the Company or any agreement or
instrument, permit, license, judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to the Company, its properties or assets, if to do
so would have a material adverse effect on the business, properties, prospects
or financial condition of the Company.
2.5 Accuracy of Reports; Financial Statements. All reports required to
be filed with the Securities and Exchange Commission (the "SEC") by the Company
from February 1, 1996 (the
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<PAGE> 3
date of the Company's initial public offering) through the date of this
Agreement under the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), copies of which have been made available to each [sic] Purchaser (the
"SEC DOCUMENTS"), have been duly and timely filed, were in substantial
compliance with the requirements of their respective forms when filed, were
complete and correct in all material respects as of the dates at which the
information was furnished, and contained (as of such dates) no untrue statement
of a material fact nor omitted to state a material fact necessary in order to
make the statements made therein in light of the circumstances in which made not
misleading. The Company's financial statements included in the SEC Documents
(the "FINANCIAL STATEMENTS") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto. The Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently applied
and fairly present the consolidated financial position of the Company and any
subsidiaries at the dates thereof and the consolidated results of operations and
consolidated cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal, recurring adjustments).
2.6 Governmental Consents, Etc. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of the Company is required in connection with the valid execution and
delivery of this Agreement, or the consummation of any other transaction
contemplated by this Agreement, except such filings as may be required to be
made with the SEC, the National Association of Securities Dealers, Inc. ("NASD")
and with governmental authorities for purposes of effecting compliance with the
securities and Blue Sky laws in the states in which Common Stock is offered
and/or sold, which compliance will be effected in accordance with such laws.
2.7 Registration Rights. The Company has not granted or agreed to grant
any rights to register its securities under the Securities Act, including
piggy-back rights, to Purchaser.
2.8 Rights of Common Stock. The Common Stock shall have the rights,
preferences, privileges and restrictions provided in the Company's Amended and
Restated Certificate of Incorporation.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
Purchaser hereby represents and warrants to the Company as follows:
3.1 Investment. Purchaser is acquiring the Common Stock for investment
for his own account, not as a nominee or agent and not with a view to or for
resale in connection with any distribution thereof. Purchaser understands that
the Common Stock purchased from the Company pursuant to this Agreement has not
been registered under the Securities Act by reason of a specific exemption from
the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of Purchaser's investment intent and the
accuracy of such Purchaser's representations as expressed in this Agreement.
Purchaser acknowledges and understands that the securities must be held
indefinitely unless they are subsequently registered
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<PAGE> 4
under the Securities Act or an exemption from such registration is available.
Purchaser further acknowledges and understands that the Company is under no
obligation to register the securities. Purchaser understands that the
certificate(s) evidencing the securities will be imprinted with a legend that
prohibits the transfer of the securities unless they are registered or such
registration is not required in the opinion of counsel for the Company.
3.2 Accredited Investor. Purchaser is an "accredited investor" as
defined by Rule 501(a) under the Securities Act of 1933, as amended (the
"SECURITIES ACT"). The SEC documents have been made available to Purchaser, and
Purchaser has received all the information it has requested regarding the
Company. Purchaser has such business and financial experience as is required to
give him the capacity to protect his own interests in connection with the
purchase of the Common Stock.
3.3 Authority. This Agreement has been duly executed and delivered by
Purchaser and constitutes a legal, valid and binding obligation of the
Purchaser, enforceable in accordance with its terms, subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies, and to limitations of public policy. The execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated by this Agreement will not, conflict with or result in any
violation of any obligation under any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Purchaser.
3.4 Investigation. Purchaser has had a reasonable opportunity to discuss
the Company's business, management and financial affairs with the Company's
management, and has acquired sufficient information about the Company to reach
an informed and knowledgeable decision to acquire the securities.
3.5 Tax Consequences. Purchaser understands that he may suffer adverse
tax consequences as a result of the purchase or disposition of the Common Stock.
Purchaser represents that he has consulted any tax consultants he deems
advisable in connection with the purchase or disposition of the Common Stock and
that Purchaser is not relying on the Company for any tax advice.
3.6 Section 83(b) Election. Purchaser understands that Section 83(a) of
the Internal Revenue Code of 1986, as amended (the "CODE"), taxes as ordinary
income for a nonstatutory stock option and as alternative minimum taxable income
for an incentive stock option the difference between the amount paid for the
Common Stock and the fair market value of the Common Stock. Purchaser
understands that Purchaser may elect to be taxed at the time the Common Stock is
purchased, rather than when and as the Repurchase Option expires, by filing an
election under Section 83(b) (an "83(b) ELECTION") of the Code with the Internal
Revenue Service within 30 days from the date of purchase. Even if the fair
market value of the Common Stock at the time of the execution of this Agreement
equals the amount paid for the Common Stock, the election must be made to avoid
income and alternative minimum tax treatment under Section 83(a) in the future.
Purchaser understands that failure to file such an election in a timely manner
may result in adverse tax consequences for Purchaser. Purchaser further
understands that an additional copy of such election form should be filed with
his federal income tax return for the calendar year in which the date of this
Agreement falls. Purchaser acknowledges that the
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<PAGE> 5
foregoing is only a summary of the effect of United States federal income
taxation with respect to purchase of the Common Stock hereunder, and does not
purport to be complete. Purchaser further acknowledges that the Company has
directed Purchaser to seek independent advice regarding the applicable
provisions of the Code, the income tax laws of any municipality, state or
foreign country in which Purchaser may reside, and the tax consequences of
Purchaser's death.
Purchaser agrees that he will execute and deliver to the Company with
this executed Agreement a copy of the Acknowledgment and Statement of Decision
Regarding Section 83(b) Election (the "ACKNOWLEDGMENT") attached to this
Agreement as EXHIBIT A. Purchaser further agrees that he will execute and submit
with the Acknowledgment a copy of the 83(b) Election attached to this Agreement
either as EXHIBIT B (for income tax purposes in connection with the early
exercise of a nonstatutory stock option) or EXHIBIT C (for alternative minimum
tax purposes in connection with the early exercise of an incentive stock option)
if Purchaser has indicated in the Acknowledgment his decision to make such an
election.
SECTION 4
CONDITIONS TO OBLIGATIONS OF THE PURCHASER
Purchaser's obligations to the Company under this Agreement are subject
to the fulfillment, on or before the Closing, of each of the following
conditions, unless otherwise waived:
4.1 Representations and Warranties Correct. The representations and
warranties made by the Company in SECTION 2 shall be true and correct in all
material respects on the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date.
4.2 No Law Prohibiting or Restricting Sale. There shall not be in effect
any law, rule or regulation prohibiting or restricting such sale, or requiring
any consent or approval of any person which shall not have been obtained to
issue the Common Stock (except as otherwise referenced in this Agreement).
SECTION 5
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement are subject to the
fulfillment on or prior to the Closing of each of the following conditions,
unless otherwise waived:
5.1 Representations and Warranties Correct. The representations and
warranties made by the Purchaser in SECTION 3 of this Agreement shall be true
and correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
the Closing Date.
5.2 No Order Pending. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by this Agreement.
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<PAGE> 6
5.3 No Law Prohibiting or Restricting Such Sale. There shall not be in
effect any law, rule or regulation prohibiting or restricting such sale, or
requiring any consent or approval of any person which shall not have been
obtained to issue the Common Stock (except as otherwise provided in this
Agreement).
SECTION 6
MISCELLANEOUS
6.1 Governing Law. This Agreement and all acts and transactions pursuant
to this Agreement and the rights and obligations of the parties to this
Agreement shall be governed, construed and interpreted in accordance with the
laws of the State of California, without giving effect to principles of
conflicts of law.
6.2 Survival. Unless otherwise set forth in this Agreement, the
warranties, representations and covenants of the Company and Purchaser contained
in or made pursuant to this Agreement shall survive the execution and delivery
of this Agreement and the Closing.
6.3 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties to this Agreement and their respective
successors and assigns.
6.4 Entire Agreement; Amendment. This Agreement and the other documents
delivered pursuant to this Agreement constitute the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof and supersede all prior agreements and understandings among the
parties relating to the subject matter of this Agreement. Neither this Agreement
nor any of its terms may be amended, waived, discharged or terminated other than
by a written instrument signed by the party against which enforcement of any
such amendment, waiver, discharge or termination is sought.
6.5 Notices and Dates. Unless otherwise provided in this Agreement, any
notice required or permitted by this Agreement shall be in writing and shall be
deemed sufficient upon delivery, when delivered personally or by overnight
courier and addressed to the party to be notified at such party's address as set
forth on the signature page to this Agreement or as subsequently modified by
written notice. If any date provided for in this Agreement falls on a Saturday,
Sunday or legal holiday, such date shall be deemed extended to the next business
day.
6.6 Brokers. Neither Purchaser nor the Company has engaged, consented to
or authorized any broker, finder or intermediary to act on his or its behalf,
directly or indirectly, as a broker, finder or intermediary in connection with
the transactions contemplated by this Agreement. Each of the Company and the
Purchaser agree to indemnify and hold harmless the other party from and against
all fees, commissions or other payments owing to any party acting on his or its
behalf.
6.7 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, the remainder of
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<PAGE> 7
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated.
6.8 Captions and Headings. The captions and headings used herein are for
convenience and ease of reference only and are not intended to be a part of or
to affect the meaning or interpretation of this Agreement.
6.9 Counterparts. This Agreement may be executed in counterparts, and
each such counterpart shall be deemed an original for all purposes.
IN WITNESS WHEREOF, the parties to this Agreement have executed or
caused their respective authorized officers to execute this Agreement as of the
first date written above.
"COMPANY"
Connetics Corporation Address:
By: /s/ T. Wiggans 3400 West Bayshore Road
------------------------------------ Palo Alto, California 94303
Thomas G. Wiggans Facsimile: (650) 843-2899
President and Chief Executive Officer
"PURCHASER"
/s/ G. Kirk Raab 314 Wyndham Drive
- -------------------------------- Portola Valley, CA 94028
G. Kirk Raab
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<PAGE> 1
Exhibit 10.60
CONNETICS CORPORATION
1998 SUPPLEMENTAL STOCK PLAN
(ADOPTED NOVEMBER 5, 1998)
1. Purposes of the Supplemental Plan. The purposes of this 1998
Supplemental Stock Plan ("Supplemental Plan") are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentive to Employees and Consultants of the Company and its
Subsidiaries and to promote the success of the Company's business. Options
granted under the Plan may be Nonstatutory Stock Options, as determined by the
Administrator at the time of grant and reflected in the terms of the written
option agreement. Stock purchase rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees
appointed pursuant to Section 4 of the Supplemental Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Supplemental Plan below, if one
is appointed.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Company" means Connetics Corporation, a Delaware
corporation.
(g) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company, whether
compensated for such services or not.
(h) "Continuous Status as an Employee or Consultant" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Administrator, provided that such leave is for
a period of not more than ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time, or in
the case of transfers between locations of the Company or between the Company,
its Subsidiaries or its successor. For purposes of this Supplemental Plan, a
change in status from an Employee to a Consultant or from a Consultant to an
Employee will not constitute a termination of employment.
(i) "Director" means a member of the Board.
<PAGE> 2
(j) "Employee" means any person, excluding Named Executives,
Officers and Directors, employed by the Company or any Parent or Subsidiary of
the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock as quoted on such system on the date of
determination (or the closing bid, if no sales were reported on that day) as
reported in The Wall Street Journal or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System
(but not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
or;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(n) "Named Executive" means any individual who, on the last day
of the Company's fiscal year, is the chief executive officer of the Company (or
is acting in such capacity) or among the four highest compensated officers of
the Company (other than the chief executive officer). Such officer status shall
be determined pursuant to the executive compensation disclosure rules under the
Exchange Act.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(p) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the
Supplemental Plan.
(r) "Optioned Stock" means the Common Stock subject to an Option
or a Stock Purchase Right.
(s) "Optionee" means an Employee or Consultant who receives an
Option or Stock Purchase Right.
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<PAGE> 3
(t) "Parent" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(u) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(v) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
Act as the same may be amended from time to time, as any successor provision.
(w) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 below.
(x) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 11 below.
(y) "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(z) "Supplemental Plan" means this 1998 Supplemental Plan.
3. Stock Subject to the Supplemental Plan. Subject to the provisions of
Section 13 of the Supplemental Plan, the maximum aggregate number of shares
which may be optioned and sold under the Supplemental Plan is 500,000 shares of
Common Stock. The shares may be authorized, but unissued, or reacquired Common
Stock.
If an Option should expire or become unexercisable for any reason
without having been exercised in full, the unpurchased Shares which were subject
thereto shall, unless the Supplemental Plan shall have been terminated, become
available for future grant under the Supplemental Plan.
Notwithstanding any other provision of the Supplemental Plan,
Shares issued under the Supplemental Plan and later repurchased by the Company
shall not become available for future grant or sale under the Supplemental Plan.
4. Administration of the Supplemental Plan.
(a) Composition of the Administrator.
(i) Administration of the Supplemental Plan. With respect
to grants of Options or Stock Purchase Rights to Employees or Consultants who
are neither Directors nor Officers of the Company, the Supplemental Plan shall
be administered by (A) the Board or (B) a committee designated by the Board,
which committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of stock option plans, if any, of
the applicable securities laws and the Code (collectively the "Applicable
Laws"),.
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<PAGE> 4
(ii) General. If a Committee has been appointed pursuant
to subsection (i) of this Section 4(a), such Committee shall continue to serve
in its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, and remove all members
of the Committee and thereafter directly administer the Supplemental Plan, all
to the extent permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Supplemental Plan and in the case of a Committee, the specific duties delegated
by the Board to such Committee, and subject to the approval of any relevant
authorities, including the approval, if required, of any stock exchange upon
which the Common Stock is listed, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(l) of the Supplemental Plan;
(ii) to select the Consultants and Employees to whom
Options and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options and
Stock Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock to
be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the
Supplemental Plan;
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Supplemental Plan, of any award granted
hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 10(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted; and
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options or Stock Purchase
Rights.
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<PAGE> 5
5. Eligibility.
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Employees and Consultants. An Employee or Consultant who has been
granted an Option or Stock Purchase Right may, if he is otherwise eligible, be
granted additional Options or Stock Purchase Rights.
(b) Each Option shall be designated in the written option
agreement as a Nonstatutory Stock Option.
(c) The Supplemental Plan shall not confer upon any Optionee any
right with respect to continuation of employment or consulting relationship with
the Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
6. Term of Supplemental Plan. The Supplemental Plan shall become
effective upon the earlier to occur of its adoption by the Board of Directors or
its approval by the stockholders of the Company as described in Section 21 of
the Supplemental Plan. It shall continue in effect for a term of ten (10) years
unless sooner terminated under Section 17 of the Supplemental Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that in the case of an Option granted
to an Optionee who, at the time the Option is granted, owns stock representing
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided
in this Supplemental Plan, the maximum number of Shares which may be subject to
Options or Stock Purchase Rights granted to any one Employee under this
Supplemental Plan for any fiscal year of the Company shall be 150,000.
9. Option Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Administrator, but shall in any event be no less than 100% of the Fair Market
Value per Share on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator and may consist entirely of
(1) cash,
(2) check,
(3) promissory note,
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<PAGE> 6
(4) other Shares which (x) in the case of Shares acquired
upon exercise of an Option either have been owned by
the Optionee for more than six months on the date of
surrender or were not acquired, directly or
indirectly, from the Company, and (y) have a Fair
Market Value on the date of surrender equal to the
aggregate exercise price of the Shares as to which
said Option shall be exercised,
(5) authorization from the Company to retain from the
total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market
Value on the date of exercise equal to the exercise
price for the total number of Shares as to which the
Option is exercised,
(6) delivery of a properly executed exercise notice
together with such other documentation as the
Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds
required to pay the exercise price,
(7) any combination of the foregoing methods of payment,
or
(8) such other consideration and method of payment for the
issuance of Shares to the extent permitted under
Applicable Laws.
In making its determination as to the type of consideration to accept, the Board
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Supplemental Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Administrator,
consist of any consideration and method of payment allowable under Section 9(b)
of the Supplemental Plan. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a stockholder shall exist with respect
to the Optioned Stock, notwithstanding the exercise of the Option. The Company
shall issue (or cause to be issued) such stock certificate as promptly as
practicable upon exercise of the Option. No adjustment will be made for a
dividend or other right for which the
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<PAGE> 7
record date is prior to the date the stock certificate is issued, except as
provided in Section 14 of the Supplemental Plan.
Exercise of an Option in any manner shall result in a
decrease in the number of Shares which thereafter may be available, both for
purposes of the Supplemental Plan and for sale under the Option, by the number
of Shares as to which the Option is exercised.
(b) Termination of Status as an Employee or Consultant. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant, such Optionee may, but only within thirty (30) days (or such other
period of time not exceeding six (6) months as is determined by the
Administrator) after the date of such termination (but in no event later than
the date of expiration of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that he or she was entitled
to exercise it at the date of such termination. To the extent that the Optionee
was not entitled to exercise the Option at the date of such termination, or if
the optionee does not exercise such Option (which he or she was entitled to
exercise) within the time specified herein, the Option shall terminate.
(c) Disability of Optionee.
(i) Notwithstanding the provisions of Section 9(b) above,
in the event of termination of an Optionee's Continuous Status as an Employee or
Consultant as a result of his or her total and permanent disability (within the
meaning of Section 22(e)(3) of the Code), Optionee may, but only within twelve
(12) months from the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination. To the extent that Optionee was not entitled to
exercise the Option at the date of termination, or if Optionee does not exercise
such Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(ii) In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of a disability which
does not fall within the meaning of total and permanent disability (as set forth
in Section 22(e)(3) of the Code), Optionee may, but only within six (6) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of termination, or if Optionee does not exercise such Option to the
extent so entitled within six months (6) from the date of termination, the
Option shall terminate.
(d) Death of Optionee. In the event of the death of an Optionee
during the term of the Option who is at the time of death an Employee or
Consultant of the Company, the Option may be exercised, at any time within
twelve (12) months following the date of death (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), by the Optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance, but only to the extent the
Optionee was entitled to exercise the Option at the date of death. To the extent
that Optionee was not entitled to exercise the Option at the
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<PAGE> 8
date of termination, or if Optionee does not exercise such Option to the extent
so entitled within the time specified herein, the Option shall terminate.
(e) Rule 16b-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Supplemental Plan transactions.
(f) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Non-Transferability of Options. Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
12. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Supplemental Plan and/or cash awards made outside of the Supplemental Plan.
After the Administrator determines that it will offer Stock Purchase Rights
under the Supplemental Plan, it shall advise the offeree in writing of the
terms, conditions and restrictions related to the offer, including the number of
Shares that such person shall be entitled to purchase, the price to be paid
(which price shall not be less than 85% of the Fair Market Value of the Shares
as of the date of the offer or, in the case of a stockholder owning ten percent
(10%) or more of the Company's outstanding stock or a person who is a Named
Executive, 100% of the Fair Market Value of the Shares as of the date of the
offer), and the time within which such person must accept such offer, which
shall in no event exceed thirty (30) days from the date upon which the
Administrator made the determination to grant the Stock Purchase Right. The
offer shall be accepted by execution of a Restricted Stock purchase agreement in
the form determined by the Administrator. Shares purchased pursuant to the grant
of a Stock Purchase Right shall be referred to herein as "Restricted Stock."
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the Board or
Committee may determine.
(c) Other Provisions. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Supplemental Plan as may be
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<PAGE> 9
determined by the Administrator in its sole discretion. In addition, the
provisions of Restricted Stock purchase agreements need not be the same with
respect to each purchaser.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Supplemental Plan.
13. Withholding Taxes. As a condition to the exercise of Options or the
purchase of Restricted Stock pursuant to awards granted hereunder, the Optionee
or purchaser shall make such arrangements as the Administrator may require for
the satisfaction of any federal, state, local or foreign withholding tax
obligations that may arise in connection with the exercise, receipt or vesting
of such award. The Company shall not be required to issue any Shares under the
Supplemental Plan until such obligations are satisfied.
14. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by electing to
have the Company withhold from the Shares to be issued upon exercise of the
Option, or the Shares to be issued in connection with the Stock Purchase Right,
if any, that number of Shares having a Fair Market Value equal to the amount
required to be withheld. The Fair Market Value of the Shares to be withheld
shall be determined on the date that the amount of tax to be withheld is to be
determined (the "Tax Date").
All elections by an Optionee to have Shares withheld for this
purpose shall be made in writing in a form acceptable to the Administrator and
shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the election
is made; and
(c) all elections shall be subject to the consent or disapproval
of the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
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15. Adjustments Upon Changes in Capitalization; Corporate Transaction.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Supplemental Plan
but as to which no Options or Stock Purchase Rights have yet been granted or
which have been returned to the Supplemental Plan upon cancellation or
expiration of an Option or Stock Purchase Right, as well as the price per share
of Common Stock covered by each such outstanding Option or Stock Purchase Right,
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Corporate Transactions. In the event of a dissolution or
liquidation of the Company, the Option will terminate immediately prior to the
consummation of such action, unless otherwise provided by the Administrator. The
Administrator may, in the exercise of its sole discretion in such instances,
declare that any Option shall terminate as of a date fixed by the Administrator
and give each Optionee the right to exercise his or her Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable. In the event of a proposed sale of all or substantially all of the
assets of the Company, the merger of the Company with or into another
corporation or any other capital reorganization in which more than fifty percent
(50%) of the shares of the Company entitled to vote are exchanged, the Option
shall be assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Administrator determines, in the exercise of its sole discretion and in lieu of
such assumption or substitution, that the Optionee shall have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which the Option would not otherwise be exercisable. If the Administrator makes
an Option exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee that the
Option shall be exercisable for a period of thirty (30) days from the date of
such notice, and the Option will terminate upon the expiration of such period.
16. Time of Granting Options and Stock Purchase Rights. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator;
provided however that in the case of any Incentive Stock Option, the grant date
shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the
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<PAGE> 11
Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
17. Amendment and Termination of the Supplemental Plan.
(a) Amendment and Termination. The Board may amend or terminate
the Supplemental Plan from time to time in such respects as the Board may deem
advisable; provided, however, that the following revisions or amendments shall
require approval of the stockholders of the Company in the manner described in
Section 20 of the Supplemental Plan:
(i) any change in the designation of the class of
persons eligible to be granted Options;
(ii) any change in the limitation on grants to employees
as described in Section 8 of the Supplemental Plan or other changes which would
require stockholder approval to qualify options granted hereunder as
performance-based compensation under Section 162(m) of the Code; or
(iii) any revision or amendment requiring stockholder
approval in order to preserve the qualification of the Supplemental Plan under
Rule 16b-3.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Supplemental Plan shall not affect Options already granted
and such Options shall remain in full force and effect as if this Supplemental
Plan had not been amended or terminated, unless mutually agreed otherwise
between the Optionee and the Board, which agreement must be in writing and
signed by the Optionee and the Company.
18. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option and the issuance and delivery of such Shares pursuant
thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the Shares may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option or Stock Purchase
Right, the Company may require the person exercising such Option or Stock
Purchase Right to represent and warrant at the time of any such exercise that
the Shares are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of counsel for
the Company, such a representation is required by any of the aforementioned
relevant provisions of law.
19. Reservation of Shares. The Company, during the term of this
Supplemental Plan, will at all times reserve and keep available such number of
Shares as shall be sufficient to satisfy the requirements of the Supplemental
Plan. The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to
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<PAGE> 12
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
20. Agreements. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Board shall approve from time to time.
21. Information to Optionees and Purchasers. The Company shall provide
financial statements at least annually to each Optionee and to each individual
who acquired Shares Pursuant to the Supplemental Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Supplemental Plan, during the period such individual owns such Shares. The
Company shall not be required to provide such information if the issuance of
Options or Stock Purchase Rights under the Supplemental Plan is limited to key
employees whose duties in connection with the Company assure their access to
equivalent information.
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<PAGE> 1
INDUSTRIAL BUILDING LEASE
PARTIES
1. THIS LEASE, dated for reference purposes only, November 20, 1998, is
made by and between West Bayshore Associates, a general partnership, Sigrid S.
Banks, Frank Lee Crist, Jr., Allen W. Koering and George O. McKee (herein
collectively "Landlord") and Connetics Corporation, a Delaware Corporation
(herein "Tenant").
PREMISES
2. Landlord leases to Tenant and Tenant hires from Landlord for the
term, at the rental and upon the conditions in this Industrial Building Lease
(herein "Lease") a portion of the real property commonly known as 3290 West
Bayshore Avenue, Palo Alto, Santa Clara County, California as shown on Exhibit
A, attached hereto, and incorporated herein by this reference. The Premises
consists of Thirteen Thousand Four Hundred Sixty Four (13,464) rentable square
feet in the building which contains approximately Forty Two Thousand Four
Hundred Thirty Two (42,432) rentable square feet. Landlord reserves the right of
access to and the use of the roof, exterior walls, stairways, utility closets
and other common areas above and beneath the Premises together with the right
from time to time to install, maintain, use, repair and repair pipes ducts
conduits and wires leading through the Premises in locations which will not
materially interfere with Tenant's use thereof or access thereto and which serve
other parts of the building and/or other tenants therein. It is further
understood and agreed that the area set forth in this Paragraph 2 is approximate
only and that neither party shall have a claim against the other for any
variance between the actual area and that set forth above.
TERM
3. (a) The term of the Lease shall be a period of thirty seven (37)
months, commencing on January 1, 1999, and expiring (unless sooner terminated as
provided herein) at midnight on the 31st day of January, 2002, herein called the
"lease term" or "term".
(b) Notwithstanding said commencement date, if for any reason
Landlord cannot deliver possession of the Premises to Tenant on said date,
Landlord shall not be subject to any liability therefor, nor shall such failure
affect the validity of this Lease or the obligations of Tenant hereunder or
extend the term hereof, but in such case Tenant shall not be obligated to pay
rent until possession is tendered to Tenant; provided however, that if Landlord
shall not have delivered possession of the Premises by March 1, 1999, Tenant
may, at Tenant's option, by written notice to Landlord within ten (10) days
thereafter, cancel this Lease, in which event
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<PAGE> 2
the parties shall be discharged from all obligations hereunder.
(c) If Landlord permits Tenant to occupy the Premises or a portion
thereof prior to the commencement date of the term for the purpose of installing
Tenant's improvements, fixtures, furniture and equipment, such occupancy shall
be subject to all the provisions of this Lease. Said early possession shall not
advance the commencement or termination dates set forth above. No Base Rent
shall be due from Tenant, however, commencing on the date of Tenant's
construction of its tenant improvements, Tenant shall pay to Landlord the
additional rents referred to in Paragraph 6(b), below.
(d) Tenant shall give Landlord ten (10) days prior written notice of
Tenant's intention to take possession of the Premises and Tenant shall deliver
to Landlord the insurance certificates required by Paragraph 17 hereof prior to
taking possession of the Premises.
RENEWAL
4. (a) In the event Tenant shall not then be in material default
hereunder and shall have made or reasonably cured all previous rental payments
in a timely manner (no more than one payments in each calendar year being
delinquent), Tenant shall have the right, not earlier than twelve (12) months
prior to the date of expiration of the term of this Lease and not later than six
(6) months prior to the day of the expiration of the term of this Lease, to
renew the term of this Lease for a further term of one (1) year from the date of
expiration of the term of this Lease.
(b) Such election shall be made by Tenant by serving upon Landlord a
notice in writing to the effect that Tenant elects to renew and extend the term
of this Lease for such extended term.
(c) In the event Tenant shall elect to renew this Lease and shall
serve notice of such election, this Lease shall be extended for one (1)
additional year from the date of expiration of the term of this Lease.
(d) Except for the redetermination of the base rental in accordance
with this Paragraph 4, all other terms and conditions of the original lease
agreement shall apply to the extended term.
(e) During the extended term of this Lease, if any, Tenant shall pay
to Landlord as Base Rent for the Premises monthly rent in an amount equal to the
Base Rent for the Premises for the last twelve (12) months of the original term
increased by the cost of living in the same manner set forth in Paragraph 6(a)
below. In no event however, shall the monthly Base Rent for the extended term be
less than the monthly Base Rent for the prior period.
HOLDOVER
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5. (a) Holding over after the expiration of the term of this Lease, or
any oral extension thereof, with the consent of Landlord, shall be a tenancy
from month to month, and the rentals and additional rentals upon the covenants,
conditions, limitations, and agreements are subject to the exceptions and
reservations contained in this Lease. The rental rate is to be the same rate
last charged hereunder.
(b) If Tenant remains in possession without Landlord's consent after
termination of the Lease, by lapse of time or otherwise, Tenant shall pay
Landlord for each day of such retention one-twentieth (1/20th) of the amount of
the monthly rental for the last month prior to such termination and Tenant shall
also pay all costs, expenses and damages sustained by Landlord by reason of such
retention, including, without limitation, claims made by a succeeding tenant
resulting from Tenant's failure to surrender the Premises.
RENT
6. (a) Tenant agrees to pay Landlord as Base Rent for the Premises
during the term of this Lease, the following sums per month:
<TABLE>
<CAPTION>
Months Base Rent/Month
------ ---------------
<S> <C>
01 $ 0.00
02-03 $ 16,605.60
04-13 $ 24,908.40
14-25 $ 26,254.80
26-37 $ 26,254.80 + CPI increase as set forth below
</TABLE>
The Base Rent for the last twelve (12) calendar months of the term of this Lease
shall be Twenty Six Thousand Two Hundred Fifty Four and 80/100 Dollars
($26,254.80) per month adjusted upward as of the first day of February, 2001
(the adjustment date) according to the following computation:
The base for computing this adjustment is the index figure for December,
1999 as shown in the Consumer Price Index (CPI), All Urban Consumers,
San Francisco-Oakland-San Jose, based on the period 1982-84 = 100 as
published by the U.S. Dept. of Labor's Bureau of Labor Statistics. The
Base Rent shall be increased by the percentage increase in the CPI over
the one (1) year period between December, 1999 and December, 2000. For
example, assuming the base figure for December, 1999 is 149.4 and the
index figure for December, 2000 is 156.9, the increase in the CPI is:
156.9 - 149.4 = 0.05 = 5.0%
-------------
149.4
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<PAGE> 4
In this example, the Base Rent would be increased on the first day of
February, 2001 by 5%.
The Base Rent shall also be increased on the first day of the option
period, if any, in a similar manner except the base for said adjustment
shall be the index figure for December, 2000 and the index figure for
December, 2001 shall be used to determine the increase in the CPI.
The index for each adjustment date shall be the one reported in the U.S.
Department of Labor's most comprehensive official index then in use and
most nearly answering the foregoing description of the index to be used.
If it is calculated from a base different from the base period 1982-84 =
100 used for the base figure above, the base figure used for calculating
the adjustment percentage shall first be converted under a formula
supplied by the Bureau.
The index figure for December of the year of each adjustment may not be
available by the date the rent is to be adjusted. Therefore, Tenant
shall continue to pay the Minimum Base Rent for the prior twelve month
period on the adjustment date of the current year. As soon as the index
figure is available, Landlord shall perform the above calculations and
notify Tenant of the new rent and Tenant shall pay to Landlord within 20
days of receipt of Landlord's notification together with Landlord's
calculations, the increased rent.
The Base Rent in the amount of $24,908.40 for the first month of full rent (the
fourth month) shall be payable on execution of this lease. All other rents shall
be payable in advance and due on the first day of each and every month of the
term of this Lease.
Rent for any period which is for less than one (1) month shall be a
prorated portion of the monthly installment stated herein, based upon a thirty
(30) day month. Said rental shall be paid, without prior notice or demand and
without deduction or offset, except as otherwise provided herein, in lawful
money of the United States of America to The Cortana Corporation, Trustee, at
800 El Camino Real, Suite 175, Menlo Park, California 94025 or at such other
place as Landlord may from time to time designate in writing.
(b) As additional rent, Tenant shall pay to Landlord its prorata
share of real property taxes and assessments (general and special), in lieu real
property taxes, rent taxes, gross receipt taxes (whether assessed against
Landlord or assessed against Tenant and collected by Landlord, or both)
attributable to the Premises. Such taxes shall be further pro-rated if the
commencement and termination dates of this Lease do not correspond to the tax
year.
As additional rent, Tenant shall pay to Landlord its
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<PAGE> 5
prorata share of the cost of the insurance policy or policies referred to in
Paragraph 17(b) attributable to the Premises, further pro-rated if the
commencement and termination dates of this Lease do not correspond to the
periods covered by such policy or policies.
The above additional rents shall be due and payable fifteen (15)
business days after Landlord has furnished Tenant with a photocopy of the tax
bill or premium notice, as the case may be, but in no event earlier than fifteen
(15) calendar days prior to delinquency. Landlord will furnish Tenant such
photocopies promptly upon receipt of the tax bill or premium notice, as the case
may be. Any sums not paid on or before such due date shall bear interest as the
highest rate allowed by law or the penalties that are imposed by the taxing
authorities for delinquent payments, whichever is greater. Additionally, if
Tenant fails to pay such additional rent on or before the due dates described
above, Landlord reserves the right to require Tenant to pay the delinquent
payment and future payments of these additional rents by cashier's checks or
other certified funds.
As further additional rent Tenant shall pay to Landlord a
management fee equal to two percent (2%) of the Base Rent on a monthly basis
with the monthly Base Rent and reimburse Landlord for its prorata share of the
cost of maintenance of the landscaping on a monthly basis. Other maintenance
provided for the Premises by Landlord, including, but not limited to, the
parking lot sweeping and maintenance shall be billed to Tenant on a monthly
basis as such expenses are incurred by Landlord and Tenant shall pay such
additional rent to Landlord with its Base Rent. Notwithstanding the above,
Tenant shall pay to Landlord as additional rent each month an estimated amount
necessary to pay for parking lot paving, sealing and striping which estimated
amount shall be based on such work being done every three (3) years. Such work
will be done at or near the commencement date of this Lease (at no cost to
Tenant), and every three (3) years thereafter. The actual cost of the paving,
sealing, and striping shall be reconciled with the estimated payments made by
Tenant and if the total of the estimated payments exceeds the actual cost,
Tenant shall receive a credit or be given a refund of the excess and if the
total of the estimated payments is less than the actual cost, Landlord shall
bill Tenant for the shortage which shall be due and payable as additional rent
within thirty (30) days. After the last paving, sealing, and striping, during
the term, or extended term, if any, of this Lease the estimated monthly payment
shall be based on the actual cost of such paving, sealing, and striping plus a
factor based on the estimated increase in the cost of living over the next three
(3) years. There will be no reconciliation of the actual cost of any paving,
sealing, and striping with the estimated payments made by Tenant completed after
the term, or extended term, if any, of this Lease. For purposes of this Lease,
it is agreed that Tenant's prorata share of taxes, insurance, and maintenance
expenses is 31.73%.
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<PAGE> 6
LATE CHARGES
7. Tenant agrees that all Minimum Base Rent not received by Landlord
within five (5) calendar days of the due date shall be considered delinquent and
agrees to pay a late charge equal to ten percent (10%) of the delinquent payment
within five (5) business days after receipt of written notice of non receipt of
payment. Rent mailed and bearing a U. S. Postal Service postmark of the third
(3rd) of a month shall not be considered delinquent no matter when received.
Additionally, any delinquent payments not paid within thirty (30) days of the
original due date shall bear interest at the lower of the maximum rate then
allowed by law or two points over the reference rate (prime rate) charged by the
San Francisco Main Branch of the Bank of America.
SECURITY DEPOSIT
8. (a) Tenant shall deposit with Landlord the total sum of Twenty Five
Thousand and 00/100 Dollars ($25,000.00) on execution of this Lease. Said
security deposit shall be increased each year such that it equals one (1) month
of the then current Base Rent. Said sum shall be held by Landlord as security
for the faithful performance by Tenant of all of the terms, covenants, and
conditions of this Lease. If Tenant defaults with respect to any provision of
this Lease, including, but not limited to, the provisions relating to the
payment of rent, Landlord may (but shall not be required to) use, apply or
retain all or any part of this security deposit for the payment of any rent or
any other sum in default, or for the payment of any reasonable amount which
Landlord may spend or become obligated to spend by reason of Tenant's default,
or to compensate Landlord for any other loss or damage which Landlord may suffer
by reason of tenant's default. If any portion of said deposit is so used or
applied, Tenant shall, within five (5) days after written demand therefor,
deposit cash with Landlord in an amount sufficient to restore the security
deposit to its original amount and Tenant's failure to do so shall be a material
breach of this Lease. Landlord shall not be required to keep this security
deposit separate from its general funds, and Tenant shall not be entitled to any
interest on said deposit.
