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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
Commission file number: 0-27406
CONNETICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173928
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3400 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 843-2800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes [x] No [ ]
As of May 8, 2000, 27, 264, 621 shares of the Registrant's common stock
were outstanding, at $0.001 par value.
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CONNETICS CORPORATION
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999................................................................3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999.............................................4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 and 1999.............................................5
Notes to Condensed Consolidated Financial Statements.............................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risks.....................22
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................23
Exhibits........................................................................23
Reports on Form 8-K.............................................................23
SIGNATURE ................................................................................24
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONNETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
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March 31,
2000 December
(unaudited) 31, 1999
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Assets
Current assets:
Cash and cash equivalents $ 12,521 $ 8,460
Short-term investments 12,349 17,839
Accounts receivable 1,326 1,608
Other current assets 712 817
--------- ---------
Total current assets 26,908 28,724
Property and equipment, net 1,414 1,505
Non current marketable securities 20,923 --
Notes receivable from related parties 330 60
Deposits and other assets 121 121
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Total assets $ 49,696 $ 30,410
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,962 $ 4,988
Accrued liabilities 3,097 1,596
Accrued process development expenses 1,105 3,296
Accrued payroll and related expenses 1,121 1,453
Current portion of notes payable and other liabilities 1,855 2,594
Current portion of capital lease obligations, capital loans and
long-term debt 1,285 1,396
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Total current liabilities 11,425 15,323
Non-current portion of capital lease obligations, capital loans and
long-term debt 525 799
Stockholders' equity:
Common stock, treasury stock and additional paid-in capital 135,896 133,963
Deferred compensation (34) (39)
Accumulated deficit (119,152) (119,752)
Accumulated other comprehensive income 21,036 116
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Total stockholders' equity 37,746 14,288
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Total Liabilities and Stockholders' Equity $ 49,696 $ 30,410
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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Three Months Ended
March 31,
---------------------
2000 1999
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Revenues:
Product $ 5,666 $ 2,161
Contract 7,750 5,000
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Total revenues 13,416 7,161
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Operating costs and expenses:
Cost of product revenues 1,799 1,171
License amortization -- 1,680
Research and development 6,145 4,681
Selling, general and administrative 5,519 5,594
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Total operating costs and expenses 13,463 13,126
Interest and other income 746 334
Interest expense (100) (292)
-------- --------
Net income (loss) $ 599 $ (5,923)
======== ========
Net income (loss) per share:
Basic $ 0.02 $ (0.28)
======== ========
Diluted $ 0.02 $ (0.28)
======== ========
Shares used to calculate net income (loss) per
share
Basic 26,627 21,088
======== ========
Diluted 28,412 21,088
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
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Three Months Ended March 31,
2000 1999
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Cash flows from operating activities:
Net income (loss) $ 599 $ (5,923)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 170 1,859
Amortization of deferred compensation 5 637
Variable option expense 715 --
Changes in assets and liabilities:
Accounts receivable 282 (716)
Current and other long-term assets (165) (532)
Current and other liabilities (3,047) 2,648
Other long-term liabilities -- 670
-------- --------
Net cash used in operating activities (1,441) (1,357)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (1,458) (2,784)
Sales and maturities of short-term investments 6,945 4,274
Capital expenditures (79) (664)
-------- --------
Net cash provided by investing activities 5,408 826
-------- --------
Cash flows from financing activities:
Payment of notes payable (739) (2,500)
Payments on obligations under capital leases and capital loans (385) (117)
Proceeds from issuance of common stock, net 1,218 4,086
-------- --------
Net cash provided by financing activities 94 1,469
-------- --------
Net change in cash and cash equivalents 4,061 938
Cash and cash equivalents at beginning of period 8,460 14,708
-------- --------
Cash and cash equivalents at end of period $ 12,521 $ 15,646
======== ========
Supplementary information:
Interest paid $ 53 $ 173
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONNETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited condensed consolidated
financial statements of Connetics Corporation ("Connetics") in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In our opinion, all adjustments, consisting of normal
recurring accrual adjustments, considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
These financial statements and notes should be read in conjunction with
audited financial statements and notes to those financial statements for the
year ended December 31, 1999 included in our Annual Report on Form 10-K.