(b) If Landlord's interest in this Lease is terminated, Landlord
shall transfer said deposit to Landlord's successor in interest and Landlord's
successor agrees to be bound by the terms of this Lease.
USE OF PREMISES
9. (a) Tenant shall use the Premises for general office, storage and
distribution, marketing and other legally and related uses and shall not use or
permit the Premises to be used for any other purpose without the prior written
consent of Landlord.
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<PAGE> 7
(b) Tenant shall not knowingly do or permit anything to be done in or
about the Premises nor bring or keep anything therein which will:
(i) increase the existing rate of or affect any fire or other
insurance upon the building or any of its contents unless Tenant agrees to pay
such increased rate, or
(ii) cause cancellation of any insurance policy covering said
building or any part thereof or any of its contents.
Tenant shall not knowingly use or allow the Premises to be used for
any improper, immoral, unlawful or objectionable purpose, nor shall Tenant
cause, maintain or permit any nuisance in, on or about the Premises. Tenant
shall not knowingly commit or suffer to be committed any waste in or upon the
Premises. Tenant shall not place any loads upon the floors, walls, or roof which
endanger the structure or place any harmful liquids or other toxic waste in the
drainage system of the Premises or in any other place in on or about the
Premises. No materials, supplies, equipment, finished products or semi-finished
products, raw materials or articles of any nature shall be stored upon or
permitted to remain on any portion of the Premises outside of the building,
except as approved by the City of Palo Alto.
COMPLIANCE WITH LAW
10. Tenant shall not use the Premises or permit anything to be done in
or about the Premises which will in any way conflict with any law, statute,
ordinance or governmental rule or regulation now in force or which may hereafter
be enacted or promulgated. Tenant shall, at its sole cost and expense, promptly
comply with all laws, statutes, ordinances, and governmental rules, regulations
or requirements, pertaining to the specific use of the Premises by Tenant,
including, but not limited to, those relating to the protection of the
environment and storage and disposal of toxic materials, now in force or which
may hereafter be in force except that Tenant shall not be required to make
structural changes unrelated to or affected by Tenant's improvements or acts. In
the event any alterations made by Tenant, when combined with alterations made by
others in the building in which the Premises are located, triggers a requirement
to upgrade the building to comply with new flood control ordinances and codes,
Tenant shall be responsible for the costs of such upgrades in the same
proportion as the value of Tenant's permits bears to the total value of all
permits issued by the City of Palo Alto for all the alterations which trigger
the requirement. Except as set forth herein, Landlord shall be responsible for
all costs and expenses necessary to comply with all laws, statutes, ordinances,
and governmental rules, regulations or requirements where the need for such
compliance was not caused by Tenant's use of the Premises or Tenant's acts in
connection with the Premises. Notwithstanding the above, Landlord shall not be
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<PAGE> 8
responsible for any costs or expenses necessary to comply with the Americans
with Disabilities Act other than as the same relates to the restrooms, parking
lot, landscaping areas, walkways, driveways, sidewalks, and other areas outside
of the building in which the Premises are located. Except as set forth above,
Tenant shall be responsible for compliance with the Americans with Disabilities
Act. Tenant shall also comply with the requirements of any board of fire
insurance underwriters or other similar bodies now or hereafter constituted
relating to or affecting the condition, use or occupancy of the Premises,
excluding structural changes not required or affected by Tenant's improvements
or acts. The judgment of any court of competent jurisdiction or the admission of
Tenant in any action against Tenant, whether Landlord be a party thereto or not,
that Tenant has violated any law, statute, ordinance or governmental rule,
regulation or requirement, shall be conclusive of that fact as between the
Landlord and Tenant.
ALTERATIONS AND ADDITIONS
11. (a) Tenant shall not make or allow any alterations, additions or
improvements of or to the Premises without Landlord's prior written consent,
which consent shall not unreasonably be withheld. Landlord's consent shall not
be required for any non structural tenant improvements costing less than Ten
Thousand Dollars ($10,000.00). Any such alterations, additions or improvements,
including, but not limited to, wall covering, paneling and built-in cabinet
work, but excepting movable furniture, and trade fixtures, shall become a part
of the realty, shall belong to Landlord and shall be surrendered with the
Premises at expiration or termination of the Lease. If Landlord consents to any
such alterations, additions or improvements by Tenant, they shall be made by
Tenant at Tenant's sole cost and expense, and any contractor or person selected
by Tenant to perform the work shall first be approved of, in writing, by
Landlord, which approval shall not be unreasonably withheld. Landlord further
reserves the right to require all plans for structural improvements and
alterations to be reasonably approved by its structural engineer. No such work
shall be allowed to commence until three (3) days have elapsed from the date of
Landlord's consent. One Hundred Eighty (180) days prior to the termination of
this Lease, Tenant shall provide to Landlord a complete and accurate set of "As
Built" tenant improvement drawings showing any alterations and additions made by
Tenant, including, but not limited to floor plan drawings, HVAC drawings,
electrical drawings, sprinkler system drawings, and plumbing system drawings.
Upon expiration, or sooner termination, of the term hereof, Tenant shall, upon
written demand by Landlord given at least one hundred twenty (120) days prior to
the end of the term, promptly remove any alterations, additions or improvements
made by Tenant and designated by Landlord to be removed at the time Landlord
gave its written consent to the installation of such alterations, additions or
improvements. If no such consent was required, Landlord shall have the right to
direct Tenant to remove same provided Landlord gives
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<PAGE> 9
written notice to Tenant within the above the above time period. Such removal
and repair of any damage to the Premises caused by such removal shall be at
Tenant's sole cost and expense.
(b) Tenant shall not place, or permit to be placed, upon the
Premises, any signs, advertisements or notices without the written consent of
Landlord first had and obtained unless such signs, advertisements or notices are
required by law. Tenant shall also not place or permit to be placed in, upon, or
about the Premises any signs not approved by the City of Palo Alto or other
governing authority where such approval is required.
LIENS
12. Tenant shall keep the Premises and the property in which the
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. In the event a mechanic's
lien is recorded against the Premises and is not removed within ten (10)
business days after Landlord gives written notice to Tenant to cause the removal
of same, Landlord may require Tenant to provide Landlord, at Tenant's sole cost
and expense, a lien and completion bond in an amount equal to one and one-half
(1-1/2) times the estimated cost of any improvements, additions, or alterations
by Tenant, to insure Landlord against liability for mechanic's and materialmen's
liens and to insure completion of the work if the estimated cost exceeds Twenty
Five Thousand Dollars ($25,000.00). Landlord shall also have the right to post
and maintain on the Premises such notices of nonresponsibility as may be
required by law to protect Landlord's rights herein.
REPAIRS AND MAINTENANCE
13. (a) Except as set forth herein, Tenant agrees to accept the Premises
in an "As Is" condition. During the Term of this Lease Tenant shall at Tenant's
sole cost and expense, keep the Premises and every part thereof in good
condition and repair, unless caused by a casualty required to be insured
pursuant to Paragraph 17 hereof or by any inherent defects. Notwithstanding the
above, after Landlord replaces the existing roof pursuant to Paragraph 13 (b),
Landlord shall repair and maintain the new roof covering and bill Tenant its
prorata share of such maintenance costs. Further notwithstanding the above,
Tenant's obligation to repair the HVAC system shall be limited to Twenty Five
Hundred Dollars ($2,500) per year per unit. Landlord shall be responsible for
any excess costs of repairs or maintenance of an HVAC unit or may elect to
replace it. Tenant further agrees to maintain the Premises and make minor
repairs thereto in conformance with any reasonable requirements of any
institutional lender of Landlord. Should Tenant at any time during the term of
this Lease or any renewal or extension of the term fail to maintain the Premises
or make any repairs or replacements as required herein after reasonable written
notice to
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Tenant, Landlord may, at its option, enter the Premises and perform such
maintenance or make such repairs or replacements for the account of Tenant. Any
sums expended by Landlord in so doing, together with interest thereon at the
highest rate allowed by law from the date expended by Landlord until the date
repaid by Tenant, shall be due and payable by Tenant to Landlord within fifteen
(15) business days after demand of Landlord. Tenant shall upon the expiration or
sooner termination of this Lease surrender the Premises to the Landlord in good
condition, damage from causes beyond the reasonable control of the Tenant and
normal wear and tear excepted. Unless specifically provided in an addendum to
this Lease, Landlord shall have no obligation to alter, remodel, improve,
repair, decorate or paint the Premises or any part thereof and the parties
hereto affirm that Landlord has made no representations to Tenant respecting the
condition of the Premises or the building in which the Premises are located
except as specifically herein set forth. Landlord shall construct a demising
wall separating the Premises from the remainder of the building in which the
Premises are located at Landlord's sole cost and expense.
(b) As set forth in Paragraph 6(b), Landlord shall cause the
landscaping to be maintained and Tenant shall reimburse Landlord for its prorata
share as provided therein. Additionally, notwithstanding the above provisions of
Paragraph 13(a), Landlord shall maintain the structural integrity of the
building, including, without limitation, the foundation, exterior walls, and
roof (except as provided in Paragraph 13(a)) in which the Premises are located,
unless such maintenance and repairs are caused in part or in whole by the act,
neglect, fault or omission of any duty by the Tenant, its agents, servants,
employees or invitees, in which case Tenant shall pay to Landlord the reasonable
cost of such maintenance and repairs. Landlord will replace the roof covering as
soon as reasonably practical in the Spring of 1999 at Landlord's sole cost and
expense and shall maintain and repair the existing roof at Landlord's sole cost
and expense until the roof is replaced. Tenant shall give Landlord written
notice of any required repairs or maintenance. Landlord shall not be liable for
any failure to repair or to perform any maintenance unless such failure shall
persist for an unreasonable time after written notice. Except as provided in
Paragraph 22 hereof, there shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements to any
portion of the building or the Premises or to fixtures, appurtenances and
equipment therein. Tenant waives the right to make repairs at Landlord's expense
or terminate this Lease under any law, statute or ordinance now or hereafter in
effect for Landlord's failure to maintain the Premises, provided Landlord
commences or arranges for commencement of the required repairs or maintenance
within five (5) business days of receipt of Tenant's written notice; provided,
however, that Tenant may make emergency repairs if necessary to prevent a
disruption in Tenant's business or imminent danger to its employees and
property.
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In no event shall Tenant's costs of such repairs or maintenance be deducted or
offset from any amounts due from Tenant to Landlord unless Landlord fails to
make such repairs for an unreasonable period of time following written notice.
Landlord shall reimburse Tenant for the reasonable costs of such repairs or
maintenance within fifteen (15) days after receipt of copies of invoices for
same.
ASSIGNMENT AND SUBLETTING
14. (a) Tenant shall not, voluntarily or by operation of law, assign, or
transfer Tenant's interest under this Lease or in the Premises nor sublease all
or any part of the Premises or allow any other person or entity (except Tenant's
employees, agents and invitees) to occupy or use all or any part of the Premises
without the prior written consent of Landlord. Landlord's consent shall not be
unreasonably withheld or delayed. Without in any way limiting Landlord's right
to refuse to give consent under this Paragraph 14, Landlord's refusal to give
consent shall not be deemed unreasonably withheld if:
(i) The character, reputation and financial responsibility of
the proposed new Tenant is not reasonably satisfactory in Landlord's
judgment. In connection with any such assignment Tenant shall deliver to
Landlord certified financial statements of Tenant and the new proposed
tenant showing their then financial condition as required hereunder.
(ii) The character and reputation of the proposed sub-tenant is
not reasonably satisfactory in Landlord's judgment.
(iii) The proposed new tenant or sub-tenant fails to agree in
writing to assume and be bound by all the terms and provisions of this
Lease.
(b) Additionally, as a condition to Landlord's consent to an
assignment or subletting it is hereby agreed that there shall be paid to
Landlord the following: To the extent any rental or other payments under such
sublease or assignment exceed the base rental payments payable under the terms
of this Lease, after Tenant has recovered any assignment or subleasing
commissions, and other costs of assigning or subleasing, and tenant improvement
costs related to such assignment or subletting, 100% of such excess shall be
paid to Landlord as such rental or other rental payments under such sublease or
assignment become due and payable under the terms of the assignment or
subletting.
(c) If Tenant hereunder is a corporation or at any time becomes a
corporation which, under the then current laws of the State of California, is
not deemed a public corporation, or is an unincorporated association or
partnership, the transfer, or
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assignment directly or indirectly of any stock or interest in such corporation,
association or partnership in the aggregate in excess of forty-nine percent
(49%) during the term hereof shall be deemed an assignment within the meaning
and provisions of Paragraph 14. Tenant shall immediately report in writing any
such transfer or assignment of any stock or interest to Landlord.
(d) In the event Tenant proposes to transfer, assign, or sublet any
of Tenant's interests herein or enter into any license or concession agreement
or effectuate any change of ownership, Tenant shall thirty (30) days prior to
the proposed transaction supply to Landlord the following in writing:
(i) The name and address of the proposed assignee, transferee,
or sub-lessee.
(ii) All details as to the proposed assignment, subletting or
change of ownership including without limitation all of the terms and
conditions thereof including all sums or considerations to be paid.
(iii) A financial statement certified by an officer dated within
thirty (30) days of the date of notification of the proposed transferee,
assignee, sub-lessee, or the person or persons or entities which will be
involved in the proposed or change of ownership.
(iv) Within ten (10) days of any assignment or sub-lease Tenant
shall deliver to Landlord true, correct and complete copies of all
agreements, assignments, subleases and material documents pertaining
thereto, including any sales agreements.
Anything contained in this Paragraph 14 to the contrary
notwithstanding, no transfer, assignment, sub-letting of any of Tenant's
interests herein shall be effective unless all of the above provisions are
complied with within the time limits provided.
(e) Notwithstanding any other provision contained in this Lease, in
the event Tenant desires to assign this Lease or sublet the Premises, Landlord
shall have the right, exercisable in Landlord's sole discretion by written
notice to Tenant within fifteen (15) after receipt of Tenant's written notice
and the information described in subparagraph 14(d) above, to terminate this
Lease as of the date Tenant proposes to have its assignment or subletting be
effective and enter into a new lease with a third party, including, but not
limited to, Tenant's proposed assignee or sub-lessee, without any liability to
Tenant. On such termination, this Lease shall be null and void as of the
termination date set forth in Landlord's notice or as of the date Tenant
actually surrenders possession of the Premises to Landlord, whichever is later;
provided however, each party shall be liable to the other for
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any liabilities accrued up to the later of the above dates. Landlord
acknowledges that Tenant may not occupy the entire Premises at the inception of
this Lease and therefore agrees that the provisions of this subparagraph 14.(e)
shall not apply to any initial subletting of space within the Premises that
Tenant has not previously occupied itself.
(f) Any additional documentation reasonably required by Landlord
shall be prepared and executed by Tenant and its assignee or sub-lessee or
transferee as part of the assignment or sub-letting or transfer before it shall
be effected.
(g) Anything contained herein to the contrary notwithstanding,
regardless of whether or not Landlord's consent is required, no sub-letting or
assignment or transfer of any of Tenant's interests hereunder shall be deemed to
release Tenant or any guarantor from any liability under the terms of this
Lease, nor, after any such consent shall Landlord's failure to give Tenant or
guarantor notice of default under any of the terms and conditions of this Lease
release Tenant or guarantor from any liability hereunder. A consent to one
assignment, subletting, occupation or use shall not be deemed a consent to any
subsequent assignment, subletting, occupation or use. Any such purported
assignment, subletting, or permission to occupy or use without such consent from
Landlord shall be void and shall, at the option of Landlord, constitute a
default under this Lease.
(h) Notwithstanding any other provision of this Paragraph 14, it is
expressly agreed that Landlord's consent shall not be required for the
assignment of this Lease or the subletting of all or any portion of the Premises
to (a) any entity resulting from the merger or consolidation with Tenant or (b)
any subsidiary or affiliate of Tenant.
HOLD HARMLESS
15. (a) Tenant shall indemnify Landlord against and hold Landlord and
Landlord's property harmless from any and all liability, claims, loss, damages,
or expense, including reasonable counsel fees and costs, arising by reason of
the death or injury of any person, including Tenant or any person who is an
employee, agent, or customer of Tenant, or by reason of damage to or destruction
of any property, including property owned by Tenant or any person who is an
employee, agent, or customer of Tenant, caused or allegedly caused by:
(i) Any cause whatsoever while such person or property is in or
on said Premises;
(ii) Some condition of said Premises for which Tenant is
responsible or for which Landlord is responsible and Landlord has not
been given notice thereof and reasonable time
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to correct;
(iii) Some act or omission on said Premises of Tenant or any
person in or on said Premises with the permission of Tenant; or
(iv) Tenant's use, storage, or disposal of hazardous wastes,
toxic substances, or related materials ("hazardous materials").
Hazardous materials shall include, but not be limited to, substances
defined as "hazardous substances", "hazardous materials", or "toxic
substances" in the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended; the Hazardous Materials
Transportation Act; the Resource Conservation and Recovery Act; and
those substances defined as "hazardous wastes" in Section 25117 of the
California Health and Safety Code; in the regulations adopted and
publications promulgated pursuant to such laws; and in the Hazardous
Material Storage Ordinance of the City of Palo Alto, if any, as amended.
Tenant's indemnity with respect to hazardous materials shall
include, without limitation: (i) any damage, liability, fine, penalty, punitive
damages, cost or expenses arising from or out of any claim, action, suit or
proceeding for personal injury (including, without limitation, sickness, disease
or death), tangible property damage, nuisance, pollution, contamination, leak,
spill, release or other effect on the environment; and (ii) the cost of any
required or necessary investigation, repair clean-up, or treatment of the
Premises and/or the Property, and the preparation and implementation of any
closure, disposal, remedial or other required action in connection with the
Premises and/or the Property.
The indemnity of Tenant provided above shall survive the expiration
or earlier termination of this Lease but shall not apply to any damage: (1)
covered by insurance; (2) caused by a defect in the Premises; (3) caused by the
willful misconduct, negligence or omission of Landlord, its agents or employees;
or (4) caused by a breach of this Lease by Landlord.
(b) Tenant hereby assumes all risk of damage to property or injury
to persons in or upon the Premises, and Tenant hereby waives all claims in
respect thereof against Landlord, from any cause other than the following: (1)
the willful misconduct, negligence or omission of Landlord, its agents or
employees; (2) defects in the Premises; and (3) a breach of this Lease by
Landlord. Landlord and its agents shall not be liable for any damage to property
entrusted to employees of the building, nor for loss or damage to any property
by theft or otherwise, nor from any injury to or damage to persons or property
resulting from any cause whatsoever, unless caused by or due to the following:
(1) the willful misconduct, negligence or omission of Landlord, its agents
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or employees; (2) defects in the Premises; and (3) a breach of this Lease by
Landlord.
(c) If any action or proceeding is brought against Landlord by
reason of any claim for which Tenant has an obligation to indemnify Landlord as
set forth above, Tenant shall defend Landlord therein at Tenant's expense by
counsel reasonably satisfactory to Landlord; provided however, Tenant shall
control such defense.
(d) Landlord and its agents and employees shall not be liable for
interference with the light or other incorporeal hereditaments, or loss of
business by Tenant unless the same is caused by the gross negligence or willful
misconduct of Landlord, its agents, or employees. Tenant shall give prompt
notice to Landlord in case of fire or accidents in the Premises or in the
buildings or of alleged defects in the building, fixtures or equipment, provided
that Tenant has actual knowledge of such matters.
(e) To the best knowledge of Landlord, except as set forth herein,
as of the date of this Lease there are no hazardous materials on, in, under or
about the Premises or the property on which the Premises are located (the
"Property"). Landlord hereby discloses to Tenant and Tenant acknowledges receipt
of said disclosure that the Premises contain non-friable asbestos. In the event
such asbestos must be removed or encapsulated, Landlord shall pay the costs
thereof, including, but not limited to, any disposal costs. Except with respect
to hazardous materials released on or under the Premises or Property by Tenant
or adjacent or nearby landowners, tenants, or occupants, Landlord shall
indemnify, defend with counsel reasonably satisfactory to Tenant, protect and
hold Tenant harmless from and against any and all liabilities, claims, losses,
damages, or expense, including reasonable counsel fees and costs, arising out
of, or based upon: (i) the presence of any hazardous materials or asbestos on,
under, in or about the Premises or the Property, unless such hazardous materials
are released onto the Premises or Property by Tenant or, after the date of this
Lease, by adjacent or nearby landowners, tenants, or occupants; or (ii) the
violation or alleged violation by Landlord of any laws, regulations, orders, or
permits relating to the use, generation, manufacture, installation, release,
discharge, storage or disposal of hazardous materials on, under, in or about the
Premises or the Property. This indemnity shall include, without limitation: (i)
any damage, liability, fine, penalty, punitive damages, cost or expenses arising
from or out of any claim, action, suit or proceeding for personal injury
(including, without limitation, sickness, disease or death), tangible property
damage, nuisance, pollution, contamination, leak, spill, release or other effect
on the environment; and (ii) the cost of any required or necessary
investigation, repair clean-up, or treatment of the Premises and/or the
Property, and the preparation and implementation of any closure, disposal,
remedial or other
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required action in connection with the Premises and/or the Property, except for
hazardous materials released on the Premises or the Property by Tenant. Landlord
shall also indemnify Tenant and hold Tenant harmless from any and all liability,
claims, loss, damages, or expense, including reasonable counsel fees and costs,
arising by reason of the gross negligence of Landlord, its agents, or employees,
a material breach of Landlord's obligations under this Lease, and Landlord's
breach of any representation and/or warranty contained herein. Landlord's
indemnity obligations hereunder shall survive the expiration or earlier
termination of this Lease.
RELEASE FROM LIABILITY/WAIVER OF SUBROGATION
16. Landlord and Tenant hereby mutually waive their respective rights of
recovery against each other for any loss of the type required by this Lease to
be insured against. Landlord and Tenant hereby agree to obtain any special
endorsements (including waivers of subrogation) required by their insurance
carriers in order to effectuate the foregoing mutual release.
INSURANCE
17. (a) Tenant shall, at Tenant's expense, obtain and keep in force
during the term of this Lease a policy of comprehensive public liability
insurance insuring Landlord and Tenant against claims occurring in, on or about
the Premises and all areas appurtenant thereto. The limit of said insurance
shall not, however, limit the liability of Tenant hereunder. Tenant may carry
said insurance under a blanket policy, providing however, said insurance by
Tenant shall name Landlord as an additional insured. If Tenant fails to procure
and maintain said insurance, Landlord may, but shall not be required to, procure
and maintain same, but at the expense of Tenant. Tenant shall deliver to
Landlord prior to occupancy of the Premises copies of policies of liability
insurance required herein or certificates evidencing the existence and amount of
such insurance with loss payable clauses satisfactory to Landlord. No policy
shall be cancelable or subject to reduction of coverage except after fifteen
(15) days prior written notice to Landlord. The minimum acceptable amount of
comprehensive liability insurance is $3,000,000 per accident, and property
damage in an amount of not less than $1,000,000.00 per occurrence. The above
stated minimum levels of coverage are subject to amendment by Landlord upon
ninety (90) days written notice should the economic conditions, in the
discretion of Landlord, warrant adjustment thereof. Tenant may, at its own
expense, also insure or self insure its inventory, fixtures, equipment,
furniture, and its own Tenant improvements. Tenant acknowledges that Landlord
shall have no responsibility for insuring such items.
(b) Landlord shall carry and maintain, during the entire term,
including extensions hereof, fire and all risk insurance insuring the Premises
and the initial tenant improvements for their
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full replacement cost. Said insurance policy or policies shall cover at least
the following risks: fire, smoke damage, windstorm, hail, explosion, riot, riot
attending a strike, civil commotion, malicious mischief, vandalism, aircraft,
earthquake (if available at commercially reasonable rates) and sprinkler
leakage. Except for earthquake coverage, the maximum deductible shall be Five
Thousand Dollars ($5,000.00). The deductible on any earthquake coverage shall
not exceed 10% of the face amount of the earthquake coverage. Additionally, such
policy or policies shall have a loss of rents (12 months) endorsement; provided
however, if any institutional lender of Landlord allows a lower amount, said
coverage may be reduced to such lower amount. Tenant shall pay to Landlord as
additional rent, the cost of such policy or policies pursuant to Paragraph 6(b).
Any loss payable under such insurance shall be payable to Landlord and any
Lender holding an encumbrance on the Premises. The proceeds from any such policy
or policies for damages to the Premises shall be used for the repair of the
Premises except as set forth in Paragraph 22.
(c) Insurance required under this Paragraph 17 shall be in companies
rated A+, Class X or better in "Best's Insurance Guide".
SERVICES AND UTILITIES
18. (a) Tenant shall provide and pay for its own utilities, janitorial
services, trash removal and all other material and services it desires in
connection with its occupation and use of the Premises. Tenant acknowledges that
it understands that Landlord is not obligated to provide services, materials or
supplies, including but not limited to janitorial services or maintenance
services, except as otherwise provided herein, to Tenant.
(b) Tenant shall not connect with electric current except through
approved electrical outlets in the Premises or such additional electrical
outlets as may be installed by a licensed electrical contractor in conformance
with the then applicable building codes, any apparatus or device, for the
purpose of using electric current.
PERSONAL PROPERTY TAXES
19. Tenant shall pay before delinquency, all taxes levied or assessed
and which become payable during the term hereof upon all Tenant's leasehold
improvements, equipment, furniture, fixtures and personal property located in
the Premises, except that which has been paid for by Landlord and is the
standard of the building. If any of the Tenant's leasehold improvements,
equipment, furniture, fixtures and personal property are assessed and taxed with
the building, Tenant shall pay to Landlord its share of such taxes within ten
(10) days after delivery to Tenant by Landlord of a statement in writing setting
forth the amount of such taxes
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applicable to Tenant's property.
RULES AND REGULATIONS
20. Intentionally omitted.
ENTRY BY LANDLORD
21. (a) Landlord reserves the right to enter the Premises at any time to
inspect the Premises, to submit the Premises to prospective purchasers or
tenants, to post notice of non-responsibility, and to alter, improve, maintain
or repair the Premises that Landlord deems necessary or desirable, all without
abatement of rent. Except in the cases of emergencies and to post notices of
nonresponsibility, Landlord shall give telephone notice twenty four (24) hours
in advance, unless Tenant waives such notice, prior to entering the Premises.
Landlord may erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, but shall not block the
entrance to the Premises nor interfere with Tenant's business or parking, except
as reasonably required for the particular activity by Landlord. Landlord shall
not be liable in any manner for any inconvenience, disturbance, loss of
business, nuisance, interference with quiet enjoyment, or other damage arising
out of Landlord's entry on the Premises as provided in this paragraph, except
damage, if any, resulting from the willful misconduct or negligence of Landlord
or its authorized representatives.
(b) In an emergency, Landlord shall have the right to use any means
which Landlord deems reasonably necessary to obtain entry to the Premises
without liability to Tenant, except for any failure to exercise due care for
Tenant's property. Any such entry to the Premises by Landlord shall not be
construed or deemed to be forcible or unlawful entry into or a detainer of the
Premises or an eviction of Tenant from the Premises or any portion thereof.
DESTRUCTION/RECONSTRUCTION
22. (a) If ten percent (10%) or less of the Premises is damaged by a
peril not required to be insured pursuant to Paragraph 17 (b), Landlord shall
promptly and diligently proceed to repair and restore the same to substantially
the same condition as existed prior to such damage or destruction; provided,
however, that should such damage be caused by the willful act, negligent act or
omission of any duty with respect to the same by Tenant, its agents, servants,
employees or invitees, Tenant, and not Landlord, shall be so obligated to repair
and restore. If the Premises are damaged by a peril not required to be insured
pursuant to the provisions of Paragraph 17 (b) rendering more than ten percent
(10%) of the Premises unusable for the conduct of Tenant's business, Landlord
may, upon written notice, given to Tenant within thirty (30) days after the
occurrence of such damage, elect to terminate this Lease
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(the effective date of such termination shall be as mutually agreed upon and if
the parties fail to agree on such a date, the effective termination date shall
be the date of the casualty); provided, however, Tenant may, within thirty (30)
days after receipt of such notice, elect to make any required repairs and/or
restoration, in which event this Lease shall remain in full force and effect,
and Tenant shall thereafter diligently proceed with such repairs and/or
restoration.
(b) If the Premises are damaged or destroyed by fire or other peril
required to be insured pursuant to Paragraph 17 (b), Landlord shall promptly and
diligently proceed to repair and restore the same to substantially the same
condition as existed prior to such damage or destruction; provided, however,
that Landlord shall not be obligated to repair and restore until either the
insurer acknowledges that the loss is covered by insurance and sufficient
proceeds of such insurance (plus the applicable deductible which Landlord shall
contribute) are available to Landlord to pay the costs (including a reasonable
allowance for contractor's profit and overhead not to exceed ten percent (10%)
of the repairs and/or restoration) or the Tenant agrees to pay such costs to
Landlord. If the existing laws do not permit the restoration, either party can
terminate this Lease immediately by giving notice to the other party.
If the cost of restoration exceeds the amount of insurance
proceeds (plus the applicable deductible), and Tenant has not agreed to pay the
cost of repairs and/or restoration to Landlord, either party can elect to
terminate this Lease by giving notice to the other within fifteen (15) days
after determining that the restoration cost will exceed the insurance proceeds
(plus the applicable deductible). In the case of destruction to the Premises, if
Landlord elects to terminate this Lease, Tenant, within fifteen (15) days after
receiving Landlord's notice to terminate, may agree to pay to Landlord the
difference between the amount of insurance proceeds (plus the applicable
deductible which Landlord shall pay) and the cost of restoration in which case
Landlord shall restore the Premises. Landlord shall give Tenant satisfactory
evidence that all sums contributed by Tenant as provided in this paragraph 22
have been expended by Landlord in paying the cost of restoration.
If Landlord elects to terminate this Lease and Tenant does not
elect to contribute toward the cost of restoration as provided herein, this
Lease shall terminate, and all of the proceeds of the insurance shall be paid to
Landlord; provided, however, that in the event such proceeds shall include any
amounts paid for damage to or destruction of property belonging to Tenant,
Landlord shall within ten (10) days of receipt, pay over such amounts to Tenant
in the following manner: Out of the gross proceeds paid by insurance to
Landlord, Landlord shall retain an amount equivalent to the current replacement
value of the building and improvements owned by Landlord; after Landlord has
been so paid from the insurance
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proceeds, if there remains a balance of such insurance proceeds which represent
payment for damages to or destruction of improvements added by Tenant after the
date of Tenant's occupancy of the Premises, then, to the extent of any remaining
balance of the insurance proceeds and to the extent of Tenant's direct costs of
making such added improvements, Landlord shall be obligated to pay over to
Tenant such remaining insurance proceeds. During any such repairs or restoration
described in this Paragraph 22, rent and all other costs and charges, shall
abate from the date of the casualty in proportion to the area of the Premises
rendered unusable by such damage or destruction; provided, however, that
Landlord shall have no liability by reason of injury to or interference with
Tenant's business or property arising from the making of any repairs,
alterations, or improvements in or to any portion of the Premises or in or to
fixtures, appurtenances and equipment therein; and further provided, that if the
damage was caused by the willful act or gross negligence of Tenant, its agents
or employees, there shall be no such abatement of rent unless covered by the
loss of rents provisions of the insurance policy Landlord is required to carry
and maintain pursuant to the provisions of Paragraph 17 (b). If the Premises are
destroyed or substantially damaged within one year of the end of this Lease term
or extensions thereof, or if Landlord cannot restore the Premises within One
Hundred Twenty (120) days from the date of the damage or destruction, Landlord
or Tenant shall each have the option to cancel the Lease effective as of the
date of the damage or destruction or such later date as the electing party sets
forth in its written notice of cancellation, and all insurance proceeds on the
real property shall be paid to Landlord.
In the event Tenant shall have paid all or a portion of the
costs of any repairs or restorations for which Landlord subsequently receives
insurance proceeds, then to the extent that such insurance proceeds and Tenant's
payments exceed Landlord's cost of repair and/or restoration, Landlord shall
reimburse Tenant to the extent of Tenant's payments.
(c) Landlord shall not be required to repair any damage by fire or
other cause, or to make any repairs or replacements of any panels, decoration,
office fixtures, railings, floor coverings, partitions, or any other property
installed in the Premises by Tenant.
DEFAULT
23. Occurrence of any of the following events shall constitute a default
and breach of this Lease by Tenant.
(a) The abandonment of the Premises by Tenant.
(b) The failure by Tenant to make any payment of rent or any other
payment required of Tenant hereunder, as and when due, if such failure continues
for three (3) calendar days after written
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notice thereof by Landlord to Tenant.
(c) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease other than described in
Paragraph 23(b) above, where such failure continues for thirty (30) days after
written notice thereof by Landlord to Tenant; provided however, that if Tenant's
default is such that more than thirty (30) days are reasonably required for its
cure, then Tenant shall not be deemed to be in default if Tenant commences such
cure within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion.
(d) The making by Tenant of any general assignment or general
arrangement for the benefit of creditors or the filing by or against Tenant of a
petition to have Tenant adjudged bankrupt, or a petition, or reorganization or
arrangement under any law relating to bankruptcy (unless in the case of a
petition filed against Tenant, the same is dismissed within sixty (60) days); or
the appointment of a trustee or a receiver to take possession of substantially
all of Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant within thirty (30) days; or
the attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this Lease,
where such seizure is not discharged in thirty (30) days.
(e) The failure of Tenant or any employee or agent of Tenant to
occupy the Premises for ten (10) consecutive business days unless Tenant gives
prior written notice to Landlord, provides a security service for the Premises
and keeps all utility systems for the Premises functioning and in good
operation.
REMEDIES
24. Landlord shall have the following remedies if Tenant commits a
default. These remedies are not exclusive; they are cumulative and in addition
to any remedies now or later allowed by law.
(a) Landlord may continue this Lease in full force and effect, as
long as Landlord does not terminate Tenant's right to possession, and Landlord
shall have the right to collect rent when due. During the period Tenant is in
default, Landlord may enter the Premises and relet them, or any part of them, to
third parties for Tenant's account. Tenant shall be liable to Landlord for all
costs Landlord incurs in reletting the Premises, including, without limitation,
reasonable broker's commissions and expenses of remodelling the Premises
required by the reletting. Reletting may be for a period shorter or longer than
the remaining term of the Lease. Tenant shall pay to Landlord the rent due under
this Lease as and when due, less the rent Landlord receives from any reletting.
No act by Landlord allowed by this Paragraph shall
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terminate this Lease unless Landlord notifies Tenant in writing that Landlord
elects to terminate Tenant's right to possession of the Premises. If Tenant
obtains Landlord's consent, Tenant shall have the right to assign or sublet its
interest in this Lease, but Tenant shall not be released from liability.
Landlord's consent to a proposed assignment or subletting shall not be
unreasonably withheld.
(b) Landlord may terminate Tenant's right to possession of the
Premises at any time. No act by Landlord other than giving written notice to
Tenant shall terminate this Lease. Acts of maintenance, efforts to relet the
Premises, or the appointment of a receiver on Landlord's initiative to protect
Landlord's interest under this Lease shall not constitute a termination of
Tenant's right to possession. On termination, Landlord has the right to recover
from Tenant:
(i) The worth, at the time of the award of the unpaid rent that
had been earned at the time of termination of this Lease;
(ii) The worth, at the time of the award of the amount by which
the unpaid rent that would have been earned after the date of
termination of this Lease until the time of award exceeds the amount of
the loss of rent that Tenant proves could have been reasonably avoided;
(iii) The worth, at the time of the award of the amount by which
the unpaid rent for the balance of the term after the time of award
exceeds the amount of the loss of rent that Tenant proves could have
been reasonably avoided; and
(iv) Any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things
would be likely to result therefrom.