2. EARNINGS PER SHARE
We compute basic earnings per share based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share also
includes the incremental shares expected to be issued pursuant to the exercise
of in-the-money stock options and other potentially dilutive securities. The
number of incremental shares from the assumed issuance of stock options and
other potentially dilutive securities is calculated applying the treasury stock
method. Common stock equivalent shares are excluded from the computation when
there is a loss, as their effect is anti-dilutive. The following table sets
forth the computations for basic and diluted earnings per share.
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Three months ended March 31,
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(In thousand, except per share amounts) 2000 1999
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Numerator for basic and diluted earnings
per share-
Net income (loss) $ 599 $ (5,923)
====== =========
Denominator for basic earnings per share- 21,088
Weighted average shares 26,627
Effect of dilutive securities-
Stock options and warrants 1,785 --
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Denominator for diluted earnings per share 28,412 21,088
Earnings (loss) per share:
Basic $ 0.02 $ (0.28)
====== =========
Diluted $ 0.02 $ (0.28)
====== =========
</TABLE>
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3. COMPREHENSIVE INCOME (LOSS)
During the three months ended March 31, 2000, total comprehensive income
(loss) amounted to $21.5 million compared to $(5.9) million for the same period
in 1999. The components of comprehensive income (loss) for the three-month
periods ended March 31, 2000 and March 31, 1999 are as follows:
<TABLE>
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Three months ended March 31,
----------------------------
(In thousands) 2000 1999
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<S> <C> <C>
Net income (loss) $ 599 $(5,923)
Unrealized gain (loss) on securities 20,920 (9)
Foreign currency translation adjustment -- --
------- -------
Comprehensive Income (loss) $21,519 $(5,932)
======= =======
</TABLE>
Accumulated other comprehensive income at March 31, 2000 and December 31, 1999
consisted of unrealized gains on securities of $21.0 million and $ 0.1 million,
respectively.
4. RESEARCH AND LICENSE AGREEMENTS
In January 1999, Connetics entered into a development, commercialization
and supply agreement with Celltech Group, PLC (formerly Medeva PLC) of the
United Kingdom ("Celltech)") 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 contract fee and a $4.0 million equity
investment, and will potentially pay $17.0 million of milestone payments based
upon the achievement of development milestones in the U.S. and Europe and $5.0
million for the development and approval of each indication in Europe in
addition to scleroderma. Celltech is responsible for all development and
commercialization activities in Europe and is required to pay royalties on sales
in Europe. In addition, Celltech will reimburse us for 50% of the 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. We also agreed to potentially share U.S.
co-promotion rights with Celltech for up to five years, and Celltech will
purchase relaxin materials from us. We recorded $6.0 million for the quarter
ended March 31, 2000, and $5.0 million for the quarter ended March 31, 1999, in
contract revenue under this agreement.
In July 1999, we entered into a development, commercialization and
supply agreement with Paladin Labs Inc., a Canadian corporation, for relaxin.
Under the terms of the agreement, Paladin will pay up to $3.2 million in
development, milestone and equity payments for the successful development of
Relaxin for the treatment of scleroderma. We may receive additional milestone
payments for the approval of additional indications for relaxin in Canada.
Paladin is responsible for all development and commercialization activities in
Canada, and will pay royalties on all sales of relaxin in Canada. For the three
months ended March 31, 2000, we recorded $0.2 million in contract revenue under
this agreement.
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5. INTERMUNE
On April 28, 1999, our wholly-owned subsidiary InterMune became an
independent company through venture capital funding and a portion of our
original investment in InterMune was returned to us. We established InterMune to
develop Actimmune for serious pulmonary and infectious diseases and congenital
disorders shortly after we in-licensed Actimmune from Genentech in May 1998. We
retained approximately a 10% equity position in InterMune, which is now
approximately a 7% equity position, received a license fee payment of $500,000,
a $4.7 million return of invested capital, and will receive an additional return
of invested capital of $3.5 million in the form of cash and equity receivable
through fiscal 2001, of which we received $1.5 million in cash during the first
quarter of 2000. We have retained commercial rights to and revenue from
Actimmune for chronic granulomatous disease up to a predetermined annual
baseline that is preset for three years (January 15, 1999 through December 31,
2001) and will receive a royalty on Actimmune sales thereafter. In addition, we
have retained the product rights for potential dermatological applications of
Actimmune. During the first quarter of 2000, Intermune completed its initial
public offering, and as a result, we recorded a mark-to-market unrealized gain
of $20.4 million on our equity investment. The Intermune investment is included
in non current marketable securities in the Condensed Consolidated Balance Sheet
at March 31, 2000.
6. LIQUIDITY AND FINANCIAL VIABILITY
In the course of our development activities, we have sustained
continuing operating losses and expect such losses to continue for the next few
years. Our future capital uses and requirements depend on numerous factors,
including the progress of our 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,
our ability 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, we may 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. Our inability to obtain
sufficient funds could require us to delay, scale back or eliminate some or all
of our research and development programs, to limit the marketing of our
products, or to license to third parties the rights to commercialize products or
technologies that we would otherwise seek to develop and market ourselves.
7. REVENUE RECOGNITION
When we receive non-refundable fees in connection with collaborative agreements,
we have recognized the fees as revenue when received, when the technology has
been transferred and when all of our contractual obligations relating to the
fees had been fulfilled. In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 101 - Revenue Recognition in
Financial Statements (SAB 101). SAB 101 describes the SEC Staff's position on
the recognition of certain non-refundable upfront fees received in connection
with research collaborations. We are currently evaluating the applicability of
SAB 101 to our existing collaborative agreements. Should we conclude that the
approach described in SAB 101 is more
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appropriate, we will change our method of accounting effective January 1, 2000
to recognize such fees over the term of the related agreement. If we make this
change in accounting principle, the cumulative effect would be recognized in the
year to date presentation for the quarter ending June 30, 2000. The cumulative
effect, if any, would be recorded as deferred revenue and would be recognized as
revenue over the remaining term of the respective collaborative research and
development agreements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This MD&A should be read in conjunction with the MD&A included in our
Annual Report on Form 10-K for the year ended December 31, 1999, and with the
unaudited condensed consolidated financial statements and notes to financial
statements included in this report. Except for historical information, the
discussion in this report contains forward-looking statements that involve risks
and uncertainties. When used in this report, the words "anticipate," "believe,"
"estimate," "will," "intend" and "expect" and similar expressions identify
forward-looking statements. Although we believe that our plans, intentions and
expectations reflected in these forward-looking statements are reasonable, these
plans, intentions, or expectations may not be achieved. Some of the factors
which, in our view, could cause actual results to differ are discussed under the
caption "Factors That May Affect Future-Results, Financial Condition and the
Market Price of Securities" and in our Annual Report on Form 10-K. Our
historical operating results are not necessarily indicative of the results to be
expected in any future period.
OVERVIEW
We are currently developing Relaxin for the treatment of scleroderma,
infertility, peripheral arterial disease and organ fibrosis. We have completed
enrollment in a pivotal clinical trial for scleroderma, and we have two Phase
I/II clinical trials ongoing for infertility. In February, we filed an
investigational new drug application to initiate trials in peripheral arterial
disease. In our dermatology business, we received marketing clearance from the
U.S. Food and Drug Administration (FDA) in March 1999 to sell Luxiq
(betamethasone valerate) Foam, 0.12%, for the treatment of steroid responsive
scalp dermatoses. Our principal dermatology product under development is OLUX
Foam (clobetasol propionate) 0.05%, for the treatment of moderate to severe
scalp dermatoses, for which we submitted an NDA in July 1999. We also market
Ridaura (auranofin), a treatment for rheumatoid arthritis, and Actimmune
(interferon gamma) for the treatment of chronic granulomatous disease (through
licensing arrangements with Genentech and InterMune).
RESULTS OF OPERATIONS
REVENUES
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Three Months Ended March 31,
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Revenues (In thousands) 2000 1999
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Product:
Luxiq $ 2,259 $ --
Ridaura 1,650 1,269
Actimmune 1,757 892
-------- --------
Total product revenues 5,666 2,161
Contract:
Celltech Group 6,000 5,000
Paladin Labs 200 --
InterMune 1,500 --
Immune Response 50 --
-------- --------
Total contract revenues 7,750 5,000
Total revenues $ 13,416 $ 7,161
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Our product revenues for the quarter ended March 31, 2000 were $5.7
million, representing a 162% increase over revenues of $2.2 million for the same
period in 1999. The increase in total product sales was due to sales of Luxiq,
which was launched in April 1999, and sales growth for Actimune. Although
Ridaura sales increased quarter over quarter, we believe that Ridaura will
experience decreased sales for the remainder of 2000 due to competition from new
and existing products.