"The worth, at the time of the award", as used in (i) and (ii) of this
subparagraph, is to be computed by allowing interest at the maximum rate
allowed by law. "The worth, at the time of the award", as referred to in
(iii) of this subparagraph, is to be computed by discounting the amount
at the discount rate of the Federal Reserve Bank of San Francisco at the
time of the award, plus one percent (1%).
EMINENT DOMAIN
25. If more than twenty-five percent (25%) of the building which is part
the Premises, or twenty-five percent (25%) of the parking spaces and Landlord
does not provide suitable replacement parking spaces within a reasonable
distance from the building, is
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taken or appropriated by any public or quasi-public authority under powers of
eminent domain, either party hereto shall have the right at its option, to
terminate this Lease effective as of the date of taking. If less than
twenty-five percent (25%) building or twenty-five percent (25%) of the parking
spaces, is taken (or neither party elects to terminate as above provided if more
than twenty-five percent (25%) of the building a twenty five percent (25%) of
the parking spaces is taken), the Lease shall continue, and the rental
thereafter to be paid shall continue, but the rental thereafter to be paid shall
be equitably reduced. Whether or not the Lease is terminated by reason of any
such taking or appropriation, Landlord shall be entitled to the entire award and
compensation for the taking which is paid or made by the public or quasi-public
agency, and Tenant shall have no claim against said award; except for amounts
paid directly to Tenant for its moving expenses, interruption to its business or
damage to personal property or trade fixtures. A voluntary sale by Landlord to
any public body or agency having the power of eminent domain, either under
threat of condemnation or while the condemnation proceedings are pending shall
be deemed to be a taking under the power of eminent domain for the purposes of
this Paragraph.
ESTOPPEL CERTIFICATE
26. Either party shall at any time and from time to time, upon not less
than ten (10) business days prior written notice from the other, execute,
acknowledge, and deliver to the other party a statement in writing, (a)
certifying that this Lease is unmodified and in full force and effect (or, if
modified, stating the nature of such modifications and certifying that this
Lease as so modified, is in full force and effect), and the date to which the
rental and other charges are paid in advance, if any, and (b) acknowledging that
there are not, to the party's knowledge, any uncured defaults on the part of the
other party hereunder, or specifying such defaults if any are claimed. Any such
statement may be relied upon by any prospective purchaser, encumbrancer,
assignee, or subtenant of all or any portion of the Premises or any purchaser of
Tenant's assets.
SUBORDINATION/NONDISTURBANCE
27. Tenant agrees upon request of Landlord and the holder of any deed of
trust affecting the Premises to subordinate this Lease and its rights hereunder
to the lien of any mortgage, deed of trust or other encumbrance, together with
any conditions, renewals, extensions, or replacements thereof, now or hereafter
placed, charged or enforced against the Landlord's interest in this Lease and
the leasehold estate thereby created, the Premises or the land, building or
improvements included therein, and deliver (but without cost to Tenant) at any
time and from time to time upon demand by Landlord such documents as may be
required to effectuate such subordination; provided, however, that Tenant shall
not be required
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to effectuate such subordination, nor shall Landlord be authorized to effect
such subordination on behalf of Tenant, unless the mortgagee or trustee named in
such mortgage, deed of trust or other encumbrance shall first agree in writing,
for the benefit of Tenant, that so long as Tenant is not in default under any of
the provisions, covenants or conditions of this Lease on the part of Tenant to
be kept and performed, that neither this Lease nor any of the rights of Tenant
hereunder shall be terminated or modified or be subject to termination or
modification, nor shall Tenant's possession of the Premises be disturbed or
interfered with, by any trustee's sale or by an action or proceeding to
foreclose said mortgage, deed of trust or other encumbrance.
In the event any proceedings are brought for foreclosure, or in the
event of the exercise of the power of sale under any mortgage or deed of trust
made by the Landlord covering the Premises, the Tenant shall attorn to the
purchaser upon any such foreclosure or sale and recognize such purchaser as the
Landlord under this Lease.
In the event that the mortgagee or beneficiary of any such mortgage or
deed of trust elects to have this Lease prior to its mortgage or deed of trust,
then and in such event upon such mortgagee or beneficiary giving written notice
to Tenant to that effect, this Lease shall be deemed prior to such mortgage or
deed of trust whether this Lease is dated or recorded prior to or subsequent to
the date of recordation of such mortgage or deed of trust.
Landlord agrees to obtain for Tenant within 30 days after full execution
of this Lease with a non-disturbance agreement from any and all lenders holding
a mortgage, Deed of Trust, or other encumbrance on the Premises. Said
non-disturbance agreement shall be reasonably acceptable to Tenant and contain
the same provisions described above.
PARKING
28. Tenant shall have the right to use the parking facilities provided
by Landlord in common with other tenants of the building in which the Premises
are located subject to any recorded easements. Landlord shall have no obligation
to police the use of the parking facilities, however. Landlord reserves the
right to allocate and/or reserve parking spaces for all tenants.
AUTHORITY
29. Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation, in accordance
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with a duly adopted resolution of the Board of Directors of said corporation or
in accordance with the bylaws of said corporation, and that this Lease is
binding upon said corporation in accordance with its terms except as it may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium, and
similar laws or by other laws affecting creditors' or lessors' rights generally
and except as to the availability of equitable relief.
Partnership Authority. If Tenant is a partnership, each individual
executing this Lease on behalf of said partnership represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
partnership and that this Lease is binding upon said partnership and its
partners in accordance with its terms.
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GENERAL PROVISIONS
30. General Provisions.
(a) Clauses, plats and riders, if any, signed by the Landlord and
the Tenant and endorsed on or affixed to this Lease are a part hereof.
(b) The waiver by Landlord of any term, covenant or condition herein
contained shall not be deemed to be a waiver of such term, covenant or condition
on any subsequent breach of the same or any other terms, covenant or condition
herein contained. The subsequent acceptance of rent hereunder by Landlord shall
not be deemed to be a waiver of any preceding breach by Tenant of any term,
covenant or condition of this Lease, other than the failure of the Tenant to pay
the particular rental so accepted, regardless of Landlord's knowledge of such
preceding breach at the time of the acceptance of such rent.
(c) All notices and demands which may or are required to be given by
either party to the other hereunder shall be in writing. All notices and demands
by the Landlord to the Tenant shall be sufficient if delivered in person or sent
by United States Mail, certified or registered, postage prepaid, addressed to
the Tenant at the Premises or to such other place as Tenant may from time to
time designate in a written notice to the Landlord. All notices and demands by
the Tenant to the Landlord shall be sufficient if delivered in person, by
receipted courier service, or sent by United States Mail, postage prepaid,
addressed to the Landlord at 800 El Camino Real, Suite 175, Menlo Park,
California 94025 or to such other person or place as the Landlord may from time
to time designate in a notice to the Tenant. Any such notice is effective at the
time of delivery or if mailed, two (2) business days after mailing.
(d) If there be more than one Tenant, the obligations hereunder
imposed upon Tenants shall be joint and several.
(e) The paragraph titles to the paragraphs of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part hereof.
(f) Time is of the essence of this Lease and each of its provisions
in which performance is a factor.
(g) The time in which any act provided by this Lease is to be done
is computed by excluding the first day and including the last, unless the last
day is a Saturday, Sunday, or holiday, and then it is also excluded. The term
"holiday" shall mean all holidays specified in Sections 6700 and 6701 of the
Government Code.
(h) The covenants and conditions herein contained,
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subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of the parties hereto.
(i) Neither Landlord nor Tenant shall record this Lease or a short
form memorandum hereof without the prior written consent of the other party.
(j) Upon Tenant paying the rent reserved hereunder and observing and
performing all of the covenants, conditions and provisions on Tenant's part to
be observed and performed hereunder, Tenant shall have quiet possession of the
Premises for the entire term hereof, subject to all the provisions of this
Lease.
(k) This Lease contains all of the agreements of the parties hereto
with respect to any matter covered or mentioned in this Lease. No prior
agreements or understandings pertaining to any such matters shall be effective
for any purpose. No provision of this Lease shall be amended or added except by
an agreement in writing signed by the parties hereto or their respective
successors in interest. This Lease shall not be effective or binding on any
party until fully executed by both parties hereto.
(l) If either party shall be delayed or prevented from the
performance of any act required by this Lease by reason of acts of God, strikes,
lockouts, labor troubles, inability to procure materials, restrictive
governmental laws, or regulations or other cause, without fault and beyond the
reasonable control of the party obligated (financial inability excepted),
performance of such act shall be excused for the period of the delay; and the
period for the performance of any such act shall be extended for a period
equivalent for the period of such delay, provided, however, nothing in this
section shall excuse Tenant from the prompt payment of any rental or other
charge required of Tenant except as may be expressly provided elsewhere in this
Lease.
(m) In the event of any action or proceeding brought by either party
against the other under this Lease, the prevailing party shall be entitled to
recover all costs and expenses including the fees of its attorneys in such
action or proceeding in such amount as the court may adjudge reasonable as
attorney's fees.
(n) In the event of any sale of the building, Landlord shall be and
is hereby entirely freed and relieved of all liability under any and all of its
covenants and obligations contained in or derived from this Lease arising out of
any act, occurrence or omission occurring after the consummation of such sale
and the purchaser, at such sale or any subsequent sale of the Premises shall be
deemed, without any further agreement between the parties or their successors in
interest or between the parties and any such purchaser, to have assumed and
agreed to carry out all of the covenants and obligations of the Landlord under
this Lease.
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(o) Tenant shall not use the name of the building or of the
development in which the building is situated for any purpose other than as an
address of the business to be conducted by the Tenant in the Premises.
(p) Any provision of this Lease which shall prove to be invalid,
void or illegal shall in no way affect, impair or invalidate any other provision
hereof and such other provision shall remain in full force and effect.
(q) No remedy or election hereunder shall be deemed exclusive but
shall, wherever possible, be cumulative with all other remedies at law or in
equity.
(r) This Lease shall be governed by the laws of the State of
California.
(s) Tenant shall not conduct any auction, on or at the Premises or
building without Landlord's prior written consent.
(t) Nothing contained in this Lease shall be deemed or construed by
the parties or by any third person to create the relationship of principal and
agent or of partnership or of joint venture or of any association between
Landlord and Tenant, and neither the method of computation of rent nor any other
provisions contained in this Lease nor any acts of the parties shall be deemed
to create any relationship between Landlord and Tenant other than the
relationship of Landlord and Tenant.
(u) (i) The language in all parts of this Lease shall in all cases
be simply construed according to its fair meaning and not strictly for or
against Landlord or Tenant. Unless otherwise provided in this Lease, or unless
the context otherwise requires, the following definitions and rules of
construction shall apply to this Lease. (ii) In this Lease the neuter gender
includes the feminine and masculine, and the singular number includes the
plural, and the word "person" includes corporation, partnership, firm, or
association wherever the context so requires.
(iii) "Shall", "will", and "agrees" are mandatory, "may" is
permissive.
(iv) All references to the Term of this Lease or the Lease Term
shall include any extensions of such Term.
(v) Parties shall include the Landlord and Tenant named in this
Lease.
(vi) As used herein, the word "sublessee" shall mean
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and include, in addition to a sublessee and subtenant, a licensee,
concessionaire, or other occupant or user of any portion of the leased
Premises or buildings or improvements thereon.
(vii) Whenever the written consent of a party is required under
any provision of this Lease, such consent shall not be unreasonably
withheld or unduly delayed.
BROKERS
31. Each party warrants to the other that it has had no dealings with
any real estate broker or agent in connection with the negotiation of this Lease
other than Cornish & Carey Commercial and Renault & Handley and it knows of no
other real estate broker or agent who is entitled to a commission in connection
with this Lease. Each party agrees to indemnify and hold the other harmless from
any cost, expense, or liability for any compensation, commissions, or charges
claimed by any other broker or agent who alleges he is owed a compensation
through it. Landlord agrees to pay any commissions owed to the above named
brokers and shall hold Tenant harmless from any cost, expense, or liability
therefor.
NONRECOURSE OBLIGATIONS
32. It is expressly agreed by Tenant that all obligations of Landlord
accruing under this Lease shall not constitute personal obligations of Landlord
or of any other persons or entities constituting Landlord and Tenant shall not
seek recourse against any such entities, persons, or any of their assets for
satisfaction of any liabilities with respect to this Lease. In the event Tenant
obtains a judgment against Landlord resulting from any default or claim arising
under this Lease, such judgment may only be satisfied from Landlord's interest
in this Lease and the Premises, and no other real, personal, or mixed property
of Landlord or of any other persons or entities comprising Landlord, wherever
situated, shall be subject to levy to satisfy such judgment.
LIST OF EXHIBITS
33. The following is a complete list of the documents attached hereto
and made a part of this Lease:
EXHIBIT DESCRIPTION
A Floor Plan
The parties hereto have executed this Lease and on the dates specified
immediately adjacent to their respective signatures.
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LANDLORD:
West Bayshore Associates, a general partnership
By /s/ David A. Wollenberg Date 11-20-98
______________________________
/s/ Sigrid S. Banks
_________________________________
Sigrid S. Banks
/s/ F. L. Crist, Jr.
_________________________________
Frank Lee Crist, Jr.
/s/ Allen W. Koering
_________________________________
Allen W. Koering
George O. McKee
_________________________________
George O. McKee
TENANT:
CONNETICS CORPORATION
By /s/ John L. Higgins CFO Date Nov. 20, 1998
______________________________
Title
By Date
______________________________ _______________
Title
30
<PAGE> 1
EXHIBIT 10.62
RELAXIN SCALE-UP AND BULK SUPPLY AGREEMENT
THIS AGREEMENT, effective December 1, 1998, is between Bender + Co Ges.m.b.H.
("BENDER"), a subsidiary of Boehringer Ingelheim, having an address at Dr.
Boehringer-Gasse 5-11, A-1121 Vienna, Austria, and Connetics Corporation
("CONNETICS"), a corporation organized under the laws of Delaware, having an
address at 3400 West Bayshore Road, Palo Alto, California 94303 U.S.A.
WHEREAS, pursuant to the terms of a Confidential Disclosure Agreement dated
January 31, 1997 between BENDER and CONNETICS (under its former name, Connective
Therapeutics, Inc.) the parties have evaluated the feasibility of, and BENDER
has submitted a price quotation for, providing relaxin manufacturing process
scale-up and toll manufacturing services for CONNETICS; and
WHEREAS, BENDER and CONNETICS wishes [sic] to proceed with such services and
define the parties' respective rights and obligations with respect thereto, the
subject of this contract including, e.g., process transfer and implementation,
optimisation of fermentation process, scale-up of fermentation and purification
process and market supply;
NOW, THEREFORE, IT IS HEREBY AGREED as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth
below.
1.1 "AFFILIATE" shall mean in respect of either party any corporation or
business entity controlled by, controlling, or under common control
with BENDER or CONNETICS, respectively. For this purpose "control"
shall mean the direct or indirect beneficial ownership of at least
fifty percent (50%) of the voting stock of, or at least fifty percent
(50%) interest in the income of, such corporation or other business
entity, or such other relationship as, in fact, constitutes actual
control.
1.2 "ATS" shall mean the Austrian Shilling.
1.3 "BENDER IMPROVEMENTS" shall mean all intellectual property, including
knowhow, technology, trade secrets and any inventions, modifications
and improvements to the CONNETICS KNOWHOW, patents or applications for
patents that BENDER develops or conceives individually or in
conjunction with others pursuant to this Agreement. BENDER IMPROVEMENTS
shall under no circumstances mean any intellectual property including
knowhow, technology, trade secrets and any inventions which are not
PRODUCT-related and which derive solely from Benders experience and
knowhow.
1.4 "BENDER'S REPRESENTATIVE" means the person designated by BENDER who
shall be primarily responsible for communications between BENDER and
CONNETICS. As of the EFFECTIVE DATE, Monika Henninger, Ph.D. is
designated as BENDER'S REPRESENTATIVE.
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Page 2
1.5 "BEST EFFORTS" mean [sic] the good faith deployment by BENDER or
CONNETICS, in light of prevailing circumstances and taking into account
third party obligations and commitments, of sufficient of its
resources, capital equipment, material and labor as might reasonably be
expected to timely achieve, or if there is no time limit then achieve
in the shortest practical time, the goals, deliverables and benefits
which are anticipated to accrue to BENDER and CONNETICS hereunder.
1.6 "BLA" shall mean a Biological License Application.
1.7 "cGMP" shall mean Current Good Manufacturing Practices as promulgated
by the FDA (e.g., 21 CFR 210 and 211).
1.8 "CMC" shall mean the Chemistry, Manufacturing and Controls section of
an IND or BLA.
1.9 "COGS" shall mean BENDER's actual cost of the production of PRODUCT, as
determined in accordance with the applicable generally accepted
accounting principles, which shall be comprised of the sum of direct
labor and material and product testing costs incurred in connection
with the manufacture or quality control testing of such PRODUCT, as
well as directly allocable overhead.
1.10 "COMMENCEMENT OF COMMERCIAL MARKETING" shall mean the date of the first
arms' length sale of RELAXIN by CONNETICS or an AFFILIATE, sublicensee
or marketing partner, to a third party forming part of a continuous
program or campaign designed to market RELAXIN (after all the required
regulatory approvals have been granted therefor).
1.11 "COMMERCIAL PRODUCT" shall mean the PRODUCT provided by BENDER to
CONNETICS, its Affiliates, sub-licensees and assigns hereunder in
connection with and following the COMMENCEMENT OF COMMERCIAL MARKETING.
1.12 "CONNETICS' KNOWHOW" shall mean CONNETICS' existing process for the
fermentation, purification and otherwise the manufacture of PRODUCT,
and other knowhow, technology and trade secrets that CONNETICS may
disclose to BENDER related to or useful in the manufacture of PRODUCT.
1.13 "CONNETICS' PATENTS" shall mean all patent applications and valid,
issued and unexpired patents which are now or hereafter owned, licensed
or otherwise controlled by CONNETICS, including any substitutions,
extensions, reissues, renewals, divisions, continuations, or
continuations-in-part, and all foreign counterparts of the foregoing,
which cover and/or would be infringed by the unlicensed development,
manufacture, use or sale of PRODUCT as contemplated by this Agreement,
including but not limited to EP 112149, EP 303033, EP 251615, EP
407401, EP 470976, and/or PCT/US94/06997.
1.14 "CONNETICS' REPRESENTATIVE" means the person designated by CONNETICS
who shall be primarily responsible for communications between CONNETICS
and BENDER. As of the EFFECTIVE DATE, Ernst Rinderknecht, Ph.D.
is designated as CONNETICS' REPRESENTATIVE.
1.15 "EMEA" shall mean the European Medicines Evaluation Agency.
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Page 3
1.16 "EXPERT TEAM" means a team of up to eight (8) people made up of up to
four (4) people nominated by each of CONNETICS and BENDER and notified
to the other, which nominees may be changed from time to time by the
nominating party on notice to the other party. The EXPERT TEAM shall be
responsible for agreeing the design [sic] of protocols, monitoring the
SERVICES and deciding operational and scientific issues arising out of
the SERVICES.
1.17 "FDA" shall mean the United States Food and Drug Administration.
1.18 "FROZEN RELAXIN BULK" shall mean RELAXIN BULK in frozen form.
1.19 "IND" shall mean an Investigational New Drug Application.
1.20 "INFORMATION" shall mean any information of value, not generally known
to the public, provided by CONNETICS to BENDER or conceived or
developed for CONNETICS by BENDER individually or in conjunction with
others under the terms of this Agreement, including (but not limited
to):
o information relating to pharmaceuticals; processes for developing
pharmaceuticals; the development status of pharmaceuticals;
synthetic and manufacturing processes including associated
documentation such as batch records; compounds; compositions of
matter; formulations; medicaments and modes of their
administration; microorganisms; cells or parts thereof, cell
lines and the progeny thereof, including modified or recombined
DNA molecules, and vectors and hosts containing the same; natural
and synthetic antibodies; technical information, such as
clinical, biological, pharmaceutical and characterizing data;
computer programs; apparatus; devices; drawings; designs; plans;
and know-how; and
o business information, such as reports; records; customer lists;
supplier lists; marketing and sales plans; forecasts; financial
information; costs; and pricing information
For purposes of this Agreement, INFORMATION shall not include any
information unrelated to the PRODUCT but related to the BENDER's
technology and knowhow as a biopharmaceutical manufacturer. All
INFORMATION shall be subject to the confidentiality provisions of
SECTION 12.1 below.
1.21 "MCB" shall mean Master Cell Bank.
1.22 "MATERIALS" shall mean all cells, RELAXIN BULK, inclusion bodies,
MINI-C-PRORELAXIN and the like, provided by CONNETICS to BENDER or
conceived or developed for CONNETICS by BENDER individually or in
conjunction with others under the terms of this Agreement. All
MATERIALS shall be treated as information subject to the
confidentiality provisions of SECTION 12.1 and the use/transfer
provisions of SECTION 12.2 below.
1.23 "MHW" shall mean the Japanese Ministry of Health and Welfare.
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1.24 "MINI-C-PRORELAXIN" shall mean the single chain peptide precursor to
RELAXIN, having the amino acid sequence as set forth in Attachment 2 to
the RFP.
1.25 "PRODUCT" shall mean RELAXIN BULK and/or FROZEN RELAXIN BULK provided
by BENDER to CONNETICS, its AFFILIATES, sub-licensees and assigns
hereunder.
1.26 "PROPOSAL" shall mean BENDER's Final Proposal responsive to the RFP,
dated February 16, 1998 (copy attached as EXHIBIT B, and incorporated
herein by this reference).
1.27 "REGULATORY AGENCY" shall mean the FDA, the EMEA, the MHW, or
equivalent body having jurisdiction over the approval for marketing of
pharmaceutical active agents in any country of the world.
1.28 "RELAXIN" shall mean recombinant human relaxin-H2 (CONNETICS' trade
name is ConXn(R)), a peptide having the amino acid sequence as set
forth in Attachment 1 to the RFP.
1.29 "RELAXIN BULK" shall mean Relaxin bulk drug substance produced
according to GMP and released according to the Specifications.
1.30 "REPORT(S)" means the written report(s) prepared by Bender for
Connetics pursuant to this Agreement.
1.31 "RFP" shall mean CONNETICS' Request for Proposal dated February 6, 1997
(a copy of which is attached as EXHIBIT A, and incorporated herein by
this reference).
1.32 "SERVICES" means the services that comprise Groups 1, 2 and 3
activities to be carried out by BENDER as described in the PROPOSAL as
may be amended from time to time pursuant to this Agreement.
1.33 "SPECIFICATIONS" shall mean CONNETICS' specifications for RELAXIN BULK
and RELAXIN FROZEN BULK [sic] as set forth in Attachment 5 to the RFP.
The SPECIFICATIONS may be revised, and additional SPECIFICATIONS (e.g.,
for Master Cell Bank and Working Cell Bank) created, only by mutual
agreement of the parties, set forth in writing signed by BENDER and
CONNETICS as an amendment to this Agreement. Any revision to the
SPECIFICATIONS shall take into account the then-current requirements of
regulatory authorities with regard to the manufacture of recombinant
proteins.
1.34 "STEERING COMMITTEE" means a team of up to eight (8) people,
potentially including designated members of the EXPERT TEAM, made up of
up to four (4) people nominated by each of CONNETICS and BENDER and
notified to the other party. The nominees may be changed from time to
time by the nominating party on notice to the other party. The STEERING
COMMITTEE shall be responsible for reviewing issues on which the EXPERT
TEAM have been unable to reach agreement and where possible make
decisions arising out of such issues as well as carry out the specific
functions provided for it by this Agreement.
1.35 "WCB" shall mean Working Cell Bank.
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2. TECHNOLOGY TRANSFER AND COLLABORATION GUIDELINES
2.1 GENERAL DESCRIPTION. CONNETICS shall transfer to BENDER certain
INFORMATION and MATERIALS as necessary for BENDER to perform the
scale-up and manufacturing tasks as provided in this Agreement.
2.2 CONNETICS' KNOWHOW. CONNETICS shall provide necessary INFORMATION and
MATERIALS, including but not limited to:
2.2.1 To Commence Time-schedule
[*]
[*]
[*]
[*]
[*]
[*]
[*]
2.2.2 Additional
[*]
[*]
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* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
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2.3 BASIC PRODUCTION ASSUMPTIONS. All obligations and deliverables of
BENDER stated in this Agreement, particularly with respect to the
timeline, scale, PRODUCT yield, and process scalability are based on
the following production assumptions provided in the RFP by CONNETICS:
Fermentation
[*]
Downstreaming
[*]
[*]
[*]
2.4 TIMETABLE.
2.4.1 CONNETICS shall timely deliver the INFORMATION and MATERIALS
described in SECTION 2.2 to BENDER.
2.4.2 The time schedule for completion of BENDER's obligations under
this Agreement, as set forth in the Attachments 7 and 8 of the
PROPOSAL, shall commence upon BENDER's receipt of the
Information and MATERIALS provided under SECTION 2.2.1 and the
first meeting of the EXPERT TEAM (to the extent that agreement
on tasks, protocols and documentation is needed prior to
commencement). Time is of the essence in this Agreement.
2.4.3 BENDER shall, within 4 weeks of receipt of the MASTER CELL
BANK documentation and sample, evaluate and advise CONNETICS
as to the sufficiency thereof for proceeding with the Group 1
activities and, if acceptable, proceed promptly as provided
under SECTION 3, below. To the extent necessary, BENDER shall
perform comprehensive testing as described in the quotation
dated April 16, 1998 (a copy of which is attached as EXHIBIT C
and incorporated herein by this reference) and according to
all applicable regulatory guidelines, draft guidelines, and
regulations. If unacceptable, BENDER shall advise CONNETICS as
to the reasons therefor, whereupon:
(a) if CONNETICS agrees with BENDER's evaluation,
CONNETICS shall [*] and BENDER shall proceed to
generate a new MASTER CELL BANK and the required
corresponding documentation, or
(b) if CONNETICS disagrees with BENDER's evaluation,
BENDER and CONNETICS shall endeavor in good faith to
resolve any differences as to the sufficiency of the
MASTER CELL BANK.
2.5 TECHNICAL SUPPORT. CONNETICS shall, throughout the term of this
Agreement, timely respond to BENDER's questions and requests for
assistance in receiving the INFORMATION and MATERIALS, implementing the
PROPOSAL and carrying out its duties
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 7
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hereunder. CONNETICS shall provide such reasonable technical support at
its own expense, including access to CONNETICS' expert personnel.
2.6 MEETINGS. Throughout the term of this Agreement, the parties shall
designate representatives to the EXPERT TEAM and the STEERING
COMMITTEE, having technical and business expertise relating to the
PRODUCT, to meet no less than two (2) times per year to discuss issues
and define tasks, protocols and documentation relating to the Group 1,
2 and 3 activities and commercial supply.
2.7 PERFORMANCE. Throughout the term of this Agreement, the parties shall
employ their BEST EFFORTS to timely and efficiently achieve the goals
and provide the deliverables as set forth herein. BENDER's activities
and deliverables hereunder, and CONNETICS review and
acceptance/rejection thereof shall be consistent with the
SPECIFICATIONS and with the protocols and documentation as defined by
the EXPERT Team.
2.8 DELIVERY OF PRODUCTS AND SAMPLES. PRODUCTS and samples to be delivered
by BENDER pursuant to this Agreement shall be delivered to such
recipient as CONNETICS may specify, and shall be sent through a
recognized courier having access to Customs warehouses to allow for
addition of refrigerant (e.g., dry ice, cardice) if needed. Containers
for samples and shipment shall be specified by the EXPERT TEAM, if
necessary. Dispatch costs, including insurance, will be borne by
CONNETICS. All shipments shall be F.O.B. BENDER's Vienna facility.
2.9 DELIVERY OF DOCUMENTS. Documents to be delivered pursuant to this
Agreement shall be addressed to CONNETICS' REPRESENTATIVE or BENDER'S
REPRESENTATIVE, as the case may be, and may initially be sent by
facsimile, confirmed with hard copies by courier. In all cases in this
Agreement, the list of documents to be provided is intended to be by
way of example or minimum requirements, and is not an exhaustive list
of all documentation that may be required to be provided.
2.10 QUALITY MANAGEMENT SYSTEM. BENDER has established a quality management
system in accordance with requirements and guidelines of the requisite
authorities. Nevertheless, BENDER acknowledges that the PRODUCT is
recorded to be manufactured in accordance with cGMP under FDA
regulations. In the event that CONNETICS has any reasonable objections
to documentation in connection with services performed pursuant to this
Agreement, BENDER shall implement those changes needed to meet cGMP.
WITH RESPECT TO CHANGES NOT NEEDED TO meet cGMP, BENDER may evaluate
the objections and may in BENDER's sole discretion implement such
suggestions, but BENDER will implement such discretionary changes only
if they are not parallel to BENDER's existing GMP procedures and not
contrary to BENDER's overall Quality Management System.
3. PROCESS SCALE-UP (GROUP 1)
3.1 GENERAL DESCRIPTION. As set forth in the RFP and the PROPOSAL, BENDER
shall commence the Group 1 activities by completing its receipt of the
technology transfer, and ordering equipment and supplies. BENDER will
[*] in consultation with CONNETICS, into the design of scaled-up
processes. Bender will [*] and deliver the
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 8
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corresponding documentation and product samples to CONNETICS. Upon
conclusion of the Group 1 activities BENDER and CONNETICS shall review
the SPECIFICATIONS and agree upon such revisions as may be deemed
necessary, amending the SPECIFICATIONS for the commencement of Group 2
activities.
3.2 BENDER'S DELIVERABLES. BENDER shall complete the Group 1 activities as
set forth in the RFP and the PROPOSAL, including but not limited to
timely delivery of the following:
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 9
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[*]
All PRODUCT amounts and runs described in this SECTION 3.2 are based on
the Basic Production Assumptions set forth in SECTION 2.3.
Delivery of samples shall be made consistent with SECTION 2.8, unless
otherwise specified, and addressed to CONNETICS' REPRESENTATIVE.
Delivery of documents shall be made consistent with SECTION 2.9, and
addressed to CONNETICS' REPRESENTATIVE.
3.3 CONNETICS' PARTICIPATION. In addition to the technology transfer and
technical support, as set forth in the RFP, CONNETICS shall:
[*]
[*]
[*]
[*]
[*]
[*]
3.4 REGULATORY DOCUMENTS. If the RELAXIN BULK manufactured under the Group
1 activities meets the SPECIFICATIONS, BENDER shall provide the
necessary resources to prepare and either deliver to CONNETICS (or file
directly, as appropriate and to the extent requested by CONNETICS given
the understanding that additional charges may apply), the following
materials written in the English language concerning the manufacture of
PRODUCT for use by CONNETICS in seeking regulatory approval for use of
this material in clinical trials:
o All site-relevant and CMC-relevant documents necessary to the
filing of an IND amendment by CONNETICS to support the testing
of PRODUCT produced by BENDER in human clinical trials shall
be filed or delivered to CONNETICS within [*] days of
CONNETICS acceptance and release of each cGMP RELAXIN BULK lot
(the specific identification of such documents to be mutually
agreed upon at such time).
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 10
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CONNETICS shall be solely responsible for processing all data and
reports as needed to file regulatory documents, such as the IND, BLA
and, eventually, for registration of the PRODUCT.
4. PROCESS SCALE-UP (GROUP 2)
4.1 GENERAL DESCRIPTION. As set forth in the RFP and the PROPOSAL, and in
consideration of the Basic Production Assumptions set forth in SECTION
2.3, BENDER shall produce three cGMP conformance lots of PRODUCT of at
least [*] each.
4.2 BENDER'S DELIVERABLES. BENDER shall complete the Group 2 activities as
set forth in the RFP and the PROPOSAL, including but not limited to
timely delivery of the following:
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
Delivery of samples shall be made consistent with SECTION 2.8, unless
otherwise specified, and addressed to CONNETICS' REPRESENTATIVE.
Delivery of documents shall be made consistent with SECTION 2.9, and
addressed to CONNETICS' REPRESENTATIVE.
All PRODUCT amounts and runs described in this SECTION 4.2 are based on
the Basic Production Assumptions set forth in SECTION 2.3, and BENDER
shall use its BEST EFFORTS to produce the lots described in this
SECTION 4.2. Subject to SECTION 6.2, conformance with SPECIFICATIONS
shall be at CONNETICS' risk.
4.3 CONNETICS' PARTICIPATION. In addition to the technology transfer and
technical support, as set forth in the RFP, CONNETICS shall:
[*]
[*]
4.4 REGULATORY DOCUMENTS. If the RELAXIN BULK manufactured under the Group
2 activities meets the SPECIFICATIONS, BENDER shall provide the
necessary resources to prepare and either deliver to CONNETICS (or file
directly, as appropriate and to the extent requested by CONNETICS given
the understanding that additional charges may apply), the following
materials written in the English language concerning the
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 11
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manufacture of PRODUCT for use by CONNETICS in seeking regulatory
approval for use of this material in clinical trials:
[*]
5. PROCESS SCALE-UP (GROUP 3)
5.1 GENERAL DESCRIPTION. As set forth in the RFP and the PROPOSAL, BENDER
shall complete the following:
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
5.2 BENDER'S DELIVERABLES. BENDER shall complete the Group 3 activities as
set forth in the RFP and the PROPOSAL, including but not limited to
timely delivery of the following:
[*]
[*]
[*]
[*]
[*]
[*]
[*]
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 12
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[*]
Delivery of samples shall be made consistent with SECTION 2.8, unless
otherwise specified, and addressed to CONNETICS' REPRESENTATIVE.
Delivery of documents shall be made consistent with SECTION 2.9, and
addressed to CONNETICS' REPRESENTATIVE.
5.2 CONNETICS' PARTICIPATION. In addition to the technology transfer and
technical support, as set forth in the RFP, CONNETICS shall:
[*]
[*]
[*]
[*]
[*]
[*]
[*]
5.4 REGULATORY DOCUMENTS. BENDER shall use its BEST EFFORTS and provide the
necessary resources to prepare and either deliver to CONNETICS (or file
directly, as appropriate and to the extent requested by CONNETICS given
the understanding that additional charges may apply), the following
materials written in the English language concerning the manufacture of
PRODUCT for use by CONNETICS in seeking regulatory approval for
RELAXIN:
[*]
BENDER shall perform its obligations under this Agreement according to
all applicable regulatory guidelines, draft guidelines, and
regulations. The parties shall consult with each other fully concerning
the scope and content of all regulatory filings to be made related to
BENDER's manufacture of PRODUCT. If the parties determine that BENDER
should make any filing directly, then a full copy of each such filing
and any subsequent amendments shall be provided to CONNETICS
simultaneously with its filing by BENDER. BENDER will provide letter(s)
granting CONNETICS and its designees the right of cross-reference to
any BENDER filings as necessary.
5.5 If additional analytical testing and/or additional production runs are
required by the FDA, EMEA or other REGULATORY AGENCY during/after
registration, BENDER will perform such testing and/or runs as required.
The cost of such additional testing/runs will be borne by CONNETICS
unless the requirement results from an error or omission caused by
BENDER's negligence.
6. TESTING, ACCEPTANCE / REJECTION OF GROUP 1 AND 2 MATERIALS
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 13
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6.1 Promptly upon receipt of RELAXIN BULK samples from BENDER, CONNETICS
shall submit the samples to at least two (2) test methods (selected
from the SPECIFICATIONS) for confirmation of consistency with
SPECIFICATIONS. At its option, CONNETICS may perform the confirmatory
testing itself or through an independent testing laboratory.
6.1.1 BENDER shall be promptly notified of CONNETICS' acceptance or
rejection of all samples delivered in the Group 1 and 2
activities. Any rejection shall be accompanied by the detailed
reasons therefor.
6.1.2 BENDER and CONNETICS, initially through the EXPERT TEAM and if
necessary through the STEERING COMMITTEE, shall discuss any
rejection and endeavor to agree upon a satisfactory and timely
resolution of the matter. If unable to agree upon a
resolution, CONNETICS may decide whether to perform tests on
additional lots at its own cost as provided in SECTION 6.2
below.
6.2 As necessary, replacement lots shall be provided as soon as possible
using BENDER's BEST EFFORTS to expedite completion and adherence to the
time schedule, for delivery of the following:
[*]
[*]
[*]
Except as provided below, CONNETICS bears the risk that the medium and
large scale lots produced in the Group 1 and 2 activities will not meet
SPECIFICATIONS. CONNETICS shall be responsible for payment of BENDER's
COGS for production of any replacement lots; the price of such
additional lots shall be based on the cost of previous implementation
runs, and shall not exceed:
[*]
[*]
[*]
If it is determined that the PRODUCT did not meet the SPECIFICATIONS
through BENDER's negligent act or omission, all costs of replacement
will be borne by BENDER.
7. PAYMENTS FOR GROUPS 1, 2 AND 3 ACTIVITIES
7.1 CONNETICS shall pay to BENDER, and BENDER agrees to accept as
compensation for BENDER's activities and all deliverables pursuant to
Groups 1, 2 and 3:
7.1.1 GROUP 1. [*] The first installment is due within thirty (30)
days after CONNETICS receives BENDER's invoice submitted upon
the start of BENDER's time schedule
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 14
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pursuant to SECTION 2.4.2, with each respective subsequent
installment due on the anniversary [*] months thereafter.
(a) If BENDER [*] as provided in SECTION 2.4.3, CONNETICS
shall pay BENDER up to an additional [*] as set forth
in EXHIBIT C, payable within thirty (30) days of
CONNETICS' receipt of BENDER's report and invoice upon
completion of the evaluation.
(b) If BENDER [*] as provided in SECTION 2.4.3(a),
CONNETICS shall pay BENDER an additional [*], payable
within thirty (30) days after CONNETICS notifies BENDER
that it agrees with BENDER's evaluation.
7.1.2 GROUP 2. [*] payable in [*]
installments, respectively, of [*]. The first installment is
due within thirty (30) days after CONNETICS receives BENDER's
invoice submitted upon commencement of the [*] pursuant to
SECTION 4.1, with each respective subsequent installment due
on the anniversary [*] thereafter.
7.1.3 GROUP 3. [*] payable in [*] equal quarterly installments
of [*]. The first installment is due within thirty (30) days
after CONNETICS receives BENDER's invoice submitted upon
commencement of [*] pursuant to SECTION 5.1, with each
respective subsequent installment due on the anniversary [*]
thereafter.
7.1.4 EQUIPMENT. CONNETICS shall reimburse BENDER for the purchase
of equipment as specified at page 22 of the PROPOSAL for such
equipment investments, estimated at a total of [*] in [*]
installments, of which the first [*] shall be [*]. The first
installment is due within thirty (30) days after CONNETICS
receives BENDER's invoice together with proof of purchase of
the equipment submitted upon the start of BENDER's time
schedule pursuant to SECTION 2.4.2, with each respective
subsequent installment due on the anniversary [*] thereafter.
Any difference between the actual and estimated costs of such
equipment shall be paid/refunded with the last quarterly
installment.
7.2 CURRENCY. CONNETICS' payments pursuant to SECTIONS 7.1 and 8.6 shall be
made in Austrian Shillings. Any payment under this Agreement which
becomes due can be
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 15
Page 15
made at the option of Connetics in ATS or in such other European
currency which the European Union might have established then as a
valid means or [SIC] payment in the European Union or some countries of
the European Union. If the ATS is replaced by such European currency
completely at some time in the future, payments becoming due thereafter
shall be made in such European currency at the then-official conversion
rate as reported in the Wall Street Journal.
7.3 DELAYS. In case of delays of payment, BENDER has the right to
discontinue subsequent activities until such payment has been received.
8. COMMERCIAL MANUFACTURING - ORDER, SUPPLY AND PAYMENT
8.1 SUPPLY. BENDER shall manufacture and supply CONNETICS' worldwide
requirements of COMMERCIAL PRODUCT. BENDER will sell or otherwise
provide the COMMERCIAL PRODUCT for sale or use only to CONNETICS and
its AFFILIATES, licensees, marketing partners and other designees
during the term of this Agreement. Subject to CONNETICS' compliance
with SECTIONS 8.2 and 8.4, BENDER is committed and prepared to supply
COMMERCIAL PRODUCT to CONNETICS. The PRODUCT will be manufactured,
packaged, stored and prepared for shipping in accordance with cGMP, in
an FDA-inspected and certified facility, currently envisioned to be
BENDER's facility in Vienna, Austria.
8.2 PLANT CAPACITY RESERVATION.
8.2.1 INITIAL RESERVATION. CONNETICS reserves the respective space
and time in each of the fermentation plant, secondary recovery
unit, and purification area to product [SIC] [*] of PRODUCT
per [*] presently estimated at [*] in the fermentation plant,
[*] for secondary recovery [*], and [*] in the purification
area. CONNETICS initially reserves such space and time for a
period of [*] commencing within six (6) months of completion
of CONNETICS' Phase III clinical trial and contingent upon the
successful outcome thereof. The reservation of capacity for
production of [*] of PRODUCT is based on the Basic Production
Assumptions set forth in SECTION 2.3. (Commencement of
reservation to be determined - currently estimated
approximately [*].)
8.2.2 EXTENSION OF INITIAL RESERVATION. CONNETICS' initial
reservation may be extended by one (1) or more full years, at
any time up to the end of the third year of the initial
reservation. CONNETICS may make further extensions at any time
thereafter, provided that such extension is made with at least
four (4) years remaining of CONNETICS' then-existing
reservation. The grant of any extension requested after
CONNETICS' existing reservation has less than four years
remaining shall be at the sole discretion of BENDER.
8.2.3 LOWERING RESERVED CAPACITY. After the third year of the
initial reservation, the reservation of capacity may be
decreased below that required for [*] of PRODUCT per [*]
proportional to CONNETICS' actual requirements, provided that
(a) CONNETICS shall give BENDER one (1) year's notice of such
decrease,
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 16
Page 16
and (b) the reserved capacity shall never fall below [*]. If
CONNETICS' actual requirements should fall below [*],
CONNETICS shall pay BENDER an amount equal to the costs
actually incurred plus fixed costs for the difference between
CONNETICS' actual requirements and [*].
8.2.4 INCREASING RESERVED CAPACITY. CONNETICS' reservation of
capacity may be increased above that required for [*] of
PRODUCT per [*], provided that CONNETICS shall give BENDER
one (1) year's notice of such increase and subject to the
availability of space/time therefor upon receipt of such
notice by BENDER.
8.2.5 OPTION TO INCREASE THROUGHPUT. It is foreseen that the
throughput per unit time may increase, e.g., [*],
during the term of CONNETICS' reservation with the result that
CONNETICS may proportionally increase the quantities in its
purchase orders without increase in the associated fixed costs
or reservation.
8.2.6 FURTHER SCALE-UP OF PROCESS. If during the term of the
Agreement CONNETICS' actual requirements surpass the capacity
of the process employed by BENDER (e.g., lots of [*] or
[*]), BENDER and CONNETICS commit to good faith negotiations
regarding further scale-up of the process, its implementation
and regulatory approval.
8.3 FORECASTS. Commencing on March 1, 1999, and on each anniversary
thereafter, CONNETICS shall provide BENDER with a 12-month forecast for
BENDER's use in budgeting and production planning.
8.4 PURCHASE ORDERS. Written purchase orders will be placed directly by
CONNETICS or its designated representatives with BENDER no later than
June 30 of each year for the next full calendar year, for up to the
amount of the full reserved capacity for that year, including the
following details: quantity, requested shipping date, shipping
instructions and CONNETICS' order reference number including the price
calculated according to the volume ordered.
8.5 INVOICE. BENDER shall provide CONNETICS with a quarterly invoice, which
CONNETICS shall pay upon receipt of proof of delivery of COMMERCIAL
PRODUCT (together with confirmation that the PRODUCT was shipped or
placed in storage), and with the corresponding Certificate of Analysis
on a timely basis. CONNETICS shall pay each such invoice:
8.5.1 if by wire transfer or other electronic payment, within
thirty-five (35) days of receipt; and
8.5.2 if by other than electronic payment, within thirty (30) days
of receipt;
8.5.3 provided, that payment by any means within ten (10) days of
receipt shall entitle CONNETICS to a two percent (2%) discount
of the full invoice price.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 17
Page 17
8.6 COMMERCIAL PRICE.
8.6.1 Calculation of Commercial Price. BENDER shall provide RELAXIN
BULK and FROZEN RELAXIN BULK to CONNETICS. The commercial
price shall be the same for RELAXIN BULK and FROZEN RELAXIN
BULK, calculated according to the same formula as follows:
[*]
where:
[*]
The price of the fixed costs and the variable price per kg
of RELAXIN BULK and FROZEN RELAXIN BULK will increase year
by year due to the average Austrian trade index forecast
of June (AATX) shown in the statistic monthly report of
the Oesterreichische Nationalbank, Section 6.2.0 (by way
of example, the AATX for 1998 is 1.2%).
The mechanism for calculating the commercial price of
RELAXIN BULK and FROZEN RELAXIN BULK is shown at the table
set forth in EXHIBIT D.
8.6.2 Cost Savings. As an incentive to work together to reduce COGS,
BENDER and CONNETICS shall share equally in any savings of
actual manufacturing costs during the term of this Agreement.
8.7 MOST FAVORED CUSTOMER. BENDER's calculation of COGS for PRODUCT under
this Agreement shall be no less favorable to CONNETICS than BENDER's
calculation of cost of production for services of a similar scope
provided to any third party.
8.8 RISK OF LOSS. Deliveries of each order or portion thereof will be
F.O.B. delivery to CONNETICS' forwarding agent, shipper or such other
recipient as may be specified by CONNETICS and accepted by BENDER, or
documented placement in storage facility at BENDER, as applicable.
8.9 INSURANCE, SHIPPING AND TAXES.
8.9.1 CONNETICS and BENDER shall cooperate in evaluating the most
cost effective manner of securing adequate insurance for the
PRODUCT during shipment.
8.9.2 BENDER and CONNETICS shall cooperate in seeking/applying for
all available waivers, exclusions, exemptions, rebates and the
like with respect to potential taxes on the PRODUCT.
8.9.3 Dispatch costs, including insurance, will be borne by
CONNETICS.
8.10 SHORTFALL. If CONNETICS' purchase orders for a given calendar year fall
below CONNETICS' reservation for that year, CONNETICS' sole liability
shall be to pay
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 18
Page 18
BENDER in the amount of BENDER's fixed costs (as set forth in EXHIBIT
D) for any such shortfall.
8.11 STORAGE OF FROZEN BULK. BENDER shall store FROZEN RELAXIN BULK on terms
to be negotiated when, and if, CONNETICS requests such storage, and
depending on BENDER's capacity at the time.
9. QUALITY ASSURANCE - TESTING, ACCEPTANCE / REJECTION OF COMMERCIAL
PRODUCT
9.1 AUDITS
9.1.1 CONNETICS may, prior to the commencement of BENDER's time
schedule as provided in SECTION 2.4.2, conduct an initial, in
depth GMP audit of BENDER's manufacturing operations, storage
facilities and any BENDER QC laboratory at which COMMERCIAL
PRODUCT testing is to be performed, including BENDER's
relevant records (or the corresponding facilities and records
of any of BENDER's sub-contractors), and may terminate this
Agreement with no legal or financial liability if, as a result
of the audit, deficiencies are uncovered which, after good
faith discussion by the STEERING COMMITTEE, in the view of
CONNETICS cannot be adequately or appropriately resolved.
9.1.2 CONNETICS may conduct periodic, typically annual, re-audits of
BENDER's manufacturing operations, storage facilities and QC
laboratories and records. If, as a result of the audit,
deficiencies are uncovered which, after good faith discussion
by the STEERING COMMITTEE, in the view of CONNETICS cannot be
adequately or appropriately resolved, CONNETICS may terminate
this Agreement pursuant to SECTION 13.3.
9.1.3 In addition to the annual re-audits provided for under SECTION
9.1.2, responsive to any specific concern CONNETICS may
conduct additional audits whenever in good faith deemed
necessary; CONNETICS shall give BENDER such notice as is
reasonably possible under the circumstances giving rise to
such concern.
9.2 CONNETICS REPRESENTATIVE AT BENDER. Upon reasonable notice to BENDER,
CONNETICS may, at CONNETICS' expense, place a company representative
on-site at BENDER's manufacturing facility during the manufacture of
the PRODUCT hereunder. Subject to the following sentence, such
representative shall have full, unfettered access to all operations,
documents, and records (excluding any cost calculations) that pertain
to the manufacture of the PRODUCT. CONNETICS' REPRESENTATIVE at BENDER
shall accept BENDER's procedures regulating external customer
relationships (including GMP training, hygiene training, health
examination, guarantee of confidentiality, and controlled access to
documents) and will obtain BENDER's agreement prior to any active
participation in the process or analytical testing.
<PAGE> 19
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9.3 DOCUMENTATION AND RECORDS.
9.3.1 CONNETICS' review and approval of documents is required prior
to the first commencement of any cGMP manufacturing operation
hereunder, including but not limited to the following:
[*]
[*]
[*]
[*]
[*]
[*]
[*]
[*]
9.3.2 CONNETICS' review and approval of the BENDER's facilities and
controls (including any new construction and equipment) and
the sources of raw materials is required prior to the first
commencement of any cGMP manufacturing operation hereunder.
9.3.3 BENDER shall notify CONNETICS in advance of any proposed
changes to any of the documents, facilities, controls and
sources listed in SECTION 9.3.1 and 9.3.2, and shall be
included in the review cycle, and CONNETICS' written approval
shall be required for any such proposed changes. In addition
to requiring CONNETICS' written approval, any proposed changes
requiring FDA pre-approval shall not be implemented without
providing CONNETICS copies of the documentation of such
pre-approval.
9.3.4 BENDER shall provide CONNETICS with official copies of all of
the approved documents listed in this SECTION 9.3.
9.3.5 BENDER shall provide CONNETICS with necessary records in
connection with the production process, including but not
limited to the following:
[*]
[*]
[*]
[*]
[*]
[*]
9.4 QC TESTING. CONNETICS reserves the right to have COMMERCIAL
PRODUCTS tested by CONNETICS or by one or more qualified third
party testing facilities (the cost of implementation and
cross-validation at CONNETICS or a CONNETICS' third party testing
facility shall be borne by CONNETICS). In that regard, it is
envisioned that BENDER shall be required to provide:
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 20
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[*]
[*]
[*]
9.5 REGULATORY INSPECTIONS.
9.5.1 BENDER shall promptly notify CONNETICS in advance of any
pre-approval inspection of BENDER's facilities related to the
approval of PRODUCT, and permit CONNETICS to have a
representative present at such inspection.
9.5.2 BENDER shall promptly notify CONNETICS of any planned
REGULATORY AGENCY inspection of BENDER's facilities related to
the PRODUCT prior to the expected date of the inspection, and
permit CONNETICS to have a representative present at such
inspection.
9.5.3 BENDER shall notify CONNETICS of any unplanned REGULATORY
AGENCY inspection of BENDER's facilities related to the
PRODUCT immediately upon notice or if BENDER has received no
notice immediately upon commencement thereof, and permit
CONNETICS to have a representative present at such inspection.
9.5.4 BENDER warrants that it is not the subject of any regulatory
action arising from a REGULATORY AGENCY inspection of BENDER's
facilities for any purpose. If BENDER becomes the subject of
any regulatory action arising from a REGULATORY AGENCY
inspection of BENDER's facilities for any purpose, BENDER
shall promptly notify CONNETICS of such action, the extent to
which it affects the PRODUCT, and of BENDER's plans to rectify
the matters underlying such action. BENDER shall bear the full
financial and operational responsibility for rectifying the
matters underlying such action.
9.6 Prior to each shipment of the COMMERCIAL PRODUCT (or, alternatively,
upon documented proof of delivery of the PRODUCT to storage), BENDER
shall provide to CONNETICS a Certificate of Analysis attesting to the
quality of each batch contained within the shipment, including review
and approval by the appropriate quality control unit of all batch
production and control records. BENDER shall also provide to CONNETICS
a file sample from each lot of COMMERCIAL PRODUCT to be shipped (in a
quantity sufficient for complete bulk release testing, if necessary) to
be retained by CONNETICS. BENDER shall maintain all necessary records
and samples, and provide CONNETICS with such documentation as may be
required for compliance with FDA and other applicable regulations.
9.7 BENDER warrants that the COMMERCIAL PRODUCT will be prepared and tested
in accordance with cGMP and shall meet the SPECIFICATIONS.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 21
[*] Page 21
9.8 After completion of final PRODUCT manufacture, CONNETICS will submit
the biologic product (filled and finished vials of RELAXIN) to at least
two (2) test methods (selected from the SPECIFICATIONS) for
confirmation of consistency with SPECIFICATIONS. At its option,
CONNETICS may perform the confirmatory testing itself or through an
independent testing laboratory. If any failure to conform with
SPECIFICATIONS can be traced to the respective COMMERCIAL PRODUCT:
9.8.1 BENDER shall be promptly notified of CONNETICS' rejection
together with the detailed reasons therefor.
9.8.2 BENDER and CONNETICS shall discuss any rejection and endeavor
to agree upon a satisfactory and timely resolution of the
matter. If unable to agree upon a resolution, any dispute as
to acceptability or conformance with SPECIFICATIONS shall be
resolved as provided in SECTION 9.8.3 below.
9.8.3 Any dispute over acceptability or conformance with
SPECIFICATIONS shall be decided finally by a qualified
independent laboratory (the selection of which shall be
approved by the EXPERT TEAM), which will repeat the disputed
tests following the methods referenced in the SPECIFICATIONS.
If the independent laboratory determines that the COMMERCIAL
PRODUCT did not meet the SPECIFICATIONS, all costs incurred in
connection with the investigation by such independent
laboratory and the cost of replacement of COMMERCIAL PRODUCT
(including fill and finishing) will be borne by BENDER. If the
independent laboratory determines that the COMMERCIAL PRODUCT
did meet the SPECIFICATIONS, and is otherwise free of fault by
BENDER, then the costs incurred with the investigation by such
independent laboratory and the cost of any replacement of
COMMERCIAL PRODUCT will be borne by CONNETICS.
9.8.4 As necessary, replacement lots shall be provided as soon as
possible using BENDER's BEST EFFORTS to expedite completion.
10. WARRANTY AND INDEMNIFICATION
10.1 WARRANTIES. BENDER warrants to CONNETICS that, when delivered, (a) the
COMMERCIAL PRODUCT will conform in all respects to the SPECIFICATIONS,
as then in effect, and (b) the PRODUCT will not be adulterated or
misbranded within the meaning of the Federal Food, Drug and Cosmetic
Act.
10.2 INDEMNIFICATION BY BENDER. BENDER shall indemnify, defend and hold
harmless CONNETICS from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) and damages
(excluding consequential damages) arising out of or resulting from any
willful or negligent act or omission by BENDER relating to the subject
matter of this Agreement or any defect in the manufacture or failure to
deliver PRODUCT in accordance with BENDER's warranties (except to the
extent such cost, claim, suit, expense or damage arose or resulted from
any negligent act or omission by CONNETICS), provided that CONNETICS
gives reasonable notice to BENDER of any such claims or action, tenders
the defense of such claim or action to BENDER and assists BENDER at
BENDER's expense in defending such claim or action and does not
compromise or settle such claim or action without BENDER's prior
written consent.
<PAGE> 22
Page 22
10.3 INDEMNIFICATION BY CONNETICS. CONNETICS shall indemnify, defend and
hold harmless BENDER from and against all third party costs, claims,
suits, expenses (including reasonable attorney's fees) and damages
(excluding consequential damages) arising out of or resulting from any
willful or negligent act or omission by CONNETICS relating to the
subject matter of this Agreement or the use by or administration to any
person of a PRODUCT that arises out of this Agreement (except to the
extent such cost, claim, suit, expense or damage arose or resulted from
any negligent act or omission by BENDER or any defect in the
manufacture of PRODUCT by BENDER), provided that BENDER gives
reasonable notice to CONNETICS of any such claims or action, tenders
the defense of such claim or action to CONNETICS and assists CONNETICS
at CONNETICS' expense in defending such claim or action and does not
compromise or settle such claim or action without CONNETICS' prior
written consent.
11. BACK-UP SUPPLIER; LICENSES
11.1 ALTERNATE SUPPLIER. In order that CONNETICS is not dependent on a
single supplier of PRODUCT and recognizing that regulatory requirements
dictate that all PRODUCT utilized by CONNETICS should be manufactured
by the same process, BENDER agrees pursuant to SECTION 11.2 that
CONNETICS may itself use, or have another supplier use, the processes
including any BENDER IMPROVEMENTS, to produce annually two (2) 500 gram
lots of PRODUCT. In addition to the foregoing, in the event BENDER
fails for any reason, including without limitation, a force majeure
event described in SECTION 14.5, to deliver COMMERCIAL PRODUCT in the
full amounts set forth in CONNETICS' purchase orders for a continuous
period of 120 days, then CONNETICS shall have the right to make or have
made all of its requirements of COMMERCIAL PRODUCT for the duration of
BENDER's inability to supply.
11.2 CONNETICS agrees to provide the first opportunity to qualify as a
second source for Product to a BENDER AFFILIATE in North America or
Europe, at costs, if any, to be negotiated in good faith. If no such
Affiliate is qualified, BENDER shall assist CONNETICS in transferring
the process to an alternate supplier for PRODUCT by providing
reasonable technical assistance and documentation as necessary.
BENDER's obligations under this SECTION 11.2 shall be subject to the
availability of BENDER personnel and time, provided that BENDER shall
not unreasonably withhold such assistance. In no event shall BENDER be
responsible for costs relating to (a) process transfer and
implementation at the backup supplier, (b) transfer of any process
improvements, (c) implementation of analytical methods or qualification
of the analytical laboratories of the backup supplier, or (d) any costs
for compliance testing and verifying PRODUCT identity between BENDER
and the backup supplier.
11.3 Unless CONNETICS selects a Bender AFFILIATE to qualify as CONNETICS'
second source, CONNETICS shall reimburse BENDER'S out-of-pocket
expenses in providing technical assistance pursuant to SECTION 11.2.
<PAGE> 23
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12. INTELLECTUAL PROPERTY
12.1 CONFIDENTIALITY.
12.1.1 In order to facilitate this Agreement it will be necessary for
the parties to exchange certain proprietary information, each
recipient of which agrees to retain such information in strict
confidence and not to disclose or transfer Information to any
party (except to an AFFILIATE of BENDER under similar
conditions of confidentiality) or make any use of information
except as authorized by the terms of this Agreement or
otherwise in writing by the discloser.
12.1.2 The parties hereby acknowledge that the information can
constitute "inside information" for securities purposes and
each recipient agrees not to make any unauthorized disclosure,
trading or other such use of information received hereunder.
12.1.3 These obligations of confidentiality and non-use shall not
apply to information:
o that was previously known to the recipient as evidenced
by recipient's written records, or
o that is lawfully obtained by recipient from a source
independent of the discloser, or
o that is now or becomes public knowledge other than by
breach of this Agreement or
o that is properly required by law, regulation, rule, act
or order of any governmental authority or agency to be
disclosed by receiver, provided that receiver shall
provide discloser with reasonable advance notice of any
such required disclosure and cooperate with discloser
in minimizing the extent of any such disclosure and in
seeking such protective order(s) or the like as may be
available to protect the confidentiality of the
Information.
12.1.4 These obligations of confidentiality and non-use shall survive
the expiration or termination of this Agreement.
12.2 MATERIALS.
12.2.1 BENDER agrees:
o not to use the MATERIALS for any purposes other than in
conducting the Group 1, 2 and 3, and commercial
manufacture and supply activities pursuant to this
Agreement;
o not to transfer the MATERIALS to any third party; and
o that the MATERIALS will not be used on any human
subjects.
12.2.2 BENDER represents that it is regularly engaged in
manufacturing biopharmaceutical active agents, and will assure
that the MATERIALS will be used and/or disposed in compliance
with all applicable federal, state and/or local laws and
regulations.
<PAGE> 24
Page 24
12.3 INVENTIONS. Recognizing that CONNETICS will disclose the CONNETICS'
KNOWHOW to BENDER, that CONNETICS holds the CONNETICS' PATENTS, and
that it will compensate BENDER for conducting the process scale-up
Group 1, 2 and 3, and commercial manufacture and supply activities,
which may give rise to BENDER IMPROVEMENTS:
12.3.1 BENDER agrees to and does hereby sell, assign, transfer and
set over to CONNETICS, its successors or assigns, as the case
may be, all of BENDER's right, title and interest in and to
the BENDER IMPROVEMENTS, to be held and enjoyed by CONNETICS,
its successors or assigns, as the case may be, as fully as the
BENDER IMPROVEMENTS would have been held by BENDER had this
Agreement, sale or assignment not been made, including for any
patent that may be granted within the BENDER IMPROVEMENTS for
the full term thereof. CONNETICS agrees to pay BENDER a
license fee to be negotiated for the right to use BENDER
IMPROVEMENTS pursuant to this SECTION 12.3.1 in connection
with products unrelated to the PRODUCT.
12.3.2 Any writings prepared by BENDER pursuant to this Agreement are
prepared as works for hire for the benefit of CONNETICS, for
which BENDER hereby assigns to CONNETICS any copyright to
which BENDER is entitled.
12.3.3 BENDER shall promptly disclose to CONNETICS any such
intellectual property, and shall make, execute and deliver any
and all instruments and documents and perform any and all
acts, necessary to obtain, maintain and enforce patents,
trademarks and copyrights for such intellectual property as
CONNETICS may desire in any and all countries. All costs and
expenses of application and prosecution of such patents,
trademarks and copyrights shall be paid by CONNETICS.
12.3.4 Upon the written request of CONNETICS, BENDER shall make any
assignment provided for in this SECTION 12.3 directly to, or
for the benefit of, a CONNETICS AFFILIATE or CONNETICS'
designee, including BENDER's performance of any related
obligations hereunder.
12.4 PUBLICATIONS. BENDER may publish under BENDER's (and CONNETICS')
scientists' names as appropriate, scientific papers relating to the
work done in the course of the this [sic] Agreement, but only with the
prior written approval of CONNETICS, which approval (a) shall be in
CONNETICS's sole discretion with respect to material directly relating
to the PRODUCT, and (b) shall not otherwise be unreasonably withheld by
CONNETICS.
12.5 LICENSE TO BENDER. CONNETICS hereby grants to BENDER a non-exclusive,
non-transferable license to use CONNETICS' KNOWHOW and CONNETICS'
PATENTS solely for the purpose of manufacturing PRODUCT for CONNETICS
as provided in this Agreement. The license granted under this SECTION
12.5 shall automatically terminate upon the expiration or termination
of this Agreement.
<PAGE> 25
Page 25
12.6 THIRD PARTY CLAIMS. With respect to any third party claims for
infringement of intellectual property:
12.6.1 CONNETICS shall indemnify and hold harmless BENDER to the
extent the claim alleges infringement based on the structure
of RELAXIN, the fact that BENDER is manufacturing RELAXIN, and
the work performed by BENDER for CONNETICS pursuant to this
Agreement, and
12.6.2 BENDER shall indemnify and hold harmless CONNETICS to the
extent the claim alleges infringement based on the specific
process and methods of fermentation, purification or otherwise
manufacture when utilized by BENDER, to the extent that such
claim is based on BENDER IMPROVEMENTS.
13. TERM AND TERMINATION
13.1 This Agreement is effective as of the date first written above
(the "Effective Date") and shall remain in force for the
longer of ten (10) years from the Effective Date, or eight (8)
years from the COMMENCEMENT OF COMMERCIAL MARKETING.
Thereafter, this Agreement may be renewed for successive
periods of three (3) or more calendar year(s) each, any such
agreement to renew to be confirmed in writing by the parties.
13.2 EARLY TERMINATION
13.2.1 CONNETICS may terminate this Agreement on thirty (30)
days written notice pursuant to SECTION 14.3, at any
time prior to the start of the Group 2 or Group 3
activities, but shall remain liable for the payment
of any fees or expenses for services or equipment
already performed, already expended or otherwise not
cancelable. Unless such termination is predicated on
data failing to show efficacy in the primary endpoint
[*] and/or a therapeutic ratio (vs any side-effects)
that is acceptable under reasonable standards
then-prevailing in the biotechnology industry,
however, CONNETICS shall also be liable for the
payment of BENDER's fixed costs (as set forth in
SECTION 8.6 and EXHIBIT D) for reserving capacity in
the fermentation and purification plant for Group 2
[*] or Group 3 [*], except to the extent that such
reserved capacity is otherwise filled by BENDER.
13.2.2 CONNETICS may terminate this Agreement on thirty (30)
days written notice pursuant to SECTION 14.3, at any
time after completion of the Group 3 activities,
prior to the start of the commercial manufacturing,
but shall remain liable for the payment of any fees
or expenses for services or equipment already
performed, already expended or otherwise not
cancelable. Unless such termination is predicated on
data failing to show efficacy in the primary endpoint
[*] and/or a therapeutic ratio (vs. any side-effects)
that is acceptable under reasonable standards
then-prevailing in the biotechnology industry,
however, CONNETICS shall also be liable for the
payment of BENDER's
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 26
Page 26
fixed costs (as set forth in SECTION 8.6 and EXHIBIT
D) for reserving capacity in the fermentation and
purification plant for up to one (1) year of
commercial manufacturing.
13.2.3 CANCELLATION.
(a) If, during the term of this Agreement, the
PRODUCT is withdrawn or not approved for
commercial use by virtue of a government order
or authority, CONNETICS may terminate this
Agreement on thirty (30) days written notice
pursuant to SECTION 14.3, provided that
CONNETICS shall be liable for the payment of
BENDER's fixed costs (as set forth in SECTION
8.6 and EXHIBIT D) for reserved capacity in the
fermentation and purification plant for one (1)
year following such notice, except to the
extent that such reserved capacity is otherwise
filled by BENDER.
(b) If, during the term of this Agreement, FDA
approval for the PRODUCT is delayed beyond
reasonable expectations, CONNETICS and BENDER
shall negotiate in good faith with respect to
the costs related to continue this Agreement in
force.
(c) If, during the term of this Agreement, the
PRODUCT is withdrawn for any other reason,
CONNETICS may, at any time after the first two
(2) years of commercial production, terminate
this Agreement on thirty (30) days written
notice pursuant to SECTION 14.3, provided that
CONNETICS shall be liable for the payment of
BENDER's fixed costs (as set forth in SECTION
8.6 and EXHIBIT D) for reserved capacity in the
fermentation and purification plant for two (2)
years following such notice, except to the
extent that such reserved capacity is otherwise
filled by BENDER.
13.3 If either party hereto breaches any of the material terms of
this Agreement, and fails to remedy such breach within two (2)
months after written notice thereof from the other party
pursuant to SECTION 14.3, the other party may at its option
terminate this Agreement immediately upon written notice
pursuant to SECTION 14.3 to the breaching party, upon which
event all rights of the breaching party shall terminate upon
the effective date of termination specified in such notice.
13.4 Either party may terminate this Agreement by notice to the
other in the event that such other party shall have become
insolvent or bankrupt, or shall have made an assignment for
the benefit of creditors, or there shall have been appointed a
trusted [sic] or receiver for all or a substantial part of its
property, or any case or proceeding shall have been commenced
or other action taken by or against such other party in
bankruptcy or seeking reorganization, liquidation,
dissolution, winding-up, arrangement, composition or
readjustment of its debts or any other similar relief, and any
such event shall have continued for more than 60 days
undismissed, unbonded and undischarged.
13.5 Termination of this Agreement shall not release either party
from any liability or obligation which has accrued prior to
such termination and which remains to be
<PAGE> 27
Page 27
performed under the terms of this Agreement, nor release
either party from any obligation that is intended to survive
termination of this Agreement.
14. GENERAL TERMS AND CONDITIONS
14.1 ASSIGNMENT. Save as otherwise agreed this Agreement may not be assigned
by either of the parties except to any successor by merger or sale of
substantially all of its assets to which this Agreement relates, but
(a) CONNETICS shall be entitled to assign or delegate performance of
this Agreement to any company which is an AFFILIATE of CONNETICS
provided that such successor or AFFILIATE first agrees to be bound by
the terms of the Agreement as if named as a party thereto, and (b)
BENDER shall be entitled to assign or delegate performance of this
Agreement to any company which is an AFFILIATE of BENDER provided that
CONNETICS gives its prior written consent and such successor or
AFFILIATE first agrees to be bound by the terms of the Agreement as if
named as a party thereto.
14.2 INDEPENDENT PARTIES/ANNOUNCEMENTS/PUBLICITY. Notwithstanding anything
herein to the contrary, the parties' status with each other shall be,
at all times during the term of this Agreement, that of independent
contractors. Nothing in this Agreement shall be construed to give
either party the power or authority to act or make representations for,
or on behalf of, or to bind or commit the other. Accordingly, the
parties shall endeavor to provide each other courtesy copies in advance
of any public statements, whether verbal or written, including, but not
limited to shareholder reports, prospectuses, communications with stock
market analysts, press releases or other communications with the media.
14.3 NOTICES. Any notice required or permitted by the terms of this
Agreement shall be given by registered mail, prepaid and properly
addressed, or delivered by hand including overnight courier to BENDER
or CONNETICS at the respective addresses first given above or at such
other address as either party hereto may designate by notice pursuant
hereto. Any such notice shall be deemed to have been given when
received. All notices to CONNETICS shall be sent to the attention of
its President, with a copy to Vice President, Legal Affairs. All
notices to BENDER shall be sent to the attention of its President.
14.4 DISPUTE RESOLUTION / APPLICABLE LAW. Any dispute, controversy or claim
arising out of or relating to this Agreement, or the breach or
termination thereof shall be dealt with in the following manner:
14.4.1 The dispute, controversy or claim shall first be referred for
discussion at a meeting of the parties held pursuant to
SECTION 2.6, or a special meeting if necessary, or at the
parties option to the President of each of BENDER and
CONNETICS for resolution at a place to be agreed between such
chief executive officers and, failing agreement, in New York,
New York.
14.4.2 If the dispute, controversy or claim is not settled or agreed
at such meeting or between such chief executive officers
within a period of thirty (30) days, then it shall be settled
by arbitration in accordance with the rules of the American
Arbitration Association then in effect. Judgment upon the
award rendered by the
<PAGE> 28
Page 28
arbitrators may be entered in any court having jurisdiction
thereof. In any arbitration pursuant to this section, the
award shall be rendered by a majority of the members of a
board of arbitration consisting of three members, one being
appointed by each party and the third being appointed by
mutual agreement of the two arbitrators appointed by the
parties. The place of arbitration shall be New York, New York.
14.4.3 This Agreement shall be interpreted and enforced in accordance
with, and any arbitrators shall apply, the law of the State of
New York (regardless of that jurisdiction's or any other
jurisdiction's choice of law principles), and the parties
stipulate for the purpose of any legal proceeding to
jurisdiction and venue in the state and federal courts located
within the State of New York.
14.5 FORCE MAJEURE. Neither party shall be liable for failure to perform any
duty or obligation that party may have under this Agreement where such
failure has been occasioned by any Force Majeure which shall mean and
include government regulation, fire, strike, inevitable accident,
national emergency, or any other cause outside the reasonable control
of the party having the duty so to perform. Such failure to perform
shall only be excusable under the provisions of this Section for so
long as, and to the extent that, the same is rendered impossible by
Force Majeure. The party claiming that Force Majeure has occurred shall
send to the other party within five working days of the first
occurrence of Force Majeure full particulars thereof including its date
of first occurrence and of the cause or event giving rise to it.
Notwithstanding the relief granted to any party by this Section, the
relevant party shall nevertheless use its reasonable endeavors in any
situation where it has invoked this Section to perform its relevant
obligations as soon as possible after Force Majeure has ceased.
14.6 DILIGENCE.
14.6.1 Time is of the essence in this Agreement.
14.6.2 BENDER shall use its BEST EFFORTS to accomplish the Group 1, 2
and 3 activities and in the manufacture of PRODUCT for
CONNETICS pursuant to this Agreement.