Contract revenues for the quarter ended March 31, 2000 were $7.8 million
which includes a one-time $5 million payment from Celltech in connection with
our agreement for the development of Relaxin. In addition, we recorded $1.5
million in revenue in connection with our sublicense agreement with InterMune.
We expect contract revenue to fluctuate significantly depending on when and
whether we or our partners achieve milestones under existing agreements, and on
new business opportunities that we may identify.
Our cost of product revenues includes the costs of Luxiq, Ridaura and
Actimmune, royalty payments on these products based on a percentage of our
product revenues, and product freight and distribution costs from CORD. For the
quarter ended March 31, 2000, we recorded cost of product revenues of $1.8
million compared to $1.2 million for the same period in 1999. The increase in
cost of product revenues in the first quarter of 2000 over the first quarter of
1999 is primarily due to costs associated with the sales of Luxiq and Actimmune,
which we began shipping in 1999, and higher product and royalty costs. In the
first quarter of 1999, we recorded $1.7 million of amortization expense
associated with the acquisition of product rights to Ridaura.
RESEARCH AND DEVELOPMENT
Research and development expenses were $6.1 million for the three months
ended March 31, 2000 compared to $4.7 million for the same period in 1999. The
increase in research and development expenses quarter over quarter was due to:
o manufacturing scale-up of Relaxin;
o conducting a Phase II/III trial of Relaxin for the treatment of
scleroderma;
o increasing personnel in our development organization; and
o initiating of clinical trials of Relaxin for the treatment of
infertility.
We expect research and development expenses to remain at the same level
for the next few quarters, due to scale-up expenses related to Relaxin
manufacturing, Relaxin clinical trial activities for new disease indications,
and preclinical activities associated with technologies acquired from Soltec.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $5.5 million for the
quarter ended March 31, 2000 compared to $5.6 million for the same period in
1999. We expect selling, general and administrative expenses to remain flat or
increase slightly during the remainder of fiscal 2000.
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INTEREST INCOME (EXPENSE)
Interest income was $0.7 million in the three months ended March 31,
2000, compared with $0.3 million for the same period in 1999. The increase in
interest income quarter over quarter was due to a higher investment balance as a
result of proceeds received through a public offering of our common stock in
October 1999 and funds received from corporate partnership arrangements.
Interest earned in the future will depend on our funding cycles and prevailing
interest rates. Interest expense decreased to $0.1 million for the three months
ended March 31, 2000, compared with $0.3 million for the same period in 1999.
The decrease in interest expense quarter over quarter was due to:
o lower imputed interest expense attributable to the non-interest bearing
promissory note payable to SmithKline in connection with the acquisition
of Ridaura; and
o lower balances outstanding for obligations under capital leases and
loans, and notes payable
NET INCOME (LOSS)
Net income for the three months ended March 31, 2000 was $0.6 million
compared to a net loss $5.9 million for the same period in 1999. The net income
for the first quarter of 2000 was attributable to increased revenues and
included:
o a one-time $5 million contract payment from Celltech in connection with
our agreement for the development of Relaxin; and
o contract payment of $1.5 million in connection with our Amended and
Restated Exclusive Sublicense Agreement with InterMune.
o product revenue increase of 162% or $3.5 million quarter over quarter.
We expect to incur losses for the remainder of 2000 and the foreseeable
future. These losses are expected to fluctuate from period to period based on
timing of product revenues, clinical material purchases, clinical trial
expenses, and possible acquisitions of new products and technologies.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through proceeds from
equity financings, collaborative arrangements with corporate partners, and bank
loans. At March 31, 2000, cash, cash equivalents and short-term investments
totaled $24.9 million compared to $26.3 million at December 31, 1999. During the
first quarter of 2000, we recorded an unrealized gain of $20.4 million on our
equity investment in InterMune. The InterMune investment is included in other
non-current assets. Our cash reserves are held in a variety of interest-bearing
instruments including high-grade corporate bonds, commercial paper and money
market accounts.