14.7 SURVIVAL. The definitions of SECTION 1 and the covenants and agreements
set forth in SECTIONS 6.1, 7.2, 8.8, 9.7, 9.8, 10, 12 and 14 shall
survive any termination or expiration of this Agreement and remain in
full force and effect regardless of the cause of termination.
14.8 NONWAIVER OF RIGHTS. No failure or delay on the part of a party in
exercising any right hereunder will operate as a waiver of, or impair,
any such right. No single or partial exercise of any such right will
preclude any other or further exercise thereof or the exercise of any
other right. No waiver of any such right will be deemed a waiver of any
other right hereunder.
14.9 HEADINGS. Section headings contained in this Agreement are included for
convenience only and form no part of the agreement between the parties.
14.10 VALIDITY OF PROVISIONS AND SEVERABILITY. If any provision of this
Agreement is or becomes or is deemed to be invalid, illegal, or
unenforceable in any jurisdiction, such
<PAGE> 29
Page 29
provision will be deemed amended to conform to applicable laws of such
jurisdiction so as to be valid and enforceable, or, if it cannot be so
amended without materially altering the intention of the parties, it
will be stricken; the validity, legality and enforceability of such
provision will not in any way be affected or impaired thereby in any
other jurisdiction; and the remainder of this Agreement will remain in
full force and effect.
14.11 ENTIRE AGREEMENT. This Agreement, together with all of its exhibits,
sets forth the entire agreement of the parties with respect to the
subject matter hereof; in the event of any inconsistency among them,
this Agreement shall govern. This Agreement may not be modified except
by a writing signed by the parties.
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as of
the day and year first above written.
CONNETICS CORPORATION BENDER + CO GES.M.B.H.
By /s/ T. Wiggins By /s/ I. Aringer
--------------------------------- -------------------------------
Thomas G. Wiggans Mag. Irmfried Aringer
Chief Executive Officer Direktor Produktion und Technik
Date November 20, 1998 Date December 23, 1998
------------------------------- -----------------------------
By /s/ Ernst H. Rinderknecht By /s/ R. Werner
--------------------------------- -------------------------------
Ernst H. Rinderknecht, Ph.D. Prof. Dr. Rolf G. Werner
Vice President, Director of Biopharmaceutical
Process Science and Manufacturing Manufacture
Boehringer Ingelheim Pharma KG
Date November 20, 1998 Date 12.1.1999
------------------------------- -----------------------------
<PAGE> 30
EXHIBIT A
CONNETICS' Request for Proposal,
dated February 6, 1997
[***]
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 31
EXHIBIT B
BENDER's Final Proposal in response to CONNETICS' Request for Proposal,
dated February 16, 1998
[***]
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 32
EXHIBIT C
Fax Letter from Bender Wien (Dr. Henninger) to Connetics (Dr. Rinderknecht)
dated April 16, 1998.
[***]
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 33
EXHIBIT D
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
YEAR PRICE OF FIXED COSTS ("PFC") VARIABLE PRICE ("VP") PER kg
FOR [*] RESERVATION RELAXIN BULK
- --------------------------------------------------------------------------------
<S> <C> <C>
1999 ATS [*] ATS [*]
- --------------------------------------------------------------------------------
2000 [*] [*]
- --------------------------------------------------------------------------------
2001 [*] [*]
- --------------------------------------------------------------------------------
</TABLE>
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 1
EXHIBIT 10.63
AMENDMENT NO. ONE
TO
LICENSE AGREEMENT
THIS AMENDMENT NUMBER ONE TO LICENSE AGREEMENT FOR INTERFERON GAMMA
("AMENDMENT") is entered into effective December 28, 1998, between Genentech,
Inc. ("GENENTECH") and Connetics Corporation ("CONNETICS"). Terms not otherwise
defined in this Amendment shall have the meanings as defined in the License
Agreement.
R E C I T A L S
A. The parties have previously entered into a License Agreement effective
May 5, 1998, relating to interferon gamma (the "LICENSE AGREEMENT"),
together with a Stock Purchase Agreement of even date (the "STOCK
AGREEMENT").
B. Pursuant to Section 2.3(c) of the License Agreement, Connetics had the
right to sublicense the Agreement to InterMune, and has in fact entered
into a sublicense to that effect dated August 21, 1998.
C. Pursuant to Section 8.1 of the License Agreement, and the terms of the
Stock Agreement, Connetics agreed to issue additional stock to
Genentech if certain conditions were not met by December 28, 1998, and
the parties anticipate that those conditions will not be met by that
date.
D. The parties desire to amend the License Agreement effective as of the
date first written above, on the terms [set] forth in this Amendment,
and simultaneously with a corresponding Amendment Number One to the
Stock Purchase Agreement ("STOCK AGREEMENT AMENDMENT").
NOW THEREFORE, the parties agree as follows:
AGREEMENT
1. Section 8.1 of the License Agreement is hereby amended to read in its
entirety as follows:
8.1 Up-front Payment. Connetics shall issue to Genentech upon the
Original Closing Date (as defined in the Stock Agreement) shares of
Connetics Common Stock ("Original Issuance Shares" as defined in the
Stock Agreement) with a fair market value equal to two million dollars
($2,000,000), on the terms and conditions set forth in the Stock
Agreement. If on the Notification Date or, if later, the Second Closing
Date (each as defined in the Stock Agreement Amendment), the aggregate
market value of the Original Issuance Shares (based on the Second
Issuance Price, as defined in the Stock Agreement Amendment) is less
than $4,000,000, then Connetics shall issue to Genentech on the Second
Closing Date that number of additional shares of its Common Stock (the
"SECOND ISSUANCE SHARES") equal to the lesser of: (i) the number of
shares necessary to increase the aggregate market value of the Original
Issuance Shares (based on the Second Issuance Price) and the Second
Issuance Shares (based on the Second Issuance Price) to $4,000,000; or
(ii) the number of shares
Page 1 of 2
<PAGE> 2
(rounded to the nearest whole number) necessary to increase the
aggregate number of shares of Connetics Common Stock held by Genentech
(exclusive of any shares that Genentech has purchased from parties
other than Connetics) to 9.9% of Connetics' total outstanding shares of
Common Stock as of the close of business on the Notification Date or
the Second Closing Date, if later. In lieu of all or any portion of the
Second Issuance Shares that Connetics is obligated to issue to
Genentech on the Second Closing Date, Connetics may elect to pay
Genentech the cash value of such Second Issuance Shares (based on the
Second Issuance Price). The Original Closing of the stock issuances
shall take place as described in the Stock Agreement and the Second
Closing of the stock issuances shall take place as described in the
Stock Agreement Amendment. In the event that Connetics does not issue
to Genentech all of the Second Issuance Shares or the cash value of the
Second Issuance Shares, Genentech may, in addition to other remedies
available to it by law or in equity, immediately terminate this
Agreement and the licenses granted to Connetics under this Agreement.
Such termination by Genentech of the Agreement and the licenses
hereunder does not discharge Connetics' obligation to issue all of the
Second Issuance Shares or to pay to Genentech the cash value of the
Second Issuance Shares. The up-front payment shall not be creditable
against any royalty payments owed by Connetics under Sections 8.3 and
8.4 of this Agreement.
2. To the extent necessary, the remaining provisions of the License
Agreement are amended to reflect the revised definitions of Second
Closing Date and Second Issuance Shares, as modified by the Stock
Agreement Amendment.
3. The remainder of the License Agreement, including the exhibits to that
Agreement (except the Stock Agreement, to the extent modified by the
Stock Agreement Amendment), will continue in full force and effect as
though fully set forth in this Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment Number One to
License Agreement as of the date first written above.
Genentech, Inc. Connetics Corporation
By: /s/ W. D. Young KM By: /s/ T. Wiggans
_____________________________ _________________________
William D. Young Thomas G. Wiggans
Chief Operating Officer President and Chief
Executive Officer
Page 2 of 2
<PAGE> 1
EXHIBIT 10.64
AMENDMENT NO. ONE
TO
STOCK PURCHASE AGREEMENT
THIS AMENDMENT NUMBER ONE TO STOCK PURCHASE AGREEMENT ("AMENDMENT") is
entered into effective December 28, 1998, between Genentech, Inc. ("GENENTECH")
and Connetics Corporation ("CONNETICS"). Terms not otherwise defined in this
Amendment shall have the meanings as defined in the Stock Agreement (except to
the extent modified by this Amendment).
B A C K G R O U N D
A. The parties have previously entered into a Stock Purchase Agreement
effective May 5, 1998 (the "STOCK AGREEMENT"), together with a License
Agreement of even date (the "LICENSE AGREEMENT").
B. Pursuant to Section 8.1 of the License Agreement, and the terms of the
Stock Agreement, Connetics agreed to issue additional stock to
Genentech if certain conditions were not met by December 28, 1998, and
the parties anticipate that those conditions will not be met by that
date.
C. The parties desire to amend the Stock Agreement effective as of the
date first written above, on the terms [set] forth in this Amendment,
and simultaneously with a corresponding Amendment Number One to the
License Agreement.
NOW THEREFORE, the parties agree as follows:
A G R E E M E N T
1. Section 2.1(b) of the Stock Agreement is hereby amended to read in its
entirety as follows:
(b) Potential Second Issuance. If on the Notification Date or (if
later) the Second Closing Date (each as defined below), the aggregate
market value of the Original Issuance Shares (based on the Second
Issuance Price, as defined below) is less than $4,000,000, then
Connetics shall issue to Genentech on the Second Closing Date that
number of additional shares of its Common Stock (the "SECOND ISSUANCE
SHARES") equal to the lesser of: (i) the number of shares necessary to
increase the aggregate market value of the Original Issuance Shares
(based on the Second Issuance Price) and the Second Issuance Shares
(based on the Second Issuance Price) to $4,000,000; or (ii) the number
of shares (rounded to the nearest whole number) necessary to increase
the aggregate number of shares of Connetics Common Stock held by
Genentech (exclusive of any shares that Genentech has purchased from
parties other than Connetics) to 9.9% of Connetics' total outstanding
shares of Common Stock as of the close of business on the Notification
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Date or (if later) the Second Closing Date. The "SECOND ISSUANCE PRICE"
for purposes of this Agreement is based upon the average daily closing
price per share for Connetics' Common Stock as reported on the Nasdaq
Stock Market for the ten (10) trading days immediately preceding (but
not including) either the Notification Date or the Second Closing Date
(as defined below) as the case may be. Such issuance shall be referred
to hereinafter as the "SECOND ISSUANCE." Connetics shall have the
right, at any time after the date of this Amendment and before December
12, 1999, to trigger the Second Issuance by notifying Genentech in
writing of its intent to do so, and the date that Connetics notifies
Genentech is referred to as the "NOTIFICATION DATE."
2. Sections 2.2(b) and (c) of the Stock Agreement are hereby amended to
read in their entirety as follows:
(b) Second Closing Date. The closing of the issuance of the
Second Issuance Shares (the "SECOND CLOSING"), if any, shall be held,
following the satisfaction or waiver of the conditions set forth in
Sections 6.3 and 6.4 of this Agreement, at 10:00 a.m. Pacific Standard
time (i) three (3) days after the Notification Date, or (ii) on
December 15, 1999, or (iii) at such other time or date as Connetics and
Genentech may agree orally or in writing (in any case, referred to as
the "SECOND CLOSING DATE").
(c) Location. The Second Closing, if any, shall be held at the
offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California or at such other place as Connetics and Genentech may
agree orally or in writing.
3. Section 3.1 of the Stock Agreement is hereby amended to read in its
entirety as follows:
3.1 Form S-3 Registration. Connetics will use its best efforts
to prepare and file within fifteen (15) days after the date of this
Amendment a registration statement on Form S-3 that contemplates a
distribution of the portion of Registrable Securities comprised of the
Original Issuance Shares, on a delayed or continuous basis pursuant to
Rule 415 under the 1933 Act and any related qualification or compliance
with respect to all of the Registrable Securities. No later than the
Second Closing Date, unless otherwise requested by Genentech, Connetics
will use its best efforts to prepare, file, and have declared effective
a registration statement on Form S-3 that contemplates a distribution
of the portion of Registrable Securities comprised of the Second
Issuance Shares, on a delayed or continuous basis pursuant to Rule 415
under the 1933 Act and any related qualification or compliance with
respect to all of the Registrable Securities; provided, however, that
Connetics shall not be obligated to effect any such registration,
qualification or compliance if Connetics furnishes to Genentech a
certificate signed by the President of Connetics stating that in the
good faith judgment of Connetics' Board of Directors, it would be
seriously detrimental to Connetics and its stockholders for such Form
S-3 Registration to be effected at such time, in which event Connetics
shall have the right to defer the filing or effectiveness of the Form
S-3 registrations [sic] statement for a period of time deemed necessary
by Connetics, but in any event not to exceed 60 days. If Form S-3 is
not available for such offering by reason of any act or omission of
Connetics, Connetics shall prepare and file by the Second Closing Date
a registration statement on Form S-1 for the same purposes and subject
to the same conditions set forth in this paragraph.
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4. The remainder of the Stock Agreement will continue in full force and
effect as though fully set forth in this Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment Number One to Stock
Agreement as of the date first written above.
Genentech, Inc. Connetics Corporation
By: /s/ W.D. Young km By: /s/ T. Wiggans
----------------------------- -----------------------------
William D. Young Thomas G. Wiggans
Chief Operating Officer President and Chief Executive
Officer
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Exhibit 10.65
RELAXIN
DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT
This DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT, effective as
of January 11, 1999 ("EFFECTIVE DATE") is made by and between Medeva
Pharmaceuticals, Inc., a Delaware corporation, having its principal place of
business at 755 Jefferson Road, Rochester, New York, U.S.A. ("MEDEVA") and
Connetics Corporation, a Delaware corporation, having its principal place of
business at 3400 West Bayshore Road, Palo Alto, California, U.S.A. ("CONNETICS")
(each, respectively, a "PARTY" and collectively, the "PARTIES").
BACKGROUND
A. Connetics possesses certain technology and intellectual property
rights pertaining to Relaxin as defined in this Agreement.
B. Connetics and Medeva desire to collaborate to develop and
commercialize Relaxin Products as defined in this Agreement in all countries
comprising the Territory (as defined in this Agreement) and, in the limited
circumstances described in this Agreement, in the United States.
THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
In addition to certain terms defined in the body of this Agreement, the
following terms shall be deemed to have the meanings stated below:
"ADDITIONAL INDICATION(S)" means all human therapeutic indications
(except DSS and reproductive indications) as agreed to by the Parties in
accordance with SECTION 3.3.
"ADVERSE EXPERIENCE" shall have the meaning set forth in SECTION 11.2 of
this Agreement.
"AFFILIATE" means any individual, corporate or other entity that
controls, is controlled by or is under common control with a Party. For purposes
of this definition, "control" shall mean the possession directly or indirectly,
of a majority of the voting power of such entity (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise); provided that such entity shall be deemed an Affiliate only so long
as such control continues.
"AGREEMENT" means this agreement together with all exhibits, schedules,
and appendices attached to this agreement, all as respectively amended, modified
or supplemented by the Parties in accordance with the terms of this agreement.
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"BLA" means a Biologics License Application, or equivalent FDA
application relating to the manufacturing and marketing of biologically based
pharmaceutical products, filed with the FDA or any such comparable applications
in other countries in the Territory.
"CLINICAL DEVELOPMENT" means all activities subsequent to the Effective
Date relating to human clinical trials including pre-clinical and additional
studies specifically required to support Regulatory Filings for the purpose of
obtaining Regulatory Approval to market and sell Product. Clinical Development
specifically excludes any activities which are part of CMC Development.
"CMC DEVELOPMENT" means all development activities relating to Product
manufacturing, scale-up, quality assurance, quality control, Product
characterization, and stability.
"COGS" means a Party's cost of producing the Product, computed in
accordance with GAAP applied on a consistent basis. Such costs shall include the
reasonable, out of pocket cost (whether incurred directly by such Party or
invoiced by any Third Party) of all raw materials, labor and overhead for
manufacturing, formulation, storage, filling, finishing, labeling, packaging,
quality assurance and quality control, shipping and distribution costs, and
technical support incurred directly and exclusively for, or proportionately
allocated to, the production of the Product, any value added taxes or
transportation charges, and any royalties (other than royalties payable pursuant
to Third Party Licenses) paid pursuant to licenses in connection with the
manufacturing process or materials used. Until such time, if ever, as Connetics
manufactures Relaxin Materials and/or Product, Connetics' COGS shall equal the
net amount invoiced by Contract Manufacturer(s) allocable to the Product for
Medeva plus ten percent (10%).
"COMMERCIALLY REASONABLE EFFORTS" means the effort by Medeva or
Connetics to deploy, in light of prevailing circumstances and taking into
account Third Party obligations and commitments, sufficient resources, capital
equipment, material and labor as might reasonably be expected to achieve in an
appropriate time-scale, the benefits which are anticipated to accrue to Medeva
and Connetics from the commercial exploitation of the Product, and if the
Commercially Reasonable Efforts are to be directed to a specific goal, then that
goal.
"CONFIDENTIAL INFORMATION" shall have the meaning set forth in SECTION
9.2.1 of this Agreement.
"CONNETICS' IMPROVEMENTS" means any inventions, discoveries,
improvements or enhancements relating to Relaxin, whether patented, patentable
or not, conceived or first reduced to practice by Connetics during the Term and
any and all intellectual property rights therein and thereto. Connetics shall
promptly notify Medeva of the details of such Connetics Improvements as soon as
possible.
"CONTRACT MANUFACTURER" means any Third Party contracted by Connetics
(or Medeva pursuant to SECTION 5.1.5) to provide manufacturing services which
are material to Relaxin Materials or Product, or any component or ingredient
therein. Without limiting the foregoing, the term "Contract Manufacturer" shall
include any Third Party whose acts or omissions in
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connection with its assumption of any obligation under this Agreement or the
Supply Agreement would be imputed to, and would therefore be considered, the
acts or omissions of Connetics or Medeva (as the case may be) pursuant to any
applicable law or by any Regulatory Authority.
"CONTRACT MANUFACTURER AGREEMENT" shall have the meaning set forth in
SECTION 5.1.4 of this Agreement.
"CONTRACT PROVIDER" means any Third Party contracted by Connetics or
Medeva to provide products or non-manufacturing services which result in any
work product or other information that Connetics or Medeva would include or
might reasonably be expected to include in any document or report (including
without limitation a Regulatory Filing) that is either submitted to, or subject
to review by any Regulatory Authority. Without limiting the foregoing, the term
"Contract Provider" shall include any Third Party whose acts or omissions in
connection with its assumption of any obligation under this Agreement would be
imputed to, and would therefore be considered, the acts or omissions of
Connetics or Medeva (as the case may be) pursuant to any applicable law or by
any Regulatory Authority.
"COUNTRY" shall have the meaning set forth in SECTION 2.6.2 of this
Agreement.
"DEFENDING PARTY" shall have the meaning set forth in SECTION 2.5.2 of
this Agreement.
"DEVELOPMENT COMMITTEE" means the committee formed pursuant to SECTION
6.1.1.
"DEVELOPMENT PLAN" means the plan as amended from time to time which
sets forth, in one or more sections, (a) the Parties' strategies, plans,
activities and estimated time schedules with regard to Clinical Development and
Regulatory Filings for the United States and/or the Territory; (b) the Parties'
respective responsibilities for such development activities; and (c) the
estimated costs for such development activities. A copy of the initial
Development Plan for the United States will be delivered to the Parties in
connection with a letter of even date with this Agreement. The Development
Committee shall develop a plan for the Territory as appropriate after the
Effective Date.
"DOLLARS" or "$" means the lawful currency of the United States.
"DSS" means diffuse systemic sclerosis, systemic sclerosis, progressive
systemic sclerosis, and/or systemic sclerosis with diffuse scleroderma.
"ENFORCING PARTY" shall have the meaning set forth in SECTION 2.5.1 of
this Agreement.
"FAIR MARKET VALUE" means the price of Connetics' Common Stock
calculated as the average closing price for the ten trading days prior to the
Effective Date, as reported by Nasdaq.
"FERTILITY INDICATION" shall have the meaning set forth in SECTION 3.3.2
of this Agreement.
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"FIELD" means the treatment of DSS and all Additional Indications.
"FDA" means the U.S. Food and Drug Administration or successor agency.
"GAAP" (or Generally Accepted Accounting Principles) means generally
accepted accounting and reporting assumptions, standards, and practices as
applied in the United States and as prescribed by authoritative bodies such as
the Financial Accounting Standards Board.
"INDEMNITEE" and "INDEMNITOR" shall have the meanings set forth in
SECTION 7.6 of this Agreement.
"LICENSED IP" means the Relaxin Patents, Relaxin Information and Third
Party Licenses.
"LOSSES" shall have the meaning set forth in SECTION 7.4 of this
Agreement.
"MEDEVA IMPROVEMENTS" means any inventions, discoveries, improvements or
enhancements relating to Relaxin, whether patentable or not, conceived or first
reduced to practice by Medeva during the Term and any and all intellectual
property rights therein and thereto. Medeva shall notify Connetics of the
details of such Medeva Improvements as soon as possible.
"NET SALES" means all amounts invoiced by a Party and/or an Affiliate of
a Party or a distributor appointed by a Party for sales of Product to a Third
Party, less deductions for:
(1) price reductions or discounts, including rebates, non-cash
rebates, allowances, quantity discounts, cash discounts or
chargebacks actually granted, allowed and incurred, medicaid or
similar rebates, government control sales rebates or charges;
(2) credits or allowances actually granted upon claims, rejections or
returns of Product, including recalls, regardless of the Party
requesting such; and
(3) an allowance for bad debts.
Sales of Product between a Party and its Affiliates and sales solely for
research or testing purposes shall be excluded from the computation of Net
Sales.
"NET SELLING PRICE" means Net Sales of Medeva and/or an Affiliate of
Medeva or a distributor appointed by Medeva per milligram (or such other unit as
the Parties may agree) in respect of Product sold in the Territory to a Third
Party.
"NON-DEFENDING PARTY" shall have the meaning set forth in SECTION 2.5.2
of this Agreement.
"NON-ENFORCING PARTY" shall have the meaning set forth in SECTION 2.5.1
of this Agreement.
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"OPERATING PROFITS" means Net Sales less COGS, royalties payable
pursuant to Third Party Licenses, allocable administrative costs, distribution
costs of Connetics' distributors, and sales and marketing costs determined in
accordance with GAAP. For purposes of calculating Operating Profits, the amount
allocated for Connetics sales representatives shall be the same number used to
reimburse Medeva for its sales representatives pursuant to SECTION 5.5.
Operating Profits shall in no case mean operating losses.
"PRODUCT" means a commercial pharmaceutical product containing Relaxin
for use in the Field.
"PRODUCT DEVELOPMENT" shall be comprised of: (1) CMC DEVELOPMENT, (2)
CLINICAL DEVELOPMENT, and (3) REGULATORY FILINGS.
"REGULATORY APPROVAL" means all approvals, including pricing approvals
for reimbursement purposes, from the appropriate Regulatory Authorities (a) in
the United States or (b) in each country in the Territory that are required to
promote and market the Product in the relevant country.
"REGULATORY AUTHORITY" means the FDA or any equivalent or additional
governmental or regulatory agencies in the Territory.
"REGULATORY FILINGS" means all activities relating to the filing for and
procurement of Regulatory Approval, including but not limited to price
reimbursement approval for the marketing and sale of Product from the relevant
Regulatory Authorities.
"RELAXIN" means a polypeptide hormone which both (1) has an amino acid
sequence corresponding to all or a part of the sequence of the polypeptide
described in EXHIBIT A-1, and peptide derivatives thereof and (2) is an agonist
to any of the biological activities of the substances identified in EXHIBIT A-2.
"RELAXIN INFORMATION" means trade secrets, know-how, information and
proprietary rights in any tangible or intangible form, other than Relaxin
Patents, but including Connetics Improvements to the extent licensed to Medeva
pursuant to SECTION 2.1.3, relating to the development, manufacture and
commercialization of Relaxin, Relaxin Materials and the Product, including but
not limited to any pre-clinical, clinical and regulatory information that Medeva
may need for the purposes of this Agreement that: (1) is owned by Connetics
and/or its Affiliates, or (2) is owned by a Third Party, which Connetics and/or
its Affiliates has a right to license or is not prohibited from disclosing to
Medeva and its Affiliates under this Agreement.
"RELAXIN MATERIALS" means bulk Relaxin or formulated Relaxin for use in
Product Development and/or procuring Regulatory Approval for the Product.
"RELAXIN PATENTS" means the patents and patent applications including
any reissues, renewals, extensions, substitutions, divisionals, continuations
and continuations-in-part of such
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patents or patent applications, relating to Relaxin or the Product, owned or
controlled by Connetics and/or its Affiliates or included in the Third Party
Licenses which: (1) are in existence as of the Effective Date or which come into
existence during the Term of this Agreement; or (2) are licensed to Connetics
under the Third Party Licenses. The Relaxin Patents include, without limitation,
the patents and patent applications set forth on EXHIBIT B to this Agreement.
"SPECIFICATIONS" means the specifications for the Relaxin Materials and
the Product as set forth in EXHIBIT A-3 to this Agreement, and such changes to
such specifications as the Parties may subsequently agree to in writing.
"STATEMENT OF EXPENSES" shall have the meaning set forth in SECTION
4.1.3 of this Agreement.
"SUPPLY AGREEMENT" means the agreement to be entered into at a future
date pursuant to SECTION 5.1.2.
"SUPPORT EXPENSES" shall have the meaning set forth in SECTION 4.1.3 of
this Agreement.
"TERM" shall have the meaning set forth in SECTION 10.1 of this
Agreement.
"TERRITORY" means all countries of the European Union ("EU") and the
European Economic Area ("EEA") (each of the EU and the EEA as constituted on the
Effective Date, together with future member countries if Connetics and Medeva
mutually agree in writing), Poland, Hungary, the Czech Republic, and Cyprus. New
member countries of the EU and the EEA will automatically be included in the
definition of Territory provided that Connetics has not otherwise licensed the
Licensed IP to another party in that country between the Effective Date and the
date the country joins either the EU or the EEA.
"THIRD PARTY LICENSES" means the licenses to Third Party intellectual
property rights including without limitation patents, patent applications, trade
secrets, and/or know-how covering, or related to, Relaxin, Relaxin Materials and
Product, under which Connetics and/or its Affiliates has a right to grant a
sublicense to Medeva and its Affiliates. A list of the Third Party Licenses as
of the Effective Date is attached to this Agreement as EXHIBIT C.
"THIRD PARTY(IES)" means any person or entity other than Medeva,
Connetics, or an Affiliate of Medeva or Connetics.
"THIRD PARTY WORK" shall have the meaning set forth in SECTION 8.1.8 of
this Agreement.
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ARTICLE II
LICENSE
2.1 LICENSE.
2.1.1 LICENSED IP. Subject to the terms and conditions of this
Agreement, during the Term, Connetics grants to Medeva and its Affiliates an
exclusive license, solely within the Territory and in the Field, with the right
to sublicense as set forth in SECTION 2.1.4, to use the Licensed IP, and to
develop, manufacture (to the extent provided in this Agreement), use, sell,
offer for sale and import the Product for DSS and Additional Indications. The
Parties agree that the commercialization of Product in the United States shall
be in accordance with SECTIONS 5.2, 5.3, 5.4 and 5.5.
2.1.2 TRADEMARKS. Subject to the terms and conditions of this
Agreement, during the Term, Connetics grants to Medeva an exclusive,
royalty-free license to use the trademarks CONXN(R) and ConXn(R) for the
advertising, promotion, marketing, distribution and sale of Product in the
Territory. If Medeva chooses to use to use the trademarks, then in addition to
the requirements set forth in SECTION 5.3, Medeva shall display the marks in a
style or size of print distinguishing the mark from any accompanying wording or
text. Where feasible, Medeva shall display the appropriate trademark symbol to
the right of and slightly above or below the last letter of the word, or to the
right of the logo. Except as expressly permitted in this Agreement, no right or
license is granted to Medeva to use Connetics' name or any trademarks or
tradenames of Connetics in advertising, publicity or other promotional
activities without the express written approval of Connetics.
2.1.3 CONNETICS IMPROVEMENTS. Subject to the terms and conditions of
this Agreement, Connetics grants to Medeva and its Affiliates an exclusive,
royalty-free license in the Field, with the right to sublicense as provided in
this Agreement, to any Connetics Improvements in the Territory for use in
connection with the manufacture and sale of Product. Notwithstanding the
foregoing sentence, to the extent any Connetics Improvement does not relate
exclusively to the Licensed IP or Product, Connetics shall have the right to use
or license such Connetics Improvement for any purpose outside the Field
throughout the Territory and for any purpose outside the Territory. Connetics
shall have no duty to notify Medeva of the details of any Connetics Improvement
to the extent that such disclosure would adversely affect the patentability of
the matters disclosed.
2.1.4 SUBLICENSES. Medeva shall have the right to grant sublicenses
under the license set forth in SECTIONS 2.1.1, 2.1.2 and 2.1.3, and to employ
Affiliates and Third Parties in connection with the performance of its rights
and obligations under this Agreement, provided that (a) the execution of a
sublicense or a subcontract shall not in any way diminish, reduce or eliminate
any of Medeva's obligations under this Agreement, and Medeva shall remain
primarily liable for such obligations, (b) Medeva shall notify Connetics within
five (5) business days after entering into such a sublicense, and shall provide
a copy of the sublicense agreement (with non-relevant passages appropriately
redacted) to Connetics, and (c) Medeva shall only grant a sublicense to any
Affiliate or Third Party which undertakes to perform those obligations of this
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Agreement relevant to such sublicense in accordance with the terms of this
Agreement, including specifically the obligation under SECTION 8.2.1.
2.2 LICENSE TO MEDEVA IMPROVEMENTS. Subject to the terms and conditions
of this Agreement, Medeva grants to Connetics and its Affiliates an exclusive,
non-transferable, royalty-free license in the Field, without the right to
sublicense (except as provided in this Agreement), to any Medeva Improvements in
all territories of the world excluding the Territory for use in connection with
the development, manufacture and sale of Product. Notwithstanding the foregoing
sentence, to the extent any Medeva Improvement does not relate exclusively to
the Licensed IP or Product, Medeva shall have the right to use or license such
Medeva Improvement for any purpose in any territory in the world. Medeva shall
have no duty to notify Connetics of the details of any Medeva Improvement to the
extent that such disclosure would adversely affect the patentability of the
matters disclosed.
2.3 THIRD PARTY TECHNOLOGY. The Parties acknowledge that the licenses
granted to Medeva in this Agreement include sublicenses under Third Party
Licenses. Connetics shall be solely responsible for all payments under the Third
Party Licenses prior to the Effective Date. The Parties shall share 50:50 all
payments for Third Party Licenses related to the manufacture, sale or use of the
Product in the Territory under this Agreement that are entered into after the
Effective Date, provided that, subject to the last sentence of this Section,
neither Party shall enter into any Third Party Licenses after the Effective Date
without the other Party's prior approval, which approval shall not unreasonably
be withheld. Medeva agrees to abide by the terms and conditions of such Third
Party Licenses applicable to Medeva as Connetics' sublicensee. Connetics shall
abide by the terms and conditions of all Third Party Licenses to maintain the
Third Party Licenses for Medeva as Connetics' sublicensee. Connetics agrees not
to terminate or assign, nor by act or omission permit the termination or
assignment of, any of the Third Party Licenses, nor to amend or by act or
omission permit the amendment of any Third Party Licenses to the extent such an
amendment would adversely affect Medeva's rights under this Agreement, without
the prior written consent of Medeva, which consent may be granted or withheld in
Medeva's sole discretion. Within five (5) days after entering into any amendment
of a Third Party License, Connetics shall notify Medeva and provide Medeva with
a copy of the amendment.
2.4 RESERVATION OF RIGHTS. No right, title, or interest is granted,
whether expressly or by implication, to any technology or intellectual property
rights owned by either Party, except for the rights and licenses expressly
granted under this Agreement, and each Party hereby reserves all rights not
expressly granted under this Agreement, nor shall anything in this Agreement be
deemed to restrict either Party from exploiting any of its rights not expressly
granted to the other Party under this Agreement.
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2.5 ENFORCEMENT.
2.5.1 ENFORCEMENT OF AND CLAIMS AGAINST LICENSED IP.
(a) A Party shall promptly notify the other Party if it
becomes aware of any infringement or misappropriation of the Licensed
IP. As between the Parties, Connetics shall have the primary right and
discretion regarding enforcement of the Licensed IP against Third
Parties who may be infringing or misappropriating such intellectual
property rights in the Territory or the U.S. Connetics shall use
Commercially Reasonable Efforts, at its sole expense, to protect the
exclusive license granted to Medeva pursuant to this Agreement, taking
into account the costs and benefits of such action, including, without
limitation, the costs to be incurred in any such action and the amount
and likelihood of the damages that may be awarded in any such action.
(b) If Connetics (i) decides not to enforce the Licensed IP,
or having commenced an action fails to pursue it, or (ii) does not bring
such action within ninety (90) days after notice of Medeva's request to
enforce the Licensed IP, then Medeva may do so at its own expense.
(c) In either case, the Party enforcing the Licensed IP at
the relevant time (the "ENFORCING PARTY") shall be entitled to recover
all of its actual costs, expenses and fees incurred in such action from
the damages awarded, and any remaining amount (subject to any amounts
payable to any Third Party licensee as a result of the damages awarded)
shall be payable two-thirds (2/3) to the Enforcing Party and one-third
(l/3) to the Party not enforcing the Licensed IP (the "NON-ENFORCING
PARTY"). The Enforcing Party shall, in its sole discretion, have the
right to file and control such action as it deems warranted; provided,
however, that the Enforcing Party shall provide to the Non-enforcing
Party and its attorneys the following: (i) reasonable notice of, and
permission to attend, all meetings and proceedings related to such
actions; (ii) copies of all documents (including without limitation
correspondence, notices, filings, responses, requests, orders and
rulings) related to such action in sufficient detail and with sufficient
time to enable the Non-enforcing Party to review and provide comments on
such documents; and (iii) timely information and updates regarding the
status of such action.
(d) The Non-enforcing Party agrees to cooperate with the
Enforcing Party to the extent reasonably requested by and at the expense
of the Enforcing Party, including, without limitation, being named as a
party in such proceeding. The Non-enforcing Party may choose to be
represented by counsel of its choice and at its own expense at all
meetings, and to participate in all discussions, but counsel for the
Non-enforcing Party shall not be entitled to appear in any legal or
judicial proceedings.
2.5.2 INFRINGEMENT CLAIMS.
(a) The Parties agree that all third party royalties and other
expenses, losses, costs, deficiencies, liabilities and damages
(including legal fees) incurred or suffered
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by either of the Parties or their Affiliates arising out of a claim that
the Product infringes any patents or other intellectual property right,
shall be borne by the Party primarily responsible for the defense (the
"DEFENDING PARTY"). Each of the Parties agrees to promptly notify the
other of any patent infringement claim or action by a Third Party which
comes to its attention. The Parties agree that Connetics shall be
primarily responsible for the infringement defense of any action arising
(i) primarily from the manufacture of the Product (except as set forth
in the following sentence) or (ii) from any other activities outside the
Territory. The Parties further agree that Medeva shall be primarily
responsible for the infringement defense of any action arising (i) from
the marketing or sale of the Product in the Territory, (ii) primarily
from the manufacture of the Product if Medeva has assumed manufacturing
responsibility for the Product, or (iii) primarily from any services
Medeva may agree to provide in connection with the fill and finish of
bulk Product. As the person primarily responsible for the infringement
defense, the Defending Party, acting for and on behalf of both Parties
to this Agreement, shall communicate and negotiate with Third Parties,
engage counsel reasonably acceptable to the other Party (the
"NON-DEFENDING PARTY") and otherwise handle the defense of any such
claim or action; provided, however, that the approval of a Party shall
be required in writing prior to the other Party's entering into any
settlement agreement on behalf of the first Party, which consent shall
not be unreasonably withheld.
(b) The Non-defending Party agrees to cooperate with the
Defending Party to the extent reasonably requested by and at the expense
of the Defending Party, including, without limitation, being named as a
party in such proceeding. The Non-defending Party may choose to be
represented by counsel of its choice and at its own expense at all
meetings, and to participate in all discussions, but counsel for the
Non-defending Party shall not be entitled to appear in any legal or
judicial proceedings.
2.5.3 ROYALTY REDUCTION. If (a) Medeva notifies Connetics that any
pharmaceutical product containing Relaxin is being marketed or sold in the Field
in the Territory during the Term of this Agreement by any Third Party, and (b)
either (i) the Parties determine that the Licensed IP is not enforceable or
infringed or (ii) the Licensed IP is held invalid or not infringed by a final
decision of a court of competent jurisdiction from which no further appeal is or
can be taken, and (c) total market share of all pharmaceutical products
containing Relaxin sold in the Field in the Territory (not including the Product
marketed by Medeva) reach twenty percent (20%) or more of the overall market for
such pharmaceutical products, then unless Connetics is an Enforcing Party
pursuant to SECTION 2.5.1(b), the Royalties payable by Medeva pursuant to
SECTION 5.1.3 shall be reduced by fifty percent (50%) during any continuing
period of non-exclusivity.
2.6 OTHER COUNTRIES.
2.6.1 Subject to SECTION 2.6.2 below, Connetics retains the right to
grant licenses for the sale, marketing and distribution of the Product in all
countries outside the Territory; provided, however, that Connetics agrees that
for each such license entered into after the Effective Date, it will impose on
each such licensee, to the extent permitted by applicable law, a
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covenant prohibiting the licensee from: (a) seeking approval, directly or
indirectly, from the relevant Regulatory Authorities, to qualify facilities for
manufacturing or finishing the Product inside the Territory or to label or
re-label the Product in a manner that would permit it to be marketed or sold
inside the Territory, (b) selling or exporting the Product to any Third Party
for use or resale inside the Territory, (c) or selling the Product to any Third
Party that Connetics has reason to believe intends to resell or export the
Product inside the Territory.
2.6.2 Connetics covenants with Medeva, in respect of any country
sharing a border with a country in the Territory and/or any country which has
publicly indicated an intention or wish to apply to become a member of the EU or
the EEA ("COUNTRY"), that:
(a) Connetics will not grant or otherwise dispose of any
rights in the Product, Relaxin Materials or Licensed IP to any Affiliate
or Third Party in respect of such Country without Medeva's prior written
consent;
(b) Connetics will not develop, use or commercialize Relaxin
or the Product in the Country itself either directly or indirectly
without first negotiating in good faith with Medeva the terms upon which
the Country could be included in the definition of the Territory;
(c) if, notwithstanding (b) above, the Country is not included
in the definition of the Territory, Connetics will only develop, use or
commercialize the Product or Relaxin in that Country directly or through
an agent reasonably satisfactory to Medeva;
(d) if Connetics appoints any agent under (c) above, and such
Country subsequently enters into the EU or EEA, and the Country on
Medeva's request (within six (6) months of its entry) is included in the
definition of the Territory, Connetics shall cause the agent appointed
by it to become the agent of Medeva;
(e) any agreement entered into by Connetics with an agent
pursuant to (c) above shall acknowledge and provide for the
circumstances outlined in (d) above in terms reasonably acceptable to
Medeva.
ARTICLE III
PRODUCT DEVELOPMENT AND REGULATORY APPROVAL
3.1 PRODUCT DEVELOPMENT.
3.1.1 DEVELOPMENT PLAN. Product Development shall be performed in
accordance with this SECTION 3.1, the Development Plan and ARTICLE VI. The
Development Plan may be amended from time to time during the Term in accordance
with SECTION 6.1.1.
3.1.2 CLINICAL DEVELOPMENT. The Parties shall conduct Clinical
Development in accordance with the Development Plan.
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3.1.3 REGULATORY FILINGS. Connetics shall be responsible for all
Regulatory Filings for the Product in the United States; provided that Medeva
may elect to participate in meetings with the FDA for the purpose of obtaining
Regulatory Approval. Medeva shall be responsible for all Regulatory Filings for
the Product in all countries of the Territory; provided that Connetics may elect
to participate in meetings with the applicable Regulatory Authorities in such
countries for the purpose of obtaining relevant Regulatory Approval(s). Each
Party shall keep the other fully informed of all communications with the
regulatory authorities and will consult with the other before submitting
applications.
3.1.4 SUPPLEMENTARY PROTECTION CERTIFICATES. The Parties shall
cooperate with each other to the extent necessary to obtain supplementary
protection certificates or other extensions of the term of the Patents in any
country in the Territory.
3.2 PRODUCT DEVELOPMENT COSTS.
3.2.1 GENERAL. Connetics will pay 100% of all CMC Development costs
for the Product worldwide, and Connetics will pay 100% of the expenses
associated with Clinical Development and Regulatory Approval for the Product in
the United States (including expenses associated with products or services that
are necessary in the United States but that can be used in the Territory);
provided that Medeva shall make the contributions as provided in SECTION 4.1.3.
Medeva will pay 100% of the expenses that are unique to the Clinical Development
and Regulatory Approval for the Product solely in the Territory.
3.2.2 QUARTERLY REPORTS. Within thirty (30) days after the end of
each calendar quarter, commencing with the quarter ending March 31, 1999, each
Party shall provide to the Development Committee a quarterly written progress
report which shall:
(a) summarize the Product Development activities and progress
during the preceding calendar quarter; and
(b) summarize the development activities and update the
timetables of such activities expected to be conducted in the following
calendar quarter as well as the development costs estimated to be
incurred in connection with such activities.
3.3 ADDITIONAL INDICATIONS.
3.3.1 GENERALLY. In accordance with SECTION 6.1.1, Medeva and
Connetics may agree to jointly develop the Product for an Additional Indication
provided that: all expenses associated with Product Development for such
Additional Indication shall be shared between the Parties as determined by the
Development Committee. Each Party shall be obligated to consider in good faith
all proposals for developing Additional Indications made by the other Party on
the basis of reasonable data. If the Parties do not agree to jointly develop an
Additional Indication or the Parties cannot agree on a development plan, then
either Party is free to develop and
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commercialize an Additional Indication in its respective territory(ies) at its
sole cost and expense, independent of the other Party.
3.3.2 FERTILITY INDICATIONS. Connetics shall use Commercially
Reasonable Efforts to secure exclusive, worldwide rights to indications outside
the Field ("FERTILITY INDICATIONS"). Upon securing such exclusive rights,
Fertility Indications shall be considered Additional Indications. Connetics
shall propose Fertility Indications for joint development under SECTION 3.3.1
upon securing exclusive rights to Fertility Indications. If Medeva elects to
participate in the development and commercialization of Relaxin for Fertility
Indications, Medeva shall pay fifty percent (50%) of amounts paid to Third
Parties by Connetics to secure the exclusive rights to Fertility Indications.
Furthermore, the royalty to be paid by Medeva to Connetics pursuant to SECTION
5.1.3 will be increased as to Fertility Indications in the Territory by the
amount of any additional royalty to be paid to Third Parties for Fertility
Indications. If Medeva elects not to participate in development and
commercialization, Connetics may request the right to commercialize Products for
Fertility Indications within the Territory on an exclusive basis without the
right to sublicense, but Connetics shall not so commercialize within the
Territory without Medeva's consent, which consent shall not unreasonably be
withheld. If Connetics is unable to secure exclusive worldwide rights to
Fertility Indications, Connetics shall not assign its co-exclusive rights in the
Territory to any Third Party without Medeva's consent. Furthermore, Connetics
shall use Commercially Reasonable Efforts to [***]
3.4 ACCESS TO INFORMATION. Connetics will consult with Medeva on the CMC
Development and Clinical Development that will be necessary to accumulate data
required for submitting a BLA for the Product in the United States, and Medeva
will consult with Connetics on the CMC Development and Clinical Development that
will be necessary to accumulate data required for submitting a BLA for the
Product in the Territory. It is the intention of this provision and of the
language relating to committees in ARTICLE VI that the Parties cooperate with
one another to support CMC Development, Clinical Development and Regulatory
Filings to optimize commercial success in the U.S. and in the Territory.
Connetics will make available to Medeva, and Medeva under the license granted
under this Agreement shall be entitled to use in the Field in the Territory, all
Relaxin Information developed by or for Connetics with respect to the submission
of the BLA by Connetics. Medeva will make available to Connetics, and Connetics
under the license granted under this Agreement shall be entitled to use, all
Relaxin Information developed by or for Medeva with respect to the submission of
the BLA by Medeva in the Territory.
3.5 RECORDS. Connetics shall maintain, and shall cause its Affiliates,
Contract Manufacturers, Contract Providers, and other agents to maintain, all
records necessary to comply with applicable laws, rules and regulations relating
to the manufacture and storage of Relaxin, Relaxin Materials and the Product (in
bulk or finished form). All such records shall be maintained for such period as
may be required by law, rule or regulation; provided, however, that all records
relating to the manufacture, stability and quality control of each batch or
partial batch of the Product shall be retained at least until the first
anniversary of the end of the approved shelf life for all Product from such
batch or partial batch; and provided further that neither Party shall destroy
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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such records without first notifying the other Party and giving the other Party
an opportunity to take control of such records if the Party being notified
believes that applicable law or its own written corporate policy requires such
records to be maintained.
ARTICLE IV
PAYMENTS AND EQUITY INVESTMENT
4.1 PAYMENTS TO CONNETICS. The Parties agree that in consideration for
the rights granted by Connetics in this Agreement, Medeva will make the
following payments to Connetics in accordance with this ARTICLE IV.
4.1.1 DEVELOPMENT FEES. For use in connection with, and for
purposes of the continued development of the Product, Medeva agrees to pay to
Connetics the following amounts:
<TABLE>
<CAPTION>
EVENT AMOUNT
----- ------
<S> <C>
Execution of the Agreement $4.0 Million cash
[***]
$1.0 Million cash
$2.0 Million cash
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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4.1.2 MILESTONE PAYMENTS. At the time each of the following
milestones is achieved, Medeva shall pay Connetics the amounts set forth
opposite them:
<TABLE>
<CAPTION>
Milestone Amount
--------- ------
<S> <C>
[***] o $5.0 Million cash if completed by [***]
o $4.5 Million cash if not completed by [***]
but completed by [***]
o $4.0 Million cash if not completed by [***]
but completed by [***]
o $3.0 Million cash if not completed by [***]
but completed by [***]
o $2.0 Million cash if not completed by [***]
but completed by [***]
o $1.0 Million cash if not completed by [***]
but completed by [***]
o Zero if not completed by [***]
[***] $1.5 Million cash
[***] $1.5 Million cash
[***] $3.0 Million cash
[***] $3.0 Million cash
[***] One-time payment of $5.0 Million cash for each
Additional Indication
</TABLE>
4.1.3 DEVELOPMENT PAYMENTS. To provide ongoing support for Product
Development through the first full calendar quarter after submission of the
first BLA in the United States, Medeva shall pay to Connetics as an advance of
the Product Development expenses for the next calendar quarter an amount
(defined as the "SUPPORT EXPENSES") equal to $1,000,000 less (a) any amount paid
to Connetics by Suntory, Ltd., excluding milestone payments, and (b) the
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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amount by which $1,000,000 exceeded one-half of the total Product Development
expenses incurred by Connetics during the preceding calendar quarter. In no
event shall Medeva be required to pay Connetics more than $1,000,000 as an
advance payment of Connetics' quarterly U.S. Product Development expenses. To
calculate the payments due under this SECTION 4.1.3, within thirty (30) days
after the end of each calendar quarter, commencing with the quarter ending March
31, 1999, Connetics shall provide to Medeva a detailed statement prepared on a
cash basis of the costs incurred by Connetics during such calendar quarter in
connection with its Product Development (the "STATEMENT OF EXPENSES"). Within
fourteen (14) days following the delivery of the Statement of Expenses, the
Parties shall compare the Statement of Expenses to the Development Plan for such
period and Medeva shall calculate the Support Expenses to be paid pursuant to
this Section. Within seven (7) days after the Parties have reviewed the
Statement of Expenses, Medeva shall pay the Support Expenses to Connetics.
4.2 PAYMENT TERMS. Connetics or Medeva, as the case may be, shall notify
the other Party in writing within ten (10) days after a milestone under SECTION
4.1.2 is achieved. The payments pursuant to SECTION 4.1.2 shall be made within
thirty (30) days after (a) the milestone is achieved, in the case of milestones
in the Territory, or (b) Medeva receives such written notice from Connetics that
the milestone has been achieved, supported by proper and verifiable backup
documentation, in the case of all other milestones. The initial $1,000,000
payment pursuant to SECTION 4.1.3 shall be made no later than seven (7) days
after the Effective Date, and each subsequent payment shall be adjusted as
reflected in SECTION 4.1.3; provided that (a) the initial $1,000,000 advance
paid by Medeva shall be applied against the last payment due (i.e., one half of
Connetics' Product Development costs incurred in the first full calendar quarter
after the submission of the first BLA in the United States) and (b) any positive
difference between $1,000,000 and the actual costs measured in such last
calendar quarter shall be applied against the next payment that Medeva pays to
Connetics, whether pursuant to this Agreement, the Supply Agreement, or other
arrangement between the Parties.
4.3 EQUITY PURCHASE. Upon execution of the Agreement, Medeva (directly
or through its Affiliates) shall purchase $4,000,000 of Connetics' common stock
at a price equal to the greater of (a) $4.50 per share, or (b) 50% premium over
Fair Market Value. The purchase of Connetics stock shall be pursuant to a Stock
Purchase Agreement in the form attached to this Agreement as EXHIBIT D.
ARTICLE V
MANUFACTURE AND COMMERCIALIZATION
5.1 MANUFACTURE.
5.1.1 CLINICAL SUPPLIES. Connetics shall, and shall cause its
Contract Manufacturer(s) to, commencing from the Effective Date until Medeva
receives Regulatory Approval to market the Product in the Territory, use
Commercially Reasonable Efforts to manufacture for and supply to Medeva, and
Medeva shall (subject to the terms of this Agreement) purchase at Connetics'
COGS, all Medeva's required quantities of Relaxin Materials for use in Product
Development; provided that Medeva shall not transfer the Relaxin Materials to
any Third
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Party at any time except to the extent transfer is required for Clinical
Development, Regulatory Filings or Regulatory Approval related to the Product in
the Field and Territory. If Connetics decides that change or modification of the
production procedure of the Relaxin Materials is necessary during the Term for
any reason, Connetics shall promptly notify Medeva in writing of the need for
such change or modification. Connetics may implement such change or modification
to the actual production procedure only upon Medeva's prior written consent,
which shall not be unreasonably withheld and shall be deemed given unless
Connetics is otherwise notified in writing by Medeva within thirty (30) days of
Connetics' corresponding notice.
5.1.2 PRODUCT FOR COMMERCIAL SALE. Commencing upon Medeva's initial
purchase order until the termination or expiration of this Agreement, Connetics
shall, and shall cause its Contract Manufacturer(s), to use Commercially
Reasonable Efforts to manufacture for and supply to Medeva all of Medeva's
requirements for Product on the terms set forth in a Supply Agreement to be
entered into as soon as practicable after Medeva's decision to proceed with the
first Regulatory Filing in the Territory, the outlined terms of which are
reflected in EXHIBIT E. The price to Medeva for commercial supply of Product
shall be Connetics' COGS plus the royalty on Medeva's Net Sales of Product in
the Territory calculated pursuant to SECTION 5.1.3. Notwithstanding the
foregoing, if the price per milligram of Product calculated in accordance with
SECTIONS 5.1.2 and 5.1.3 exceeds [***] of Medeva's Net Selling Price, the
Parties shall negotiate in good faith a new price for the Product. Such
negotiations can be requested by either Party after the end of the first fiscal
year following the first Regulatory Approval in the Territory, and thereafter no
more frequently than every six (6) months. Notwithstanding the foregoing, either
Party can request such negotiations earlier should an event outside the Parties'
control result in the price per milligram of Product exceeds [sic] [***] of
Medeva's Net Selling Price. If following any renegotiation requested by Medeva,
the price to Medeva falls below the [***] threshold, the price shall be reset to
equal the threshold number. Solely for purposes of this Agreement, and by way of
illustration, the Parties agree to negotiate in good faith a new price for the
Product if [(A divided by B) + (C divided by D)] > E([***])], where:
A = the total of Connetics' COGS invoiced to Medeva over the prior
three months
B = the number of milligrams of Product sold to Medeva over the prior
three months
C = the applicable royalty payable by Medeva pursuant to SECTION 5.1.3
over the prior three months
D = the number of milligrams of Product sold by Medeva over the prior
three months, and
E = Medeva's Net Selling Price averaged over the prior three months.
Subject to SECTION 5.1.5 below, during the Term, Medeva shall purchase all its
requirements for Product from Connetics. Upon Medeva's request, during the one
(1) year period preceding the expiration of the Term, the Parties agree to
negotiate in good faith for an extension of supply by Connetics and purchase of
the Product by Medeva.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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5.1.3 ROYALTY. Medeva shall pay Connetics a royalty equal to [***]
of Medeva's annual Net Sales in the Territory up to $100 Million Net Sales, plus
[***] on the amount of Medeva's annual Net Sales in the Territory over $100
Million.
5.1.4 CONTRACT MANUFACTURING.
(a) Connetics may contract with one or more Contract
Manufacturers to perform any or all of its obligations under this
Agreement and the Supply Agreement, provided that (i) Connetics permits
Medeva to review and comment on, and incorporates the reasonable
comments of Medeva in, the drafts of the respective agreements to be
entered into after the Effective Date (each a "CONTRACT MANUFACTURER
AGREEMENT"), (ii) Connetics provides Medeva with a true and accurate
copy of each such Contract Manufacturer Agreement, and (iii) Connetics
uses Commercially Reasonable Efforts to cause each Contract Manufacturer
to agree to execute and deliver to Medeva a letter in the form of
EXHIBIT F to this Agreement, and to include the provisions set forth in
that letter in the relevant Contract Manufacturer Agreement.
(b) As to each Contract Manufacturer, Connetics agrees that
Medeva may seek to enforce Connetics' remedies under such Contract
Manufacturer Agreement directly against such Contract Manufacturer
without first exhausting its remedies against Connetics if the Contract
Manufacturer breaches its Contract Manufacturer Agreement so as to cause
Connetics to become liable to Medeva for damages due to Connetics'
inability to supply Product or Relaxin Materials in accordance with the
terms of this Agreement and the Supply Agreement. Notwithstanding the
preceding sentence, if Medeva shall seek to exercise such remedies,
Connetics shall remain primarily liable and obligated to Medeva under
all provisions of this Agreement.
(c) Connetics agrees to use its Commercially Reasonable
Efforts to include in each Contract Manufacturer Agreement the following
provisions: (i) a prohibition against sublicensing by such Contract
Manufacturer of Licensed IP licensed to such Contract Manufacturer by
Connetics; (ii) a prohibition against the sale by such Contract
Manufacturer to any Third Party of (A) Relaxin for use in any product to
be sold or distributed in the Territory or (B) Product for resale (other
than by Connetics to Medeva, or by Medeva) in the Territory, and (iii) a
right for Connetics to terminate such Contract Manufacturer Agreement in
the event of a breach of the terms set forth in either of (i) or (ii)
above.
5.1.5 INABILITY TO SUPPLY. If Connetics fails for any reason,
including without limitation, a force majeure event described in SECTION 12.7,
to deliver Relaxin Materials and/or Product to Medeva, then Medeva shall have
the right to make or have made all of its requirements of Relaxin Materials
and/or Product; provided that Medeva shall not have the right to manufacture if,
within thirty (30) days after Medeva first notifies Connetics of its intent to
exercise its rights under this Section, Connetics provides Medeva with a plan to
cure the inability to supply within the next one hundred fifty (150) days and
then does so within such 150-day period. In addition to the other remedies
provided for with respect to any failure to supply the
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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Product, the Supply Agreement shall set forth a mechanism by which Connetics
will transfer to Medeva, upon request, such manufacturing technology and
know-how so as to permit Medeva to manufacture Product and/or Relaxin Materials,
and Connetics agrees to cooperate with Medeva to facilitate the transition. If
Medeva begins manufacturing Relaxin Materials and/or Product pursuant to this
Section, Medeva shall be obligated by the provisions of SECTION 3.5 of this
Agreement with respect to record-keeping. During the time Medeva manufactures
Product pursuant to this Section, Medeva shall continue to pay royalties to
Connetics in accordance with SECTION 5.1.3. Nothing in this SECTION 5.1.5 shall
prevent Connetics from recommencing manufacturing after Medeva begins to
manufacture, provided that Connetics shall only manufacture Relaxin Materials or
Product for use or sale outside the Territory except as set forth in SECTION
8.1.8.
5.1.6 ALTERNATE SUPPLY. Connetics agrees to use Commercially
Reasonable Efforts to cause at least two sources of supply of Relaxin to become
and remain pre-qualified as soon as practicable after the first Regulatory
Approval and during the remainder of the Term of this Agreement.
5.2 PAYMENT TERMS.
5.2.1 ROYALTY PAYMENTS. Medeva shall remit royalty payments to
Connetics quarterly, within forty-five (45) days after the end of each calendar
quarter with respect to Medeva's Net Sales in the Territory during that quarter.
5.2.2 TIMING, FORM OF PAYMENT. All payments payable by Medeva to
Connetics pursuant to this ARTICLE 5 shall be calculated according to SECTION
12.2. Upon shipment of clinical supplies pursuant to SECTION 5.1.1, Connetics
shall invoice Medeva, and Medeva shall pay the invoice within thirty (30) days
after receipt of the invoice. All payments to Connetics by Medeva under this
Agreement shall be made in United States dollars by wire transfer (or such other
reasonable means as Connetics may direct) to such United States bank account as
Connetics may designate from time to time.
5.2.3 NONCONFORMING CLINICAL SUPPLIES.
(a) Within thirty (30) days after the delivery of Relaxin
Materials and the accompanying Certificate of Analysis to Medeva, Medeva
shall submit to Connetics in writing any claim that Relaxin Materials do
not conform with the Specifications, accompanied by a report of Medeva's
analysis (which analysis shall be conducted in good faith) and a sample
of the Relaxin Materials at issue, explaining in reasonable detail the
basis on which the allegedly nonconforming Relaxin Materials does not
meet the Specifications. Medeva shall not be obligated to pay for such
nonconforming shipment of Relaxin Materials. Only those tests listed in
the Specifications may be used to demonstrate nonconformance of Relaxin
Materials.
(b) Connetics shall conduct its own analysis of the sample in
good faith within thirty (30) days after the receipt by Connetics of the
report and sample from
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Medeva, and provide the results to Medeva. If after Connetics' own
analysis of the sample Connetics agrees with the claim of nonconformity,
Medeva shall promptly inform Connetics if Medeva wishes to have
Connetics replace the nonconforming Relaxin Materials with conforming
Relaxin Materials. If Medeva wishes to receive such replacement Relaxin
Materials, Connetics shall provide such replacement as soon as
reasonably practicable thereafter, in which case Medeva shall be
obligated to pay only for such replacement Relaxin Materials. Medeva
shall not be obligated to pay for the nonconforming Relaxin Materials,
and Connetics shall: (i) credit Medeva for the amount paid by Medeva for
the nonconforming Relaxin Materials if Medeva has already paid for such
nonconforming Relaxin Materials or (ii) cancel its invoice to Medeva for
such nonconforming Relaxin Materials if Medeva has not yet paid for such
nonconforming Relaxin Materials, and Medeva shall not be obligated to
pay such canceled invoiced amount. If, after its own analysis, Connetics
does not agree with the claim of nonconformity or determines that Medeva
is responsible for the nonconformity, the Parties shall in good faith
discuss and agree upon a settlement of the issue, and Medeva shall not
be obligated to pay for such alleged nonconforming Relaxin Materials
until such settlement is reached.
(c) After Connetics has agreed that the Relaxin Materials
shipment is nonconforming, and if Connetics is responsible for the
nonconformity, Medeva shall return or destroy it at Connetics' request
and cost in the most cost effective and environmentally safe and
appropriate manner available, consistent with federal, state and local
laws and regulations.
(d) If conforming Relaxin Materials supplied under this
Agreement become nonconforming or unsuitable at no fault of Connetics,
Medeva will remain obligated to pay Connetics for such Relaxin
Materials. At Connetics' request, Medeva shall return such unsuitable
Relaxin Materials to Connetics. Otherwise, Medeva shall destroy it in
the most environmentally safe and appropriate manner available,
consistent with federal, state and local laws and regulations.
5.2.4 PAYMENTS FOR COMMERCIAL SUPPLY. All payments by Medeva for
commercial supplies shall be made in accordance with the Supply Agreement.
5.3 PRODUCT MARKINGS. Medeva shall market and sell Product in the
Territory as Medeva's products under trademarks selected and owned or controlled
by Medeva; provided, however, to the extent Medeva determines to use any
trademarks owned by Connetics each Product marketed and sold by Medeva under
this Agreement shall be marked: (a) in accordance with the provisions of SECTION
2.1.2; (b) with a notice that such Product is sold under a license from
Connetics Corporation; and (c) with all patent and other intellectual property
notices relating to the Licensed IP as may be required by applicable law.
5.4 PROFIT SHARING. Beginning on the date of Regulatory Approval in the
U.S., Medeva shall be entitled to receive and Connetics shall pay Medeva fifty
percent (50%) of the Operating Profits on Connetics' or its Affiliates' U.S.
sales of Product, for five (5) years or until
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the end of the first calendar year when Medeva's annual Net Sales of Product in
the Territory exceed [***], whichever occurs first. All payments due from
Connetics to Medeva under this Section shall be paid within forty-five (45) days
after the end of each calendar quarter. This SECTION 5.4 shall apply regardless
of whether Connetics requests Medeva's assistance to co-promote in the U.S.
pursuant to SECTION 5.5; provided that if Connetics requests Medeva's
assistance, Medeva shall be entitled to recovery of Medeva's sales
representative expenses described in SECTION 5.5 below (which Connetics shall
reimburse to Medeva within thirty (30) days after receipt of Medeva's invoice)
prior to the calculation of Connetics' Operating Profits.
5.5 COMMERCIALIZATION. After obtaining Regulatory Approval for the
Product in the Territory, Medeva shall use Commercially Reasonable Efforts to
develop and commercialize the Product in the Territory. In addition, at
Connetics' request, Medeva shall assist Connetics to co-promote the Product in
the U.S. until the earlier of (a) five (5) years after Regulatory Approval in
the U.S. or (b) the end of the first calendar year when Medeva's annual Net
Sales of Product in the Territory exceed [***]. During that period, Connetics
may discontinue the co-promotion arrangement at any time at its sole discretion
on ninety (90) days' notice. After such period, either of Medeva or Connetics
may discontinue the co-promotion arrangement upon no less than ninety (90) days'
notice to the other Party. During either notice period, the provisions of this
SECTION 5.5 and SECTION 5.4 shall continue in effect, provided that Medeva must
use Commercially Reasonable Efforts during that notice period to facilitate the
transfer of all promotion activities to Connetics. During the co-promotion
period, Connetics will book sales and lead marketing efforts determined by the
Commercialization Committee and, at Connetics' discretion and upon Connetics'
request, Medeva will match all reasonable field sales efforts by Connetics
(which shall in no event require Medeva to provide more than thirty (30)
representatives). To the extent that Medeva is co-promoting, Connetics shall pay
Medeva an amount per Medeva representative equal to Connetics' fully-loaded cost
per Connetics representative.
5.6 AUDIT.
5.6.1 BOOKS AND RECORDS. Each Party agrees to maintain and cause its
Affiliates and, to the extent possible, cause its Contract Manufacturers and
Contract Providers, to maintain complete and accurate books and records of
account so as to enable the other Party to verify amounts due and payable under
this Agreement. In particular, each Party shall preserve and maintain all such
records and accounts required for audit for a period of four (4) years after the
calendar quarter for which the record applies.
5.6.2 AUDIT OF MEDEVA'S RECORDS. Upon two (2) weeks notice to
Medeva, Connetics shall have the right to have an independent certified public
accountant, selected by Connetics and reasonably acceptable to Medeva, audit
Medeva's records during normal business hours to verify all records pertaining
to the calculation of Medeva's Net Sales in the Territory; provided, however,
that such audit shall not take place more frequently than once a year and shall
not cover records for more than the preceding four (4) years. Except in the
event that the audit reveals fraud, Connetics shall have no right under this
Section to audit records for periods which have already been audited under this
provision.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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5.6.3 AUDIT OF CONNETICS' RECORDS. Medeva shall have the right, upon
two (2) weeks notice to Connetics, to have an independent certified public
accountant, selected by Medeva and reasonably acceptable to Connetics, audit
Connetics' records during normal business hours to verify all records pertaining
to the calculation of Connetics' Net Sales, COGS, Operating Profits, and the
amounts due Medeva pursuant to SECTIONS 5.4 and 5.5; provided, however, that
such audit shall not take place more frequently than once a year and shall not
cover records for more than the preceding four (4) years; and provided further
that Medeva shall not have the right to audit records pertaining to the
calculation of Connetics' Net Sales or Operating Profits or the amounts due
pursuant to SECTIONS 5.4 and 5.5 after the end of Connetics' first full fiscal
year following the termination of the profit sharing described in SECTION 5.4.
Except in the event that the audit reveals fraud, Medeva shall have no right
under this Section to audit records for periods which have already been audited
under this provision.
5.6.4 AUDIT RESULTS: PAYMENTS. Each Party shall promptly pay or
refund to the other Party the amount of any overpayment or underpayment
determined in such audit. Any such audit shall be at the expense of the Party
requesting the audit unless such audit indicates greater than five percent (5%)
error in payment in favor of the audited Party based on the records and/or
calculations of the audited Party, in which case such audit shall be at the
expense of the audited Party and such payment or refund shall bear interest from
the date the payment was originally due at two percent (2%) plus the then
current prime rate established by the U.S. Federal Reserve Bank. Any dispute
between the Parties with respect to the results of any dispute shall be resolved
in accordance with SECTION 12.4 of this Agreement. All information resulting
from such audits conducted pursuant to this SECTION 5.6 shall be kept
confidential pursuant to SECTION 7.2. The results of any such audit shall be
disclosed to the auditing Party, provided that the certified public accountants
shall not disclose to the auditing Party the business details of the audited
Party's records, but shall report only as to whether the amounts charged or
royalties paid were correct, or if not, the amount by which the certified public
accountant's calculation varies from the audited Party's calculation.
ARTICLE VI
GOVERNANCE
6.1 COMMITTEES. The Parties shall establish the committees described
below for the purpose of performing the obligations and governing the
relationship between the Parties pursuant to this Agreement. Each Party will
provide to the relevant committees such data and documentation developed by each
Party necessary to enable the committees to perform the duties described in this
SECTION 6.1.
6.1.1 DEVELOPMENT COMMITTEE. Within thirty (30) days after the
Effective Date, the Parties shall establish a Development Committee which shall
(a) develop, approve and amend the Development Plan and associated budget
(including Support Expenses) with respect to Product Development in the United
States and the Territory, (b) provide overall direction, monitor progress,
manage information exchange between the Parties, decide key strategies and solve
problems with respect to the Clinical Development of and Regulatory Filings for
the
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Product in the Territory, and (c) make decisions about the potential joint
development of the Product for Additional Indications. At the first meeting of
the Development Committee, the members shall establish a regular meeting time
and structure, and appoint a secretary whose responsibility it will be to
coordinate the timing, notice, and agendas for Development Committee meetings.
6.1.2 COMMERCIALIZATION COMMITTEE. Upon successful completion of the
last U.S. clinical trial required for BLA filing (as determined pursuant to
SECTION 4.1.2), or upon such earlier date as the Parties may agree, the Parties
shall establish a Commercialization Committee which shall be responsible for
providing overall direction, monitoring progress, managing information exchange
between the Parties, deciding key strategies and solving problems with respect
to commercialization and promotion of the Product in the U.S. and the Territory.
At the first meeting of the Commercialization Committee, the members shall
establish a regular meeting time and structure, and appoint a secretary whose
responsibility it will be to coordinate the timing, notice, and agendas for
Commercialization Committee meetings.
6.2 DECISION MAKING. Each committee shall be composed of up to six (6)
members, with an equal number of representatives from each Party, and each
committee shall be duly authorized and empowered to make decisions on behalf of
its appointing Party. Meetings of the committees may be held in person at
mutually agreed times and locations, or may be held by telephone or video
conference. In general, each of the committees shall strive to make decisions by
consensus. In the event that consensus cannot be reached on matters assigned to
the Development Committee or the Commercialization Committee, then (a) with
respect to Clinical Development, Regulatory Filings, and commercialization in
the Territory, Medeva shall have the right to resolve deadlocks, and (b) with
respect to Clinical Development, Regulatory Filings, and commercialization
outside of the Territory, and all CMC Development, Connetics shall have the
right to resolve deadlocks.
ARTICLE VII
WARRANTIES AND INDEMNITIES
7.1 REPRESENTATIONS AND WARRANTIES OF CONNETICS. Connetics represents
and warrants to Medeva as follows:
7.1.1 ORGANIZATION; STANDING. Connetics is duly organized, validly
existing and in good standing and has the corporate power and authority to
execute and deliver this Agreement and the other agreements contemplated by this
Agreement, including the Stock Purchase Agreement.
7.1.2 NO CONFLICTS. The execution, delivery and performance of this
Agreement have been validly authorized by Connetics; neither the execution and
delivery of, or the performance of its obligations under this Agreement (i)
conflicts with, or contravenes or constitutes any default under, any agreement,
instrument or understanding, oral or written, to which it is a party, including
without limitation its certificate of incorporation or bylaws, or (ii)
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violates applicable laws, rules or regulations, or any judgment, injunction,
order or decree of any governmental authority having jurisdiction over it.
7.1.3 RIGHTS TO LICENSED IP. As of the Effective Date, Connetics
owns, controls, or otherwise has the right to use, all Relaxin Information and
Relaxin Patents required or necessary to develop, manufacture and sell Products
(in bulk or finished form); and further Connetics has the right to grant to
Medeva the rights and licenses under the Licensed IP in this Agreement.
7.1.4 NO LAWSUITS, ETC. To the best of Connetics' knowledge, as of
the Effective Date and during the immediately preceding five (5) year period (or
three [3] year period with respect to Connetics' licensors), there have not been
any claims, lawsuits, arbitrations, legal or administrative or regulatory
proceedings, charges, complaints or investigations by any government authority
or other Third Party threatened, commenced or pending against Connetics or its
licensors relating to, and Connetics has not received any notice of infringement
with respect to, the Relaxin Information, Relaxin Patents, Relaxin or the
Relaxin Materials, including Connetics' right to manufacture, use or sell
Products.
7.1.5 THIRD PARTY RIGHTS. The exercise by Medeva of the rights and
licenses granted to Medeva by Connetics under this Agreement will not infringe
any rights owned by any Third Party or violate any agreement between Connetics
and any Third Party (including without limitation the licensors under the Third
Party Licenses). Except as set forth in the Third Party Licenses, as of the
Effective Date, Connetics is not aware of any Third Parties that own or control
any patents or Relaxin Information required for the production, manufacture or
commercialization of Products.
7.1.6 NO ENCUMBRANCES. As of the Effective Date, Connetics controls
or otherwise is entitled to use throughout the Territory all rights in, to and
under the Relaxin Patents and Relaxin Information, free and clear of any lien,
claim, charge, encumbrance or right of any Third Party (other than as set forth
in the Third Party Licenses).
7.1.7 NO OTHER AGREEMENTS. No other agreement or understanding,
verbal or written, exists to which Connetics is legally bound regarding the
intellectual property rights granted to Connetics pursuant to the Third Party
Licenses. The Third Party Licenses represent the complete and entire
understanding of Connetics and, to the knowledge of Connetics, its respective
Third Party License licensors as of the Effective Date with respect to the
intellectual property rights granted to Connetics pursuant to the Third Party
Licenses.