Cash flows from operating activity. Cash used in operations for the three month
periods ended March 31, 2000, and March 31, 1999, was $1.4 million and $1.4
million, respectively. Net income of $0.6 million for the first quarter of 2000
was affected by non-cash charges including $0.7 million of variable option
expense. Cash outflow for the first quarter of 2000 was
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primarily for operating activities which included a $2.0 million and $2.2
million reduction in accounts payable and accrued process development expense,
respectively, partially offset by a lower accounts receivable balance.
Cash flows from investing activity. Investing activities provided $5.4
million in cash during the three month period ended March 31, 2000, due to the
sale of $7.0 million of short-term investments partially offset by $1.5 million
of short term investment purchases.
Cash flows from financing activity. Cash provided by financing
activities for the three months ended March 31, 2000 included $1.2 million of
cash proceeds from the issuance of stock, offset by $1.1 million of note and
lease payments.
Working Capital. Working capital increased by $2.1 million to $15.5
million at March 31, 2000 from $13.4 million at December 31, 1999. The increase
in working capital was due to lower accounts payable and accrued liabilities
balances partially offset by cash used for operations.
At March 31, 2000, we had an aggregate of $3.7 million in future
obligations of principal payments under capital leases, loans, long-term debt
and other obligations, of which $3.1 million is to be paid within the next year.
We have an equity line agreement with an investor, Kepler, that may
potentially provide access to capital through sales of our common stock. The
equity line expires in December 2000. Until then, when our stock meets certain
minimum trading volume requirements and trades above $10.00 per share, then the
investor may require us to draw up to $500,000 against the equity line
approximately every three months in exchange for the sale of stock at a discount
to the market price. During the first quarter of 2000, our stock traded over
$10.00 per share for the first time since the Equity Line Agreement became
available in December 1997. Consequently, Kepler exercised its right to draw
down $500,000 against the equity line in exchange for our common stock, and we
issued 58,438 shares to Kepler at a purchase price of $8.556 on February 10,
2000. We also have the right to draw down on the equity line in exchange for the
sale of stock, beyond the $500,000 minimum investment each quarter, provided our
stock trades above $7.00 per share.
We believe our existing cash, cash equivalents and short-term
investments, cash generated from product sales and collaborative arrangements
with corporate partners, will be sufficient to fund our operating expenses, debt
obligations and capital requirements through at least the next 12 months. Our
future capital uses and requirements depend on numerous factors, including the
progress of our 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, our ability 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, we may require additional funds before
we become profitable 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, we currently have
no commitments for any additional financings, and there can be no assurance that
additional funding will be
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available to finance our ongoing operations when needed or, if available, that
the terms for obtaining such funds will be favorable or will not result in
dilution to our stockholders. Our inability to obtain sufficient funds could
require us to delay, scale back or eliminate some or all of our research and
development programs, to limit the marketing of our products or to license to
third parties the rights to commercialize products or technologies that we would
otherwise seek to develop and market ourselves.
YEAR 2000 COMPLIANCE
As of May 8, 2000, we had not experienced, nor do we expect to
experience, any Year 2000-related disruption in the operation of our systems. To
our knowledge, none of our material suppliers or customers experienced any
material Year 2000 problems or had any difficulty resolving the so-called
"century leap year" algorithm. Although most Year 2000 problems should have
become evident on January 1, 2000 or February 29, 2000, additional Year
2000-related problems may become evident in the future.
FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE MARKET PRICE
OF SECURITIES
Please also read Items 1 and 3 in our 1999 Annual Report and Form 10-K
where we have described our business and the challenges and risks we may face in
the future.
Our results of operations have varied widely in the past, and they could
continue to vary significantly from quarter to quarter due to a number of
factors, including those listed below. Any shortfall in revenues would have an
immediate impact on our earnings per share, which could adversely affect the
market price of our common stock. Our operating expenses, which include sales
and marketing, research and development and general and administrative expenses,
are based on our expectations of future revenues and are relatively fixed in the
short term. Accordingly, if revenues fall below our expectations, we will not be
able to reduce our spending rapidly in response to such a shortfall. This will
adversely affect our operating results. Due to the foregoing factors, we believe
that quarter-to-quarter comparisons of our results of operations are not a good
indication of our future performance.
RISKS RELATED TO OUR BUSINESS
If we do not obtain the capital necessary to fund our operations, we wil be
unable to develop or market our products.