7.1.8 INFORMATION. All information relating to Relaxin or the
Product delivered to Medeva by Connetics, its officers, directors,
representatives or agents, was when delivered and is as of the date of this
Agreement in all material respects accurate and correct and Connetics is not
aware of any information which would be required to be disclosed to make any
such information not misleading.
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7.2 REPRESENTATION AND WARRANTIES OF MEDEVA. Medeva represents and
warrants to Connetics as follows:
7.2.1 ORGANIZATION; STANDING. Medeva is duly organized, validly
existing and in good standing and has the corporate power and authority to
execute and deliver this Agreement and to perform its obligations under this
Agreement and the other agreements contemplated by this Agreement, including the
Stock Purchase Agreement.
7.2.2 NO CONFLICTS. The execution, delivery and performance of the
Agreement have been validly authorized by Medeva; neither the execution and
delivery of, or the performance of its obligations under this Agreement (i)
conflicts with, or contravenes or constitutes any default under, any agreement,
instrument or understanding, oral or written, to which it is a party, including
without limitation its certificate of incorporation or bylaws, or (ii) violates
applicable laws, rules or regulations, or any judgment, injunction, order or
decree of any governmental authority having jurisdiction over it.
7.3 DISCLAIMER OF WARRANTIES. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN
THIS AGREEMENT OR BY APPLICABLE LAW, NEITHER PARTY MAKES ANY WARRANTY WITH
RESPECT TO ANY TECHNOLOGY, GOODS, SERVICES, RIGHTS, OR OTHER SUBJECT MATTER OF
THIS AGREEMENT AND HEREBY DISCLAIMS ALL WARRANTIES, CONDITIONS OR
REPRESENTATIONS OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO,
IMPLIED WARRANTIES OF PERFORMANCE, MERCHANTABILITY, SATISFACTORY QUALITY,
FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OF THIRD PARTY INTELLECTUAL
PROPERTY RIGHTS.
7.4 INDEMNIFICATION OF MEDEVA. Connetics shall indemnify Medeva, its
Affiliates and their respective directors, officers, employees and agents, and
defend and save each of them harmless, from and against any and all suits,
losses, actions, demands, investigations, claims, damages, liabilities, costs
and expenses (including, without limitation, reasonable attorneys' fees and
expenses) (collectively, "LOSSES") brought by Third Parties arising from or
occurring as a result of (a) any breach (or alleged breach) by Connetics of its
representations, warranties, or obligations under this Agreement; (b) the
manufacture (except by Medeva pursuant to SECTION 5.1.5) or the storage of the
Product prior to the date of shipment of Product to Medeva by Connetics, its
Affiliates, Contract Manufacturers or Contract Providers, all except to the
extent caused by the negligence or willful misconduct of Medeva or its officers,
agents, employees, Affiliates, sublicensees or customers; (c) the negligence or
willful misconduct of Connetics or its officers, agents, employees or
Affiliates; or (d) the use or consumption of the Product outside of the
Territory.
7.5 INDEMNIFICATION OF CONNETICS. Medeva shall indemnify Connetics, its
Affiliates and their respective directors, officers, employees and agents, and
defend and save each of them harmless, from and against any and all Losses
brought by Third Parties arising from or occurring as a result of (a) any breach
(or alleged breach) by Medeva of its representations, warranties, or obligations
under this Agreement; (b) the manufacture by Medeva (pursuant to SECTION 5.1.5)
or
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the storage of the Product after the date of shipment of Product to Medeva by
Medeva, its Affiliates, Contract Manufacturers or Contract Providers, all except
to the extent caused by the negligence or willful misconduct of Connetics or its
officers, agents, employees, Affiliates, sublicensees or customers; (c) the
negligence or willful misconduct of Medeva or its officers, agents, employees or
Affiliates; or (d) the use or consumption of the Product within the Territory.
7.6 INDEMNIFICATION PROCEDURE.
7.6.1 NOTICE. Each indemnified party (the "INDEMNITEE") agrees to
give the indemnifying party (the "INDEMNITOR") prompt written notice of any
Losses or discovery of fact upon which such indemnified party intends to base a
request for indemnification under SECTION 7.4 or 7.5. Notwithstanding the
foregoing, the failure to give timely notice to the Indemnitor shall not release
the Indemnitor from any liability to the Indemnitee to the extent the Indemnitor
is not prejudiced thereby.
7.6.2 COPIES. The Indemnitee shall furnish promptly to the
Indemnitor copies of all papers and official documents in the Indemnitee's
possession or control which relate to any Losses; provided, however, that if the
Indemnitee defends or participates in the defense of any Losses, then the
Indemnitor shall also provide such papers and documents to the Indemnitee. The
Indemnitee shall cooperate with the Indemnitor in providing witnesses and
records necessary in the defense against any Losses.
7.6.3 PARTICIPATION. The Indemnitor shall have the right, by prompt
notice to the Indemnitee, to participate in the defense of any third party claim
forming the basis of such Losses with counsel reasonably satisfactory to the
Indemnitee, and at the sole cost of the Indemnitor so long as (a) the Indemnitor
shall promptly notify the Indemnitee in writing (but in no event more than 60
days after its receipt of notice of the claim) that it will indemnify the
Indemnitee from and against any Losses the Indemnitee may suffer arising out of
the claim, and (b) the Indemnitor diligently participates the defense of the
claim.
7.6.4 CONTROL OF DEFENSE. If the Indemnitor participates in the
defense of the claim as provided above, the Indemnitee may at its option
relinquish total control to the Indemnitor or participate in such joint defense
with its own counsel who shall be retained, at the Indemnitee's sole cost and
expense; provided, however, that neither the Indemnitee nor the Indemnitor shall
consent to the entry of any judgment or enter into any settlement with respect
to the claim without the prior written consent of the other party, which consent
shall not be reasonably [sic] withheld [sic] or delayed. If the Indemnitee
withholds consent in respect of a judgment or settlement involving only the
payment of money and which would not involve any stipulation or admission of
liability or result in the Indemnitee becoming subject to injunctive relief or
other relief, the Indemnitor shall have the right, upon notice to the Indemnitee
within five (5) days or receipt of the Indemnitee's written denial of consent,
to pay to the Indemnitee the full amount of such proposed judgment or
settlement, including all interest, costs or other charges relating thereto, and
shall pay all attorneys' fees incurred to such date for which the Indemnitor is
obligated under this Agreement, if any at which time the Indemnitor's rights and
obligations and duty to indemnify with respect to the claim shall cease.
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7.6.5 SETTLEMENT. If the Indemnitor does not so participate in the
defense of such claim, the Indemnitee may conduct such defense with counsel of
its choice and at the sole cost of the Indemnitor and may settle such case (for
monetary damages only) as it shall determine in the exercise of its reasonable
discretion. Except as provided in this SECTION 7.6.5, the Indemnitor shall not
be liable for any settlement or other disposition of a Loss by the Indemnitee
which is reached without the written consent of the Indemnitor.
7.6.6 COSTS AND EXPENSES. Except as provided in this SECTION 7.6,
the costs and expenses, including fees and disbursements of counsel, incurred by
any Indemnitee in connection with any claim shall be reimbursed on a calendar
quarter basis by the Indemnitor, without prejudice to the Indemnitor's right to
contest the Indemnitee's right to indemnification and subject to refund in the
event the Indemnitor is ultimately held not to be obliged to indemnify the
Indemnitee.
7.7 LIMITATION OF LIABILITY. EXCEPT FOR ANY LOSS, LIABILITY, DAMAGE OR
OBLIGATION ARISING OUT OF OR RELATING TO THE INABILITY TO SUPPLY THE PRODUCT,
DISCLOSURE OF CONFIDENTIAL INFORMATION PURSUANT TO ARTICLE IX OR AS PROVIDED IN
SECTION 7.4 OR 7.5, IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY TO THE
OTHER PARTY OR ANY OTHER THIRD PARTY FOR ANY LOST OPPORTUNITY OR PROFITS, OR FOR
ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES ARISING OUT
OF A BREACH OF THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY
(INCLUDING NEGLIGENCE), AND WHETHER OR NOT SUCH PARTY TO THIS AGREEMENT HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
ARTICLE VIII
COVENANTS
8.1 CONNETICS' COVENANTS TO MEDEVA. Connetics covenants to Medeva as
follows:
8.1.1 MANUFACTURE. At the time of delivery of Relaxin Materials to
Medeva, the Relaxin Materials (a) will have been manufactured, filled, packaged,
stored and shipped in accordance with all applicable laws, rules, regulations or
requirements, (b) will have been manufactured, filled, packaged and stored in
accordance with the Specifications, and (c) will be free from defects in
material, manufacturing and workmanship for the shelf life of such Relaxin
Materials as set forth in the Specifications.
8.1.2 COMPLIANCE WITH LAWS. Connetics has conducted or has caused
Connetics' Contract Manufacturers and Contract Providers to conduct, and will in
the future conduct Product Development and other relevant research and
development activities required to support clinical testing, Regulatory
Approvals and commercialization of the Products in the Field
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(and any Additional Indications) in accordance with applicable laws, rules and
regulations, including without limitation, known or published standards of the
FDA.
8.1.3 PERMITS; LICENSES. Connetics will maintain in effect all
governmental permits, licenses, orders, applications and Regulatory Approvals,
if applicable, necessary to manufacture, supply and sell Relaxin Materials
and/or Product and otherwise as necessary to perform its obligations in
accordance with the terms of this Agreement and the Supply Agreement. Connetics
will manufacture and supply such Relaxin Materials and/or Product in accordance
with such governmental permits, licenses, orders, applications, and Regulatory
Approvals.
8.1.4 ADEQUATE WORKFORCE. Connetics maintains and shall maintain
throughout the term of this Agreement a work force suitably qualified and
trained, and facilities and equipment sufficient, to enable Connetics to perform
its obligations as constituted from time to time under this Agreement.
8.1.5 FUTURE PATENTS. Connetics will promptly disclose to Medeva any
knowledge it acquires during the Term of this Agreement relating to any patents
or patent applications other than the Relaxin Patents, required for the
production, manufacture or commercialization of Products in the Field.
8.1.6 COMMERCIALIZATION. Connetics shall use Commercially Reasonable
Efforts to develop and commercialize the Product in the United States.
8.1.7 INSURANCE. Connetics shall obtain and maintain sufficient
liability insurance to cover its activities and obligations (including without
limitation indemnified obligations) contemplated under this Agreement, in such
amount normal and customary for companies engaged in industry and activities
similar to Connetics.
8.1.8 NON-COMPETE. Connetics covenants that, except as expressly
permitted under this Agreement, during the Term, it will not, nor will it permit
or cause its Affiliates or any Third Party to, enter into any agreement or
arrangement to manufacture, develop, use, offer for sale, lease, market, sell,
import, commercialize or otherwise exploit either directly or indirectly in the
Territory any product which contains human or animal relaxin (whether
recombinant or natural) or any product for the treatment of DSS except in
accordance with the terms of this Agreement (collectively, "THIRD PARTY WORK").
Without limiting the foregoing, except for sublicenses and subcontracts entered
into in accordance with the terms of this Agreement, Connetics will not grant to
any Affiliate or Third Party any rights under the Licensed IP which would permit
such Affiliates or Third Party to engage in or otherwise exploit Third Party
Work in the Territory. If Connetics breaches the provisions of this SECTION
8.1.8, then without limiting any other remedies available to Medeva, Connetics
shall at its sole expense contribute the Third Party Work to Medeva for use and
exploitation under the terms of this Agreement and secure for Medeva the
exclusive right in the Field to use and exploit the Third Party Work in the
Territory.
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8.1.9 MAINTENANCE OF PATENTS. Connetics shall prosecute and maintain
the Relaxin Patents and shall not take any steps to abandon, or allow to lapse,
nor fail to take any steps which are required to avoid the abandonment or
lapsing of any Relaxin Patent (nor cause or permit any other person to do so)
unless, in each case, the Parties otherwise specifically agree in writing. For
the avoidance of doubt, the provisions of this SECTION 8.1.9 apply to the
Portuguese patents Nos. 85134 and 89835 listed in EXHIBIT B, notwithstanding
that they are shown in EXHIBIT B as "not maintained," to the extent that they
are not already abandoned as of the Effective Date.
8.2 MEDEVA'S COVENANTS TO CONNETICS. Medeva covenants to Connetics as
follows:
8.2.1 COMMERCIALIZATION. Medeva shall use Commercially Reasonable
Efforts to develop and commercialize the Product in the Territory.
8.2.2 PERMITS; LICENSES. Medeva will maintain in effect in the
Territory all governmental permits, licenses, orders, applications and
Regulatory Approvals, if applicable, necessary to supply and sell Relaxin
Materials and/or Product in the Territory and otherwise as necessary to perform
its obligations in accordance with the terms of this Agreement and the Supply
Agreement (all to the extent not otherwise required to be held by Connetics
under applicable law or by the terms of this Agreement), and Medeva will supply
such Relaxin Materials and/or Product in accordance with such governmental
permits, licenses, orders, applications, and Regulatory Approvals.
8.2.3 ADEQUATE WORKFORCE. Medeva, directly or through its Affiliates
or sublicensees, maintains and shall maintain throughout the term of this
Agreement a work force suitably qualified and trained, and facilities and
equipment sufficient, to enable Medeva to perform its obligations as constituted
from time to time under this Agreement.
8.2.4 FUTURE PATENTS. Medeva will promptly disclose to Connetics any
knowledge it acquires during the Term of this Agreement relating to any patents
or patent applications other than the Relaxin Patents, required for the
production, manufacture or commercialization of Products in the Field.
ARTICLE IX
CONFIDENTIALITY AND PUBLICITY
9.1 PUBLIC RELATIONS AND ANNOUNCEMENTS. The Parties shall agree upon and
issue a press release upon the signing of this Agreement. The Parties shall
endeavor to provide courtesy copies of any public announcements concerning the
relationship created by this Agreement. Neither Party shall make any
representations concerning the other without the prior consent from the other
Party. Except for such disclosure as is required by applicable law and/or stock
exchange regulation, neither Party shall make any announcement, news release,
public statement, publication or presentation relating to the existence of this
Agreement or the arrangements referred to in this Agreement without the other
Party's prior written consent, which consent will not be unreasonably withheld.
The Parties agree to coordinate the initial announcement and/or
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press release relating to this Agreement. Notwithstanding the foregoing, each
Party consents to references to it in reports or documents or other disclosures
sent to stockholders or filed with or submitted to any governmental authority or
stock exchange. However, the Party making such references shall afford the other
Party the prior opportunity to review the text of any such report, document or
other disclosure and shall use Commercially Reasonable Efforts to comply with
the other Party's reasonable requests regarding changes. The Parties agree that
once approval for disclosure of information has been obtained in accordance with
the provisions of this SECTION 9.1, the Party that requested such approval shall
be entitled to use such information without any obligation to seek further
approval.
9.2 CONFIDENTIALITY.
9.2.1 CONFIDENTIAL INFORMATION. The Parties acknowledge that by
reason of their relationship to each other under this Agreement, each will have
access to certain information and materials concerning Relaxin Information, the
other's business, plans, trade secrets, customers (including, but not limited
to, customer lists of both Parties), technology, and/or products that is
confidential and of substantial value to that Party, which value would be
impaired if such information were disclosed to Third Parties ("CONFIDENTIAL
INFORMATION"). Each Party agrees that it will not use in any way other than
expressly authorized or contemplated under this Agreement, nor disclose to any
Third Party, any such Confidential Information revealed to it by the other Party
(except that Confidential Information may be disclosed, as required for the
purposes of this Agreement, to any Regulatory Authority, an Affiliate, assignee,
distributor, consultant or Third Party contractor or research and development
organization under similar written obligations of non-disclosure and non-use),
and will take every reasonable precaution to protect the confidentiality of such
information and with no less restrictive precautions than it takes to protect
its own confidential information. If Confidential Information is required to be
disclosed in response to a valid order by a court, regulatory authority or other
government body of competent jurisdiction, or if otherwise required to be
disclosed by law, or if necessary to establish the rights of either Party under
this Agreement, the receiving Party shall use commercially reasonable efforts to
provide the disclosing Party with advance notice of such required disclosure to
give the disclosing Party sufficient time to seek a protective order or other
protective measures, if any are available, for such Confidential Information.
9.2.2 EXCEPTIONS. For purposes of this Agreement, information shall
be deemed Confidential Information if such information, by its nature or due to
the context within which it is disclosed, is obviously intended by the
disclosing Party to be kept confidential even if not identified as such in
writing or with legends or other markings, provided that Relaxin Information
shall automatically be treated as Confidential Information. Upon request by
either Party, the other Party will advise whether or not it considers any
particular information or materials to be Confidential Information. Confidential
Information does not include information, technical data or know-how which: (a)
is rightfully in the possession of the receiving Party at the time of disclosure
as shown by the receiving Party's files and records immediately prior to the
time of disclosure; (b) becomes part of the public knowledge or literature, not
as a result of any inaction or action of the receiving Party; (c) is
independently developed by a Party without the use of any Confidential
Information of the other Party; (d) is obtained from any Third Party who is
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authorized to disclose such data and information without obligation of
confidentiality to the disclosing party, or (e) is approved for release in
writing by the disclosing Party.
9.3 REMEDY. If either Party breaches any of its obligations with respect
to this ARTICLE IX, or if such a breach is likely to occur, the other Party
shall be entitled to seek equitable relief, including specific performance or an
injunction, in addition to any other rights or remedies, including money
damages, provided by law, without posting a bond.
9.4 AGREEMENT TERMS. Subject to SECTION 9.1 and the exclusions set forth
in SECTION 9.2.2, the Parties shall treat the terms and conditions of this
Agreement as Confidential Information; provided, however, after written
notification to the other Party, each Party may disclose the existence of this
Agreement and the material terms and conditions of this Agreement under
circumstances that reasonably ensure the confidentiality thereof to: (a) any
government or regulatory authorities, including without limitation the United
States Security and Exchange Commission pursuant to applicable law (excluding,
to the extent legally permitted, disclosure of financial terms in any publicly
available versions of information so-disclosed), (b) its legal representatives,
advisors and prospective investors, and (c) to Connetics' licensors to the
extent required for compliance with Connetics' obligations under the Third Party
Licenses.
ARTICLE X
TERM AND TERMINATION
10.1 TERM. The term of this Agreement shall commence on the Effective
Date and continue in full force and effect until the later of the last to expire
of the Relaxin Patents, or any supplemental protection certificates which
provide exclusivity for the Product in any country in the Territory ("TERM").
10.2 TERMINATION. In addition to and notwithstanding the termination
rights stated elsewhere in this ARTICLE X and in SECTION 12.8 of this Agreement,
this Agreement may be terminated as follows:
10.2.1 FOR BREACH BY CONNETICS. Upon breach by Connetics of any of
its material obligations contained in this Agreement ("CONNETICS BREACH"),
Medeva shall be entitled to give Connetics notice specifying the nature of the
Connetics Breach and stating its intent to terminate this Agreement if the
Connetics Breach is not cured. This Agreement shall terminate forty-five (45)
days after Connetics receives such notice (a) if Connetics does not cure the
Connetics Breach to the reasonable satisfaction of Medeva, or (b) if a plan,
reasonably acceptable to Medeva, is not implemented to cure as soon as
practicable after notice of the Connetics Breach.
10.2.2 FOR BREACH BY MEDEVA. Upon breach by Medeva of any of its
material obligations contained in this Agreement ("MEDEVA BREACH"), Connetics
shall be entitled to give Medeva notice specifying the nature of the Medeva
Breach and stating its intent to terminate this Agreement if the Medeva Breach
is not cured. This Agreement shall terminate forty-five (45) days after Medeva
receives such notice (a) if Medeva does not cure the Medeva Breach to the
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reasonable satisfaction of Connetics, or (b) if a plan, reasonably acceptable to
Connetics, is not implemented to cure as soon as practicable after notice of the
Medeva Breach.
10.2.3 LOSS OF THIRD PARTY LICENSES. Notwithstanding the provisions
of SECTION 10.2.1, Medeva may terminate this Agreement on notice to Connetics if
either of the following agreements is terminated resulting in the loss of
Medeva's license under the Third Party Licenses: (a) the License Agreement dated
September 27, 1993 between Genentech and Connective Therapeutics, Inc. (now
known as Connetics) or (b) the License Agreement dated December 31, 1982 and
re-executed as amended and varied as of June 30, 1987 between the Howard Florey
Institute of Experimental Physiology and Medicine and Genentech, Inc. Connetics
shall use its best efforts to obtain from relevant Third Parties an
acknowledgement that, should the relationship contemplated by the Third Party
Licenses terminate through no fault of Medeva's, that Medeva shall have the
right to continue to commercialize Relaxin as set forth in this Agreement.
10.2.4 TERMINATION BY MEDEVA. Medeva shall have the right to
terminate this Agreement by giving one hundred eighty (180) days prior written
notice to Connetics for any reason or no reason; provided that Connetics may
elect at its sole discretion to continue development of the Product in the
Territory.
10.2.5 TERMINATION FOR INSOLVENCY. Either Party may terminate this
Agreement immediately upon delivery of written notice to the other Party (a)
upon the institution by or against the other Party of insolvency, receivership
or bankruptcy proceedings or any other proceedings for the settlement of the
other Party's debts, provided, however with respect to involuntary proceedings,
that such proceedings are not dismissed within one hundred and twenty (120)
days; (b) upon the other Party's making an assignment for the benefit of
creditors; or (c) upon the other Party's dissolution or ceasing to do business.
10.3 EFFECT OF TERMINATION.
10.3.1 EFFECT ON LICENSE. Upon the expiration or earlier
termination of this Agreement, the rights licensed under this Agreement shall be
treated as follows:
(a) Upon the expiration of the Term, Medeva shall have a
fully paid-up, perpetual, irrevocable, royalty-free, transferable,
worldwide, non-exclusive right and license under the Licensed IP
existing as of the date of such expiration to make, have made, use,
offer to sell, and sell Products in the Territory.
(b) Upon termination pursuant to SECTIONS 10.2.2, 10.2.4, or
12.8, or termination by Connetics pursuant to SECTION 10.2.5, all rights
to the Product (except to Medeva's trademarks) in the Territory shall
revert to Connetics.
(c) Upon termination by Medeva pursuant to SECTIONS 10.2.1,
10.2.3, or 10.2.5, the license granted to Medeva pursuant to this
Agreement shall become a perpetual, irrevocable, royalty-free (as to
Connetics), transferable, exclusive as to the
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Territory, license under the Licensed IP existing as of the date of such
termination, to make, have made, use, offer to sell, and sell Products
in the Territory, with the right to sublicense; provided that Medeva
assumes Connetics' obligations to Third Parties under existing Third
Party Licenses with respect to the Territory.
10.3.2 ONGOING OBLIGATIONS. Except as expressly provided in this
Agreement, termination of this Agreement pursuant to the terms and conditions
set forth in this Agreement shall not relieve the Parties of any right or
obligation, including but not limited to any payment obligations, accruing prior
to or upon such expiration or termination. Upon expiration or termination of
this Agreement for any reason, each Party shall immediately return to the other
Party or destroy any Confidential Information disclosed by the other Party,
except that each Party may retain one copy of such Confidential Information
marked and used for legal archival purposes only. In the event of termination
pursuant to SECTION 10.2.2 by Connetics or SECTION 10.2.4 by Medeva, then Medeva
shall assign and deliver to Connetics all data and information (including
registration dossier) obtained in pursuing regulatory approvals, and all
regulatory approvals (e.g., to Connetics' designee in the Territory as permitted
under the applicable law) for the Product in the Territory received as of such
termination date. Except for the provisions of SECTIONS 2.2, 3.5, 5.3, 5.6 and
10.3, and ARTICLES I, VII, IX, XI and XII which shall survive such expiration or
termination (except as limited by the terms of such section or Article), all
other rights and obligations of the Parties shall cease upon expiration or
termination of this Agreement.
10.3.3 INVENTORY. Notwithstanding the foregoing, upon early
termination of this Agreement pursuant to SECTION 10.2.4, Medeva shall have the
right to sell all remaining Product in its inventory within six (6) months after
the date of termination, subject to the payment to Connetics of the amounts
specified in SECTION 4.1. Thereafter, Medeva agrees to destroy any remaining
supply of Product and Relaxin Materials at Connetics' request and direction.
ARTICLE XI
REGULATORY COMPLIANCE AND REPORTING
11.1 GOVERNMENT INSPECTION. Connetics agrees to advise Medeva by
telephone and facsimile immediately of any proposed or announced visit or
inspection, and as soon as possible but in any case within twenty-four (24)
hours (or, in the case of a Contract Manufacturer, within twenty-four [24] hours
after receipt by Connetics of notice thereof), of any unannounced visit or
inspection, by any Regulatory Authority of any facilities used by Connetics or
its Contract Manufacturers in the performance of its obligations under this
Agreement, including the processes or procedures used at such facilities in the
manufacture of Relaxin Materials, Relaxin or Product. Connetics shall provide
Medeva with a reasonable description of each such visit or inspection promptly
(but in no event later than five [5] calendar days) thereafter, and with copies
of any letters, reports or other documents (including Form 483's) issued by any
such authorities that relate to Relaxin, Relaxin Materials, or the Product, or
such facilities, processes or procedures. Medeva may review Connetics' responses
to any such reports and communications, and if practicable, and, insofar as
timely received, Medeva's reasonable views and requests shall be taken into
account prior to submission of such reports and communications to the relevant
Regulatory
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Authority. Connetics shall also provide Medeva with the notice, information,
documentation, and opportunity to comment provided for above with respect to
Contract Manufacturers.
11.2 ADVERSE EXPERIENCE REPORTING. Each Party shall notify, and shall
cause its Affiliates, sublicensees and Contract Providers and, with respect to
Connetics, its Contract Manufacturers, to notify, the other party promptly upon
receipt of (a) any information concerning any potentially serious or unexpected
side effect, injury, toxicity or sensitivity reaction or any unexpected
incidence or other adverse experience (an "ADVERSE EXPERIENCE") and the severity
thereof associated with the clinical uses, studies, investigations, tests and
marketing of the Relaxin Materials, Relaxin or the Products, whether or not
determined to be attributable to the same, (b) any information regarding any
pending or threatened action which may affect the safety or efficacy claims of
the Products or the continued marketing of the Products in any nation or
jurisdiction, (c) any material communications with or notice from a Regulatory
Authority indicating that it intends to visit or inspect a Party's facilities,
or the facilities of an Affiliate, sublicensee or Contract Provider of such
Party and, with respect to Connetics, a Contract Manufacturer, for a purpose
relevant to the development, manufacture of [sic] marketing of the Products.
Without limiting the foregoing, Connetics shall use Commercially Reasonable
Efforts to require each Affiliate, sublicensee and Contract Manufacturer to
notify Medeva's responsible drug safety department by telephone and facsimile
within twenty-four (24) hours after Connetics first becomes aware of any Adverse
Experience that gives cause for concern or is unexpected or that is fatal,
life-threatening (as it occurred), permanently disabling, requires (or prolongs)
inpatient hospitalization, represents a significant hazard, or is a cancer or a
congenital anomaly or represents an overdose, or any other circumstance that
might necessitate a recall, expedited notification of any Regulatory Authorities
or a significant change in the label of the Product, including without
limitation, any deviation from the specified environmental conditions for
shipping or storage of the Product. Each Party shall make such reports as are
necessary to comply with laws and regulations applicable to it, at its sole
expense. Further, in the event a Party (or its Affiliates, sublicensees,
Contract Manufacturers or Contract Providers) receives a communication or
directive from a Regulatory Authority commencing or threatening seizure of (or
other removal from the market of) Relaxin, Relaxin Materials, or Product, such
Party shall transmit such information to the other Party within twenty-four (24)
hours of receipt.
11.3 NOTIFICATION AND RECALL. If any Regulatory Authority issues or
requests a recall or takes similar action in connection with Relaxin or the
Product, or if either Party determines that an event, incident or circumstance
has occurred which may result in the need for a recall or market withdrawal, the
Party notified of or wishing to call such recall or similar action shall, within
twenty-four (24) hours, advise the other Party of notification or its
determination by telephone or facsimile, after which the Parties shall promptly
discuss and work together to effect an appropriate course of action; provided,
however, that either Party may initiate a recall or market withdrawal thereafter
if it deems such action necessary or appropriate. Connetics shall be responsible
for notification to FDA (or such other applicable Regulatory Authority with
respect to countries other than the United States and the Territory) and
compliance with applicable laws outside the Territory in conducting such recall.
Medeva shall be responsible for notification to the applicable Regulatory
Authority with respect to countries in the Territory and compliance with
applicable laws in the Territory in conducting such recall.
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11.4 RECALL EXPENSE. If a recall results from the breach of a Party's
warranties or obligations under this Agreement, the breaching Party shall bear
the full expense of both Parties incurred in any such recall. Such expenses of
recall shall include, without limitation, the expenses of notification and
destruction or return of the recalled Product and the sum paid for the recalled
Product. Without limitation of the foregoing, if the failure to meet applicable
legal requirements is caused by the act or omission of Connetics in manufacture
or sale of Product to Medeva, (a) Connetics shall have the option of (i)
replacing the recalled Product, or (ii) reimbursing Medeva for any amounts paid
to Connetics by Medeva under this Agreement for Products which are recalled
and/or cannot be shipped by Medeva due to the condition requiring the recall,
and (b) with respect to Product manufactured by Connetics, Connetics shall
reimburse Medeva for all liabilities incurred by Medeva by virtue of being
unable to meet its supply obligations to its customers because Product could not
be shipped by Connetics or Medeva due to the condition requiring recall. In the
event, however, that a recall is partially caused by Connetics' actions or
omissions and partially caused by Medeva's actions or omissions, then each Party
shall be responsible for its proportionate share of the recall expenses based on
its proportionate share of causation.
ARTICLE XII
MISCELLANEOUS
12.1 OFFSETS; TAXES, TARIFFS, FEES. Medeva shall have the right to
offset any amounts receivable from Connetics against the payments due and
payable by Medeva to Connetics under this Agreement, except those payments
specified in SECTION 4.1 of this Agreement (as modified by SECTION 4.2);
provided, however, that Medeva has the right to deduct from the payments set
forth in SECTION 4.1 any withholding tax applicable to Connetics' income which
Medeva is obliged to pay by under [sic] applicable law; provided further that
Medeva shall provide Connetics with an appropriate tax receipt for the deducted
amount which Connetics can present to its tax authority and sufficient for
Connetics to receive the corresponding credit to which it is entitled. The
Parties agree to cooperate in all respects necessary to take advantage of such
double taxation agreements as may be available to optimize the tax obligations
of each Party.
12.2 CURRENCY OF PAYMENTS. All amounts payable to Connetics by Medeva
pursuant to this Agreement shall be made to Connetics in Dollars and by wire
transfer to the U.S. bank account(s) specified by Connetics from time to time.
Medeva shall apply a conversion rate from all other currencies to Dollars for
amounts payable under this Agreement equal to the average of the conversion
rates in effect on each day of the quarterly period for which such payment is
due. The conversion rates to be used in this Agreement shall be the rates
reported by Olsen & Associates, Ltd. and referenced on the internet website at
HTTP://WWW.OLSEN.CH/.
12.3 COMPLIANCE WITH LAWS. In performing this Agreement, each Party
shall comply with all applicable laws and government regulations at all times,
including but not limited to any applicable laws and regulations in the
Territory and the U.S. with respect to the export or re-export or release of
technology and technical data.
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12.4 DISPUTE RESOLUTION AND GOVERNING LAW.
12.4.1 PROCESS. The Parties shall endeavor to resolve in good faith
any disputes or conflicts arising from or relating to the subject matter of this
Agreement, failing which either Party shall submit such conflict for resolution
to the Chief Executive Officers of Medeva PLC and Connetics. If the Chief
Executive Officers of Medeva and Connetics are unable to resolve such conflict
within thirty (30) days after having such conflict submitted to them for
resolution, such conflict may be submitted to judgment by a court of competent
jurisdiction.
12.4.2 GOVERNING LAW. This Agreement shall be governed, controlled,
interpreted and defined by and under the laws of the State of New York and the
United States without regard to that body of law known as conflicts of law;
provided that issues relating to the validity and enforceability of patents
shall be governed by the laws of the jurisdiction by which such patent was
granted. The Parties specifically disclaim application to this Agreement of the
Convention on Contracts for the International Sale of Goods.
12.5 SECTION HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
12.6 NOTICES. Any notice required or permitted by this Agreement shall
be in writing and in English and shall be sent by prepaid registered or
certified mail, return receipt requested; by facsimile; by internationally
recognized courier; or by personal delivery, in each case addressed to the other
Party at the address below or at such other address for which such Party gives
notice under this Agreement.
Connetics Corporation
Attn: President and Chief Executive Officer
3400 West Bayshore Road
Palo Alto, California 94303
U.S.A.
Medeva Pharmaceuticals, Inc.
Attn: Chief Executive Officer
755 Jefferson Road
Rochester, New York 14603
U.S.A.
Such notice shall be deemed to have been given when delivered or, if delivery is
not accomplished by some fault of the addressee, when tendered.
12.7 FORCE MAJEURE. Neither Party shall be considered in default of
performance of its obligations under this Agreement, except any obligation under
this Agreement to make payments when due, to the extent that performance of such
obligations is delayed by contingencies or
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causes beyond the reasonable control and not caused by the negligence or willful
misconduct of such Party, including but not limited to strike, fire, flood,
earthquake, windstorm, governmental acts or orders or restrictions, or force
majeure, to the extent that the failure to perform is beyond the reasonable
control of the nonperforming Party.
12.8 NONASSIGNABILITY AND BINDING EFFECT. Each Party agrees that its
rights and obligations under this Agreement may not be transferred or assigned
directly or indirectly, except as follows: (a) either Party may transfer or
assign this Agreement to an Affiliate of such Party which agrees in writing to
undertake the obligations under this Agreement provided the assigning Party
remains primarily liable, (b) either Party may transfer or assign this Agreement
in connection with the sale of all or substantially all of the assigning Party's
related business, and (c) either Party may transfer or assign this Agreement to
a non-Affiliate Third Party with the prior written consent of the other Party,
which consent shall not be unreasonably withheld. Subject to the foregoing, this
Agreement shall be binding upon and inure to, the benefit of the Parties, their
successors and assigns. Any attempted assignment contrary to the provisions of
this SECTION 12.8 shall be deemed ineffective, and either Party shall have the
right to terminate this Agreement, with the effect described in SECTION 10.3.1.
12.9 PARTIAL INVALIDITY. If any provision of this Agreement is held to
be invalid by a court of competent jurisdiction, then the remaining provisions
shall remain, nevertheless, in full force and effect. The Parties agree to
renegotiate in good faith any term held invalid and to be bound by the mutually
agreed substitute provision in order to give the most approximate effect
intended by the Parties.
12.10 NO WAIVER. No waiver of any term or condition of this Agreement
shall be valid or binding on either Party unless agreed in writing by the Party
to be charged. The failure of either Party to enforce at any time any of the
provisions of this Agreement, or the failure to require at any time performance
by the other Party of any of the provisions of this Agreement, shall in no way
be construed to be a present or future waiver of such provisions, nor in any way
affect the validity of either Party to enforce each and every such provision
thereafter.
12.11 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
12.12 ENTIRE AGREEMENT. This Agreement, including the attached Exhibits
which are incorporated in this Agreement by reference, constitutes the entire
agreement of the Parties with respect to the subject matter, and supersedes all
prior or contemporaneous understandings or agreements, whether written or oral,
between Connetics and Medeva with respect to such subject matter. No amendment
or modification of this Agreement shall be valid or binding upon the Parties
unless made in writing and signed by the duly authorized representatives of both
Parties.
12.13 INDEPENDENT CONTRACTORS. The Parties to this Agreement are
independent contractors. This Agreement does not establish a relationship of
agency, partnership, joint
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venture, employment or franchise between the Parties and neither Party shall
have any authority to bind the other Party or incur any obligation on the other
Party's behalf.
The undersigned have executed this Agreement on behalf of Medeva and
Connetics, as applicable, effective as of the Effective Date.
CONNETICS CORPORATION MEDEVA PHARMACEUTICALS, INC.
By: /s/ Thomas G. Wiggans By: /s/ Mark G. Hardy
Thomas G. Wiggans Mark G. Hardy
President and Chief Executive Officer Its Duly Authorized Officer
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Exhibit 10.66
CONNETICS CORPORATION
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (the "AGREEMENT") is entered into as
of this 11th day of January, 1999, among Connetics Corporation, a Delaware
corporation ("CONNETICS") and Medeva PLC ("MEDEVA PLC"). Connetics and Medeva
PLC are entering into a License Agreement simultaneously with this Agreement
(the "LICENSE AGREEMENT"). All terms not otherwise defined in this Agreement
shall have the meanings ascribed to them in the License Agreement. The "CLOSING
DATE" shall be the same as the Effective Date of the License Agreement.
SECTION 1
SALE OF COMMON STOCK
1.1 Sale of Common Stock. Subject to the terms and conditions of this
Agreement, on the Closing Date, Connetics will issue and sell to Medeva PLC, and
Medeva PLC will purchase from Connetics, for $4,000,000 (the "PURCHASE PRICE")
531,341 shares of Connetics' Common Stock, par value $0.001 per share (the
"COMMON STOCK"). The purchase price per share shall equal the greater of $4.50,
or 1.50 times the Fair Market Value. For purposes of this Agreement, the term
"FAIR MARKET VALUE" is defined as the average of the last reported sale price of
Connetics' Common Stock on the Nasdaq National Market over the ten (10) trading
days ending on the trading day preceding the Closing Date.
1.2 Closing Dates. The closing of the purchase and sale of the Common
Stock (the "CLOSING") shall be held at the offices of Connetics, 3400 West
Bayshore Road, Palo Alto, California at 10:00 a.m. Pacific Standard Time on the
Closing Date, or at such other time and location as Connetics and Medeva PLC may
agree. The shares of Common Stock to be purchased, the purchase price to be
paid, and the timing of the Closing shall be as set forth in this Agreement.
1.3 Delivery. At the Closing, Connetics shall deliver to Medeva PLC a
certificate or certificates representing the shares of Common Stock purchased by
Medeva PLC, against payment of the Purchase Price by wire transfer.
1.4 Legend. The certificate or certificates for the Common Stock shall be
subject to a legend restricting transfer under the Securities Act of 1933, as
amended (the "SECURITIES ACT") and referring to restrictions on transfer of such
certificates, which legend shall be substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE
SALE, OFFERING OR DISTRIBUTION THEREOF. NO SUCH SALE, OFFERING OR DISPOSITION
MAY
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<PAGE> 2
BE EFFECTED WITHOUT (A) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, OR
(B) AN OPINION OF COUNSEL FOR CONNETICS THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT, OR (C) FULL COMPLIANCE WITH THE PROVISIONS OF RULE 144
UNDER THE SECURITIES ACT, OR (D) FULL COMPLIANCE WITH THE PROVISIONS OF
REGULATION S UNDER THE SECURITIES ACT. HEDGING TRANSACTIONS INVOLVING THOSE
SECURITIES MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT."
1.5 Removal of Legends. Any legend endorsed on a certificate pursuant to
SECTION 1.4 hereof shall be removed (a) if such shares may be transferred in
compliance with Rule 144(k) promulgated under the Securities Act, or (b) if the
holder of such shares shall have provided Connetics with an opinion of counsel,
in form and substance acceptable to Connetics, stating that a public sale,
transfer or assignment of such shares may be made without registration.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF CONNETICS
Connetics hereby represents and warrants to Medeva PLC that:
2.1 Organization. Connetics is a corporation duly organized and validly
existing under the laws of the State of Delaware and is in good standing under
such laws. Connetics has requisite corporate power and authority to own, lease
and operate its properties and assets, and to carry on its business as presently
conducted and as proposed to be conducted. Connetics is qualified to do business
as a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have a materially adverse effect on Connetics.
2.2 Authorization. Connetics has all corporate right, power and authority
to enter into this Agreement and to consummate the transactions contemplated by
this Agreement. All corporate action on the part of Connetics, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of this Agreement by Connetics, and the authorization, sale,
issuance and delivery of the Common Stock and the performance of Connetics'
obligations under this Agreement has been taken. This Agreement has been duly
executed and delivered by Connetics and constitutes a legal, valid and binding
obligation of Connetics enforceable in accordance with its terms, subject to
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
2.3 Validity of Securities. The Common Stock, when issued, sold and
delivered by Connetics in accordance with the terms of this Agreement, will be
duly and validly issued, fully-paid and nonassessable and free and clear of any
liens and encumbrances. There are no statutory, contractual or other preemptive
rights or rights of first refusal with respect to the issuance and sale of the
Common Stock. Based in part upon the representations of Medeva PLC in this
Agreement, the offer, sale and issuance of the Common Stock constitute
transactions
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<PAGE> 3
exempt from the registration and prospectus delivery requirements
of the Securities Act, and have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.
2.4 Capitalization. The authorized capital stock of Connetics as of
December 31, 1998 consists of 50,000,000 shares of Common Stock, $0.001 par
value, of which at December 31, 1998, 20,577,067 shares were issued and
outstanding and 10,394 were held as Treasury shares, and 5,000,000 shares of
Preferred Stock, $0.001 par value, of which at December 31, 1998, zero shares
were issued and outstanding. Connetics' Board of Directors has authorized the
creation of 90,000 shares of Series B Preferred Stock for potential issuance
under Connetics' stockholder rights plan. Since December 31, 1998 no shares of
Connetics' Common or Preferred Stock have been issued, except pursuant to the
exercise of options or warrants outstanding as of December 31, 1998, and in
accordance with Connetics' Employee Stock Purchase Plan. All such issued and
outstanding shares have been duly authorized and validly issued and are fully
paid and nonassessable. In addition to the foregoing, Connetics has reserved and
outstanding the following warrants, rights, options and convertible securities:
(i) warrants for the purchase of 18,395 shares of Common Stock at an
exercise price of $4.89 per share, which warrants expire in
February 2001;
(ii) warrants for the purchase of 22,728 shares of Common Stock at an
exercise price of $11.00 per share, which warrants expire in
December 2000;
(iii) warrants for the purchase of 73,071 shares of Common Stock at an
exercise price of $5.78, which warrants expire in December 2002;
(iv) warrants for the purchase of 20,000 shares of Common Stock at an
exercise price of $7.43 per share, which warrants expire in
December, 2001;
(v) warrants for the purchase of 250,000 shares of Common Stock at an
exercise price of $8.25 per share, which warrants expire in
January 2002;
(vi) warrants for the purchase of 905,000 shares of Common Stock at an
exercise price of $9.08 per share, which warrants expire in May,
2001;
(vii) warrants for the purchase of 6,000 shares of Common Stock at an
exercise price of $6.00 per share, which warrants expire in
January, 2003;
(viii) 2,600,000 shares reserved for issuance pursuant to Connetics'
1994 Stock Plan, of which, at December 31, 1998, options (net of
repurchases) to purchase 449,505 shares had been exercised,
options to purchase 2,026,142 shares were outstanding and 124,353
shares remained available for future grant;
(ix) 500,000 shares reserved for issuance pursuant to Connetics' 1995
Employee Stock Purchase Plan, of which, at December 31, 1998,
210,462 shares had been issued;
(x) 250,000 shares reserved for issuance under Connetics' 1995
Directors' Stock Option Plan, of which, at December 31, 1998,
165,000 options had been granted;
(xi) 38,863 shares reserved for issuance for option grants to various
consultants; and
(xii) 500,000 shares reserved for issuance under Connetics' 1998
Supplemental Stock Plan, of which, at December 31, 1998, 121,000
options had been granted.
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Connetics also has an equity line agreement with Kepler Capital LLC ("KEPLER")
that allows Connetics to access capital through sales of its Common Stock. The
equity line is potentially available for a three-year period beginning June 26,
1998. Through June 2001, if the stock meets certain volume restrictions and
trades above $10.00 per share, then Connetics could draw up to $500,000
approximately every three months, in exchange for Kepler's purchase of stock at
an approximate minimum price of $10.00. In addition, Connetics may be obligated
to issue additional shares to Genentech, Inc. before December 15, 1999, as part
of the consideration paid for Connetics' acquisition of rights to gamma
interferon in 1998. Except as described in this SECTION 2.4, there are no other
options, warrants, conversion privileges or other contractual rights presently
outstanding to purchase or otherwise acquire any authorized but unissued shares
of Connetics' capital stock or other securities. All of the issued and
outstanding securities of Connetics have been issued in compliance with all
applicable federal and state securities laws.
2.5 No Conflict. The execution and delivery of this Agreement does not,
and the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default (with or without notice or lapse
of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or to a loss of a material benefit under any
provision of the Certificate of Incorporation or Bylaws of Connetics or any
mortgage, indenture, lease or other agreement or instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Connetics, its properties or assets, which conflict,
violation, default or right would have a material adverse effect on the
business, properties, prospects or financial condition of Connetics.
2.6 Accuracy of Reports; Financial Statements. All reports required to be
filed with the Securities and Exchange Commission (the "SEC") by Connetics from
February 1, 1996 (the date of Connetics' initial public offering) through the
date of this Agreement under the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), have been duly and timely filed, were in substantial
compliance with the requirements of their respective forms when filed, were
complete and correct in all material respects as of the dates at which the
information was furnished, and contained (as of such dates) no untrue statement
of a material fact nor omitted to state a material fact necessary in order to
make the statements made therein in light of the circumstances in which made not
misleading. All such reports are collectively referred to as the "SEC
DOCUMENTS." Connetics' financial statements included in the SEC Documents (the
"FINANCIAL STATEMENTS") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto. The Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently applied
and fairly present the consolidated financial position of Connetics and any
subsidiaries at the dates thereof and the consolidated results of operations and
consolidated cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal, recurring adjustments).
2.7 Changes. Since November 13, 1998 (the date on which Connetics'
Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998
was filed with the SEC), Connetics has not (a) incurred any material liability,
absolute or contingent, or (b) experienced any event or condition of any nature
that has materially and adversely affected or might
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materially and adversely affect Connetics' business, properties, prospects or
financial condition (as such business is presently conducted and as it is
proposed to be conducted). There is no material liability or contingency of
Connetics that is not disclosed in the SEC Documents.
2.8 Governmental Consents, Etc. No consent, approval or authorization of
or designation, declaration or filing with any governmental authority on the
part of Connetics is required in connection with the valid execution and
delivery of this Agreement, or the consummation of any other transaction
contemplated hereby, except such filings as may be required to be made with the
SEC, the National Association of Securities Dealers, Inc. ("NASD") and with
governmental authorities for purposes of effecting compliance with the
securities and Blue Sky laws in the states in which Common Stock is offered
and/or sold, which compliance will be effected in accordance with such laws.
Connetics has all franchises, permits, licenses and any similar authority
necessary for the conduct of its business as now being conducted by it, the lack
of which could materially and adversely affect the business, properties,
prospects or financial condition of Connetics; provided further, Connetics
believes it can obtain, without undue burden or expense, any similar authority
for the conduct of business which it plans to conduct.
2.9 Litigation. There is no pending or, to the best of Connetics'
knowledge, threatened lawsuit, administrative proceeding, arbitration, labor
dispute or governmental investigation ("LITIGATION") to which Connetics is a
party or by which any material portion of its assets, taken as a whole, may be
bound, nor is Connetics aware of any basis therefor, which Litigation, if
adversely determined, would have a material adverse effect on the business,
properties, prospects or financial condition of Connetics. Connetics is not a
party or subject to the provisions of any order, writ, injunction, judgement, or
decree of any court or governmental agency or instrumentality. There is no
action, suit, proceeding, or investigation by Connetics currently pending or
that Connetics intends to initiate.
2.10 Intellectual Property. To its knowledge, and except as disclosed in
the SEC Documents, Connetics owns or possesses sufficient legal rights to all
patents, trademarks, service marks, tradenames, copyrights, trade secrets,
licenses, information and proprietary rights and processes necessary for its
business as now conducted and as proposed to be conducted, without infringement
of any rights of a third party. Connetics has not received any communications
alleging that Connetics has violated or, by conducting its business as proposed,
would violate any of the patents, trademarks, service marks, tradenames,
copyrights, trade secrets or other proprietary rights or processes of any other
person or entity, which violation would have a material adverse effect on the
business, properties, prospects or financial condition of Connetics. Except as
disclosed in the SEC Documents and as contemplated in the License Agreement,
Connetics has not granted (nor has Connetics licensed from a third party) any
material rights to or licenses to its patents, trademarks, service marks,
tradenames, copyrights, trade secrets or other proprietary rights or processes.
2.12 No Material Default. Connetics is not in violation of or default
under any provision of (a) its Certificate of Incorporation or Bylaws or (b) any
mortgage, indenture, lease or other agreement or instrument, permit, concession,
franchise or license to which it is a party or by which it is bound or (c) any
federal or state judgment, order, decree, statute, law, ordinance, rule
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or regulation applicable to Connetics, except with respect to clauses (b) and
(c) above, such violations or defaults as would not have a material adverse
effect on the business, properties, prospects or financial condition of
Connetics.
2.13 Disclosure. No representation or warranty of Connetics contained in
this Agreement or the exhibits attached to this Agreement (when read together
and taken as a whole), contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements contained in
this Agreement or its exhibits not misleading in light of the circumstances
under which they were made.
2.14 Solvency; No Default. As of this date Connetics has sufficient funds
and cash flow to pay its debts and other liabilities as they become due, and
Connetics is not in default with respect to any material debt or liability.
2.15 Rights of Common Stock. The Common Stock shall have the rights,
preferences, privileges and restrictions provided in Connetics' Amended and
Restated Certificate of Incorporation. Connetics has furnished Medeva PLC with
copies of its Amended and Restated Certificate of Incorporation and Bylaws. Said
copies are true, correct and complete and contain all amendments through the
Closing Date.
2.16 Real Property Holding Corporation. Connetics is not a real property
holding corporation within the meaning of Section 897(c)(2) of the Internal
Revenue Code and any regulations promulgated thereunder.
2.17 Investment Company Act. Connetics is not an "investment company,"
or a company "controlled" by an "investment," within the meaning of the
Investment Company Act of 1940, as amended.
SECTION 3
REPRESENTATIONS AND WARRANTIES OF MEDEVA PLC
Medeva PLC hereby represents and warrants to Connetics as follows:
3.1 Accredited Investor. Medeva PLC is an "accredited investor" as
defined by Rule 501(a) under the Securities Act. Medeva PLC has received all the
information it has requested regarding Connetics. Medeva PLC has such business
and financial experience as is required to give it the capacity to protect its
own interests in connection with the purchase of the Common Stock.
3.2 Investment. Medeva PLC is acquiring the Common Stock for investment
for its own account, not as a nominee or agent and not with a view to or for
resale in connection with any distribution thereof. Medeva PLC understands that
its purchase of Common Stock from Connetics pursuant to this Agreement has not
been registered under the Securities Act by reason of a specific exemption from
the registration provisions of the Securities Act which depends
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upon, among other things, the bona fide nature of Medeva PLC's investment intent
and the accuracy of Medeva PLC's representations as expressed in this Agreement.
3.3 Authority. Medeva PLC has duly executed and delivered this Agreement,
which constitutes a legal, valid and binding obligation of Medeva PLC,
enforceable in accordance with its terms, subject to laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
The execution and delivery of this Agreement does not, and the consummation of
the transactions contemplated hereby will not, conflict with or result in any
violation of any obligation under any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to Medeva PLC.
3.4 Government Consents, Etc. No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of Medeva PLC is required in connection with the valid execution and delivery of
this Agreement, or the offer, sale or issuance of the Common Stock, or the
consummation of any other transaction contemplated by this Agreement.
3.5 Regulation S. For purposes of this Section 3.5, unless otherwise
defined in this Section, capitalized terms used and not otherwise defined in
this Section shall have the meanings given to them in Regulation S ("REGULATION
S") under the Securities Act.
(a) Medeva PLC is not a U.S. Person as defined in Rule 902(k) of
Regulation S under the Securities Act and is not acquiring the Common Stock for
the account or benefit of any U.S. Person. That rule defines a "U.S. Person" to
mean
(i) any natural person resident in the United States;
(ii) any partnership or corporation organized or incorporated
under the laws of the United States;
(iii) any estate of which any executor or administrator is a U.S.
person;
(iv) any trust of which any trustee is a U.S. person;
(v) any agency or branch of a foreign entity located in the
United States;
(vi) any non-discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary for
the benefit or account of a U.S. Person;
(vii) any discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary
organized, incorporated, or (if an individual) resident in
the United States; and
(viii) any partnership or corporation if: (A) organized or
incorporated under the laws of any foreign jurisdiction; and
(B) formed by a U.S. Person principally for the purpose of
investing in securities not registered under the Securities
Act, unless it is organized or
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incorporated, and owned, by accredited investor (as defined
in Rule 501(a) under the Securities Act) who are [sic] not
natural persons, estates or trusts;
(b) At the time the buy order for the Common Stock was originated,
Medeva PLC was located outside the United States;
(c) Neither Medeva PLC nor any of its affiliates nor anyone acting
on its or their behalf has engaged or will engage in any Directed Selling
Efforts with respect to the Common Stock, and all such persons understand and
have complied and will otherwise comply with the requirements of Regulation S;
(d) Medeva PLC will not, through its own actions or any of its
affiliates or any person acting on its or their behalf, during the Distribution
Compliance Period applicable to the Common Stock, offer or sell any of the
Common Stock (or create or maintain any derivative position equivalent thereto)
in the United States, to or for the account or benefit of Medeva PLC other than
in accordance with Regulation S, or engage in hedging transactions with regard
to any of the Common Stock in the United States, to or for the account or
benefit of Medeva PLC other than in compliance with the Securities Act; and
(e) Medeva PLC will, after the expiration of the applicable
Distribution Compliance Period, offer, sell, pledge or otherwise transfer the
Common Stock (or create or maintain any derivative position thereto) only
pursuant to registration under the Securities Act or an available exemption
therefrom, or engage in hedging transactions with regard to the Common Stock
only in compliance with the Securities Act and, in any case, in accordance with
applicable state securities laws.
SECTION 4
CONDITIONS TO OBLIGATIONS OF MEDEVA PLC
Medeva PLC's obligations to Connetics under this Agreement are subject to
the fulfillment, on or before the Closing, of each of the following conditions,
unless otherwise waived:
4.1 Representations and Warranties Correct. The representations and
warranties made by Connetics in SECTION 2 of this Agreement and in the License
Agreement shall be true and correct in all material respects on the Closing Date
with the same effect as though such representations and warranties had been made
on and as of the Closing Date; provided, however, that representations and
warranties which are made as of a particular date shall be true and correct only
as of the date such representations and warranties were made.
4.2 Performance. All covenants, agreements and conditions contained in
this Agreement or in the License Agreement to be performed by Connetics on or
prior to such Closing Date shall have been performed or complied with in all
material respects.
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4.3 License Agreement. Medeva PLC shall have received a License Agreement
validly executed and delivered by Connetics.
4.4 No Order Pending. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by this Agreement.
4.5 No Law Prohibiting or Restricting Sale. There shall not be in effect
any law, rule or regulation prohibiting or restricting such sale, or requiring
any consent or approval of any person which shall not have been obtained to
issue the Common Stock (except as otherwise referenced in this Agreement).
4.6 Compliance Certificate. Connetics shall have delivered to Medeva PLC
a certificate substantially in the form attached as EXHIBIT A to this Agreement,
executed by a duly authorized officer, dated the Closing Date, and certifying to
the fulfillment of the conditions specified in SECTIONS 4.1 and 4.2.
4.7 Legal Opinion. Medeva PLC shall have received from Wilson Sonsini
Goodrich & Rosati, Professional Corporation, counsel for Connetics, an opinion
addressed to Medeva PLC, dated the Closing Date, in substantially the form
attached as EXHIBIT B to this Agreement.
SECTION 5
CONDITIONS TO OBLIGATIONS OF CONNETICS
The obligations of Connetics under this Agreement are subject to the
fulfillment on or prior to the Closing of each of the following conditions,
unless otherwise waived:
5.1 Representations and Warranties Correct. The representations and
warranties made by Medeva PLC in SECTION 3 of this Agreement shall be true and
correct in all material respects on and as of the Closing Date with the same
effect as though such representations and warranties had been made on and as of
the Closing Date.
5.2 Performance. All covenants, agreements and conditions contained in
this Agreement to be performed by Medeva PLC on or prior to the Closing Date
shall have been performed or complied with in all material respects.
5.3 License Agreement. Connetics shall have received a License Agreement
validly executed and delivered by Medeva PLC.
5.4 No Order Pending. There shall not then be in effect any order
enjoining or restraining the transactions contemplated by this Agreement.
5.5 No Law Prohibiting or Restricting Such Sale. There shall not be in
effect any law, rule or regulation prohibiting or restricting such sale, or
requiring any consent or approval of any person which shall not have been
obtained to issue the Common Stock (except as otherwise provided in this
Agreement).
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SECTION 6
MISCELLANEOUS
6.1 Governing Law. This Agreement and all acts and transactions pursuant
to this Agreement and the rights and obligations of the parties to this
Agreement shall be governed, controlled, interpreted and defined by and under
the laws of the State of Delaware and the United States without regard to that
body of law known as conflicts of law.
6.2 Survival. Unless otherwise set forth in this Agreement, the
warranties, representations and covenants of Connetics and Medeva PLC contained
in or made pursuant to this Agreement shall survive the execution and delivery
of this Agreement and the Closing.
6.3 Registration Rights. Medeva PLC shall have the registration rights
set forth in EXHIBIT C attached to this Agreement.
6.4 Successors and Assigns. Each Party agrees that its rights and
obligations under this Agreement may not be transferred or assigned directly or
indirectly without the prior written consent of the other Party, which consent
shall not be unreasonably withheld, except in connection with the sale of all or
substantially all of the assigning Party's related business. Subject to the
foregoing sentence, this Agreement shall be binding upon and inure to, the
benefit of the Parties, their successors and assigns; provided that Medeva PLC
may assign all or part of the Common Stock to any Affiliate of Medeva PLC. For
purposes of this Agreement, "Affiliate" means any entity that controls, is
controlled by or is under common control with Medeva.
6.5 Entire Agreement; Amendment. This Agreement and the other documents
delivered pursuant to this Agreement which are incorporated in this Agreement by
reference, together with the License Agreement, constitutes the entire agreement
of the Parties with respect to the subject matter, and supersedes all prior or
contemporaneous understandings or agreements, whether written or oral, between
Connetics and Medeva PLC with respect to such subject matter, including
specifically the Binding Letter of Intent entered into on November 19, 1998. No
amendment or modification of this Agreement or any term of this Agreement shall
be valid or binding upon the Parties unless made in writing and signed by the
duly authorized representatives of both Parties.
6.6 Notices and Dates. Unless otherwise provided in this Agreement, any
notice required or permitted by this Agreement shall be in writing and shall be
deemed sufficient upon delivery, when delivered personally or by overnight
courier and addressed to the party to be notified at such party's address as set
forth on the signature page to this Agreement or as subsequently modified by
written notice. If any date provided for in this Agreement falls on a Saturday,
Sunday or legal holiday, such date shall be deemed extended to the next business
day.
6.7 Partial Invalidity. If any term, provision, covenant or restriction
of this Agreement is held to be invalid, void or unenforceable by a court of
competent jurisdiction, then the remaining provisions shall remain in full force
and effect and shall in no way be affected,
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impaired or invalidated. The Parties agree to renegotiate in good faith any term
held invalid and to be bound by the mutually agreed substitute provision in
order to give the most approximate effect intended by the Parties.
6.8 No Third Party Rights. Nothing in this Agreement shall create or be
deemed to create any rights in any person or entity not a party to this
Agreement.
6.9 No Waiver. No waiver of any term or condition of this Agreement shall
be valid or binding on either Party unless agreed in writing by the Party to be
charged. The failure of either Party to enforce at any time any of the
provisions of this Agreement, or the failure to require at any time performance
by the other Party of any of the provisions of this Agreement, shall in no way
be construed to be a present or future waiver of such provisions, nor in any way
affect the validity [sic] of either Party to enforce each and every such
provision thereafter.
6.10 Captions and Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. The captions and headings used
herein are for convenience and ease of reference only and are not intended to be
a part of or to affect the meaning or interpretation of this Agreement.
6.11 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
IN WITNESS WHEREOF, the parties to this Agreement have executed or caused
their respective authorized officers to execute this Agreement as of the first
date written above.
Connetics Corporation Medeva PLC
By: /s/ Thomas G. Wiggans By: /s/ Garry Watts
Thomas G. Wiggans Garry Watts
President and Chief Executive Officer Its Duly Authorized Officer
Connetics Corporation Medeva PLC
3400 West Bayshore Road 10 St. James's Street
Palo Alto, California 94303 London SW1A 1EF
Fax No. 650-843-2838 Fax No. 011-44-171-930-7909
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Exhibit 10.67
CONNETICS CORPORATION
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made as of the
11th day of January, 1999, by and among Connetics Corporation, a Delaware
corporation (the "Company") and Medeva, PLC ("Investor").
R E C I T A L S
A. Effective as of the same date as this Agreement, the Company and the
Investor have entered into a Common Stock Purchase Agreement (the "Purchase
Agreement") of even date herewith pursuant to which the Company has agreed to
sell to the Investor and the Investor has agreed to purchase from the Company
shares of the Company's Common Stock (all terms not otherwise defined herein
shall have the meanings ascribed in the Purchase Agreement).
B. A condition to the Investor's obligations under the Purchase Agreement
is that the Company and the Investor enter into this Agreement in order to
provide the Investor with certain rights to register the Common Stock acquired
by the Investor pursuant to the Purchase Agreement. The Company desires to
induce the Investor to purchase the Common Stock pursuant to the Purchase
Agreement by agreeing to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
AGREEMENT
1. Registration Rights. The Company and the Investor covenant and agree
as follows:
1.1 Definitions. For purposes of this Section 1:
(a) The terms "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of effectiveness of such
registration statement or document;
(b) The term "Registrable Securities" means (i) the shares of
Common Stock issued or sold in connection with the Purchase Agreement (such
shares of Common Stock are collectively referred to as the "Shares" or "Stock")
and (ii) any other shares of common stock of the Company issued as (or issuable
upon the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, the Stock; provided, that the foregoing definition shall
exclude in all cases any Registrable Securities sold by a person in a
transaction in which his or her rights under this Agreement are not assigned.
Notwithstanding the foregoing, shares of common stock shall only be treated as
Registrable Securities if and so long as they have not been (x) sold to or
through a broker or dealer or underwriter in a public distribution or a public
securities
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transaction, or (y) sold in a transaction exempt from the registration and
prospectus delivery requirements under Section 4(1) of the Securities Act so
that all transfer restrictions, and restrictive legends with respect thereto, if
any, are removed upon the consummation of such sale;
(c) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock then
outstanding which are Registrable Securities, plus the number of shares of
common stock issuable pursuant to then exercisable or convertible securities
which are Registrable Securities;
(d) The term "Holder" means any person owning or having the right
to acquire Registrable Securities or any assignee thereof in accordance with
this Agreement;
(e) The term "Form S-3" means such form under the Securities Act
as in effect on the date hereof or any successor form under the Securities Act;
and
(f) The term "SEC" means the Securities and Exchange Commission.
(g) The term "Registration Expenses" shall mean all expenses,
except as otherwise stated below, incurred by the Company in complying with
Section 1.2 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company and special counsel to the Selling
Holders, blue sky fees and expenses, the expense of any special audits incident
to or required by any such registration (but excluding the compensation of
regular employees of the Company which shall be paid in any event by the
Company).
(h) The term "Selling Expenses" shall mean all underwriting
discounts, selling commissions and stock transfer taxes applicable to the
securities registered by the Holders.
1.2 Registration
(a) Notice of Registration. If at any time or from time to time
the Company shall determine to register any of its securities, either for its
own account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within 20 days after receipt of such written notice from the
Company, by any Holder.
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(b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.2(a)(i). In such event the right of any Holder to
registration pursuant to Section 1.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent requested shall be
limited to the extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company) enter
into an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 1.2, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter may limit the Registrable Securities to
be distributed through such underwriting and if so limited, such Registrable
Securities shall be excluded from such underwriting and registration. The
Company shall so advise all Holders distributing their securities through such
underwriting of such limitation and the number of shares of Registrable
Securities that may be included in the registration and underwriting shall be
allocated among all Holders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities requested by such Holders to be
included in such registration statement. To facilitate the allocation of shares
in accordance with the above provisions, the Company may round the number of
shares allocated to any Holder or holder to the nearest 100 shares. If any
Holder or holder disapproves of the terms of any such underwriting, such Holder
or holder may elect to withdraw therefrom by written notice to the Company and
the managing underwriter. Any securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration, and shall not be
transferred in a public distribution prior to 90 days after the effective date
of the registration statement relating thereto, or such other shorter period of
time as the underwriters may require.
(c) Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 1.2 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration. The Registration
Expenses of such withdrawn registration shall be borne by the Company in
accordance with Section 1.3 hereof.
1.3 Expenses of Registration. All Registration Expenses incurred in
connection with registrations pursuant to Section 1.2 shall be borne by the
Company. All Selling Expenses relating to securities registered on behalf of the
Holders shall be borne by the Holders of securities included in such
registration pro rata with the Company and among each other on the basis of the
number of shares so registered.
1.4. Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration
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statement to become and remain effective for at least thirty (30) days or until
the distribution described in the registration statement has been completed;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement;
(c) Furnish to the Holders participating in such registration and
to the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities;
(d) Furnish, at the request of any Holder requesting registration
of Registrable Securities at the time such securities are delivered to the
underwriters (if any) for sale in connection with a registration pursuant to
this Section 1.4, (i) an opinion, dated such date, of the counsel representing
the Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders requesting registration of
Registrable Securities.
(e) Representations of Holders. Each Holder hereby represents to
and covenants with the Company that, during the period in which a registration
statement effected pursuant to Section 1.2 remains effective, such Holder will:
(i) not engage in any stabilization activity in connection
with any of the Company's securities;
(ii) cause to be furnished to any purchaser of the Shares and
to the broker-dealer, if any, through whom Shares may be offered, a copy of the
Prospectus; and
(iii) not bid for or purchase any securities of the Company
or any rights to acquire the Company's securities, or attempt to induce any
person to purchase any of the Company's securities or any rights to acquire the
Company's securities other than as permitted under the Securities Exchange Act
of 1934, as amended ("Exchange Act").
1.5 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
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1.6 Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any dispute that might arise with respect to the interpretation or
implementation of this Section 1.
1.7 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify
and hold harmless each Holder, any underwriter (as defined in the Securities)
for such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities or the Exchange Act, against any losses,
claims, damages, or liabilities (joint or several) to which they may become
subject under the Securities, the Exchange Act or other federal or state law,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Securities, the Exchange Act, any
state securities law or any rule or regulation promulgated under the Securities,
the Exchange Act or any state securities law; and the Company will pay to each
such Holder, underwriter or controlling person, as incurred, any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; provided, however,
that the indemnity agreement contained in this subsection 1.7(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability, or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by any such Holder, underwriter or
controlling person.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Securities, any underwriter, any
other Holder selling securities in such registration statement and any
controlling person of any such underwriter or other Holder, against any losses,
claims, damages, or liabilities (joint or several) to which any of the foregoing
persons may become subject, under the Securities, the Exchange Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 1.7(b), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.7(b) shall not apply to amounts paid in settlement of any
such loss, claim, damage, liability or
PAGE 5
<PAGE> 6
action if such settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; provided, that, in no event shall
any indemnity under this subsection 1.7(b) exceed the net proceeds from the
offering received by such Holder, except in the case of willful fraud by such
Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.7, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the reasonable fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.7, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.7.
(d) If the indemnification provided for in this Section 1.7 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations; provided that, in no event shall any contribution by a Holder
under this Subsection 1.7(d) exceed the net proceeds from the offering received
by such Holder, except in the case of willful fraud by such Holder. The relative
fault of the indemnifying party and of the indemnified party shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the indemnifying party or by the indemnified party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.
(e) The obligations of the Company and Holders under this Section
1.7 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1.
PAGE 6
<PAGE> 7
1.8 Reports Under Securities Exchange Act Of 1934. With a view to
making available to the Holders the benefits of Rule 144 and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration or pursuant to a registration on
Form S-3, the Company agrees to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144, so long as the Company remains subject
to the periodic reporting requirements under Sections 13 or 15(d) of the
Exchange Act;
(b) take such action, including the voluntary registration of its
Common Stock under Section 12 of the Exchange Act, as is necessary to enable the
Holders to utilize Form S-3 for the sale of their Registrable Securities;
(c) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities and the Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of the Exchange Act
and the rules and regulations promulgated thereunder, or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3, (ii) a copy of
the most recent annual or quarterly report of the Company and such other reports
and documents so filed by the Company, and (iii) such other information as may
be reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
1.9 Termination of Registration Rights. The rights granted under this
Section 1 shall terminate on the second anniversary of the effective date of
this Agreement.
2. MISCELLANEOUS.
2.1 Successors and Assigns. Except as otherwise provided in this
Agreement, the terms and conditions of this Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns of the parties
(including transferees of any of the Shares). Nothing in this Agreement, express
or implied, is intended to confer upon any party other than the parties hereto
or their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
2.2 Governing Law. This Agreement and all acts and transactions
pursuant hereto shall be governed, construed and interpreted in accordance with
the laws of the State of California, without giving effect to principles of
conflicts of laws.
2.3 Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
PAGE 7
<PAGE> 8
2.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
2.5 Notices. Unless otherwise provided herein, any notice required or
permitted by this Agreement shall be in writing and shall be deemed sufficient
upon delivery, when delivered personally or by overnight courier and addressed
to the party to be notified at such party's address as set forth on the
signature page hereto or as subsequently modified by written notice. In the
event that any date provided for in this Agreement falls on a Saturday, Sunday
or legal holiday, such date shall be deemed extended to the next business day.
Notwithstanding the foregoing, any notice delivered pursuant to Section 1.6
hereto must be made by personal delivery or confirmed facsimile transmission.
2.6 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
2.7 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Company and the holders of a majority of the
Registrable Securities then outstanding. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
Registrable Securities then outstanding, each future holder of all such
Registrable Securities, and the Company.
2.8 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to renegotiate
such provision in good faith. In the event that the parties cannot reach a
mutually agreeable and enforceable replacement for such provision, then (a) such
provision shall be excluded from this Agreement, (b) the balance of the
Agreement shall be interpreted as if such provision were so excluded and (c) the
balance of the Agreement shall be enforceable in accordance with its terms.
2.9 Entire Agreement. This Agreement, and the documents referred to
in this Agreement (with the exception of the registration statement) 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 are expressly canceled.
PAGE 8
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement
as of the date first written above.
COMPANY
Connetics Corporation Address:
3400 West Bayshore Road
Palo Alto, California 94303
By: /s/ Thomas G. Wiggans Facsimile: (650) 843-2899
---------------------------------------
Thomas G. Wiggans
President and Chief Executive Officer
INVESTOR
Medeva, PLC Address:
10 St. James's Street
London SW1A 1EF
United Kingdom
Facsimile: 011-44-171-930-7909
By: /s/ Garry Watts
----------------------------------------
Garry Watts
Its Duly Authorized Officer
PAGE 9
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES
The Company had the following subsidiaries as of December 31, 1998:
Name State of Incorporation
- ---- ----------------------
InterMune Pharmaceuticals, Inc. California
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated January 13, 1999 in this Annual Report
(Form 10-K) of Connetics Corporation for the year ended December 31, 1998.
We also consent to the incorporation by reference in the Registration Statement
(Form S-3 Nos. 333-21941, 30815, 56757 and 69055 and Form S-8 Nos. 333-04985 and
58427) pertaining to the 1995 Employee Stock Purchase Plan, 1994 Stock Plan,
1995 Director Stock Option Plan and Non Plan Options of Connetics Corporation,
of our report dated January 13, 1999, with respect to the consolidated financial
statements of Connetics Corporation included in this Annual Report (Form 10-K)
for the year ended December 31, 1998.
ERNST & YOUNG, LLP
Palo Alto, California
March 30, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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