We believe that our available cash resources will be sufficient to fund our
operating and working capital requirements for the next 12 months. Accordingly,
we may need to raise additional funding in the future. In particular, if our
ConXn clinical trial is successful, our working capital needs will increase as
we will incur additional regulatory and commercialization expenses for ConXn. In
this event, we would need to raise additional funds. If we are unable to raise
additional funds when needed, we may not be able to market our products as
planned, or continue development of our other products.
We may need to raise additional funds through public or private
financings, strategic relationships or other arrangements. In particular, if our
ConXn clinical trial for scleroderma is successful, we would incur significant
additional expenditures associated with pursuing regulatory approval and
eventual commercialization of ConXn which would extend the date as of
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which we could first achieve profitability. If we are unable to successfully
complete development and commercialization of ConXn, we may never achieve
profitability. If we need to raise additional money to fund our operations,
funding may not be available to us on acceptable terms, or at all.
Fluctuations in our operating results may cause our stock price to decline.
Our quarterly and annual operating results are difficult to predict and may
fluctuate significantly from time to time and may not meet the expectations of
securities analysts and investors in some future period. As a result, the price
of our common stock could decline.
We have a history of losses, we expect to incur losses in the future, and we may
not be able to achieve or sustain profitability, which may cause our stock price
to decline.
We have lost money every year since our inception. We had net losses of
$26.6 million in 1998 and $27.3 million 1999. Our accumulated deficit was $119.8
million at December 31, 1999. We expect to incur additional losses for at least
the next few years. We may not achieve profitability and, if we do reach
profitability, we may not be able to sustain it. Our ability to reach and
sustain profitability will depend upon the success of our current products and
our products under development.
If our corporate partners are no longer willing or able to fund the development
of ConXn, our current product revenue will not cover the cost of fully
developing and commercializing ConXn.
We depend on licensing agreements with our corporate partners to
successfully develop and commercialize our products. We also generate revenue by
licensing our products to third parties for specific territories and
indications. Our reliance on third parties for our success carries several
risks, including the possibilities that:
o a product development contract may expire or a relationship may be
terminated, and we will not be able to attract a satisfactory
alternative corporate partner within a reasonable time;
o a corporate partner involved in the development of our products does
not commit sufficient capital to successfully develop our products; and
o we may be contractually bound to terms that, in the future, are not
commercially favorable to us.
If any of these risks occurs, we may not be able to successfully develop our
products at the rate we anticipate, or we may not be able to develop them at
all.
If we fail to protect our proprietary rights, competitors may be able to use our
technologies, which would weaken our competitive position, reduce our revenues
and increase our costs.
Our commercial success depends in part on our ability and the ability of our
licensors to protect our technology and processes.
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<PAGE> 16
The foam technology used in our Luxiq and OLUX products is not covered by
issued patents but is the subject of pending patent applications. If we do not
obtain patent coverage for Luxiq and OLUX, it may be easier and more attractive
for potential new market entrants to develop and introduce competitive products.
With regard to patent applications that we or our licensors have filed, or
patents issued to us or our licensors:
- any pending patent applications may not issue as patents;
- our competitors may successfully challenge or circumvent our
patents; or
- any patents which exist or are issued may not provide us with a
competitive advantage.
In addition, others may obtain patents that contain claims which cover
products or processes that we make, have made, use, or sell. If a third party
claimed an intellectual property right to technology we use, we might be forced
to discontinue an important product or product line; alter our products or
processes to avoid infringement; pay license fees and/or damages; and cease
certain activities.
Under these circumstances, we may not be able to obtain a license to such
intellectual property on favorable terms, if at all. We may not succeed in any
attempt to redesign our products or processes to avoid infringement.
A judgment adverse to us in any patent interference, litigation or other
proceeding arising in connection with these patent applications could materially
harm our business. In addition, the costs of any such proceeding may be
substantial whether or not we are successful.
We depend on third parties to protect and maintain our patent portfolio.
Nearly our entire patent portfolio is licensed from third parties, who are
responsible to varying degrees for the prosecution and maintenance of those
patents. Our success will depend on our ability, or the ability of our
licensors, to obtain and maintain patent protection on technologies, to preserve
trade secrets, and to operate without infringing the proprietary rights of
others. It is possible that before any of our products in development can be
commercialized, the related patents may have expired or be close to expiration,
thus reducing any advantage of the patent. Moreover, composition of matter
patent protection, which gives patent protection for a compound or a
composition, may not be available for some of our product candidates.
The patents licensed to us, if challenged, may not be upheld. In addition,
the patents in our relaxin patent portfolio begin to expire in 2002 in foreign
countries and 2005 in the United States. Additional patents may not issue, and
if they do, they may not be sufficient to protect our relaxin products.
If we do not successfully commercialize relaxin, we may lose fundamental
intellectual property rights to the product.
Licenses with Genentech and the Florey Institute require us to use our best
efforts to commercialize relaxin. Our failure to successfully commercialize
relaxin may result in the reversion of our rights under these licenses to
Genentech and the Florey Institute. The termination of these agreements and
subsequent reversion of rights could cause us to lose fundamental intellectual
property rights to relaxin. This would prohibit us from continuing our
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<PAGE> 17
relaxin development programs, which would seriously harm our business and our
future prospects.
We are subject to foreign exchange risks which may increase our operational
expenses.
We make payments to Boehringer Ingelheim for the production of ConXn in
Austrian schillings, and to CCL Pharmaceuticals for the production of Luxiq and
OLUX in pounds sterling. If the U.S. dollar depreciates against the schilling or
the pound, the payments that we must make will increase, which may harm our
financial condition.
Our use of hazardous materials exposes us to the risk of environmental
liabilities, and we may incur substantial additional costs to comply with
environmental laws.
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive materials. We are subject
to federal, state and local laws and regulations governing the use, storage,
handling and disposal of these materials and certain waste products. We cannot
completely eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident, we could be liable for any damages
that result and any liability could exceed our resources. We could be required
to incur significant costs to comply with environmental laws and regulations as
our research activities increase.
RISKS RELATED TO OUR PRODUCTS
If ConXn fails in its clinical trials for the treatment of scleroderma, we will
not be able to market ConXn for that disease.
ConXn, the recombinant human relaxin product that we are developing, is
critical to our future success. We are initially studying ConXn for the
treatment of diffuse scleroderma, a serious disease involving the excessive
formation of connective tissue. We initiated a pivotal Phase II/III trial of
ConXn for the treatment of diffuse scleroderma in February 1999, and completed
patient enrollment in that trial in December 1999. To complete the development
of ConXn for scleroderma, we will need, at a minimum, to demonstrate the safety
and efficacy of ConXn in this clinical study; and submit a biologics license
application to the FDA for the purpose of obtaining approval to market ConXn in
the United States.
The current ConXn clinical trial may not be successful and we may not be
able to submit a biologics license application for ConXn. Even if the clinical
data support the submission of a biologics license application, the FDA may not
approve this application for the indications for which we submit. Furthermore,
we may encounter unforeseen delays in the regulatory approval process.
If our clinical trials fail to demonstrate that our products are safe and
effective for the treatment of the diseases we are targeting, the FDA will not
permit us to market our products for those diseases.
Our current trials or future clinical trials may not demonstrate the safety
and efficacy of any products and may not result in approval to market products.
The results from preclinical studies and early clinical trials may not be
predictive of results that will be obtained in later-stage testing. Many
companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in advanced clinical trials, even after promising results
from earlier trials.
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<PAGE> 18
In addition to the clinical trial for scleroderma, we are in earlier stages
of development of ConXn for other indications, including infertility and
peripheral arterial disease. Even if ConXn is successful in the treatment of
scleroderma, the long-term potential of ConXn rests with other indications, such
as the ones we are studying. For ConXn to succeed, we will need, at a minimum,
to demonstrate the safety and efficacy of ConXn in these clinical studies, and
apply to the FDA to enter into pivotal trials for these indications in the
United States.
In addition to ConXn, we have a pipeline of potential products that are all
subject to FDA review. Before any company can obtain regulatory approval for the
commercial sale of its products under development, it must demonstrate through
preclinical studies and clinical trials that the product is safe and effective
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 future clinical trials may not
demonstrate the safety and efficacy of any products and may not result in
approval to market products. Furthermore, we may encounter unforeseen delays in
the regulatory approval process. If we are unable to commence clinical trials as
planned, enroll sufficient patients in our clinical trials, complete the
clinical trials, or demonstrate the safety and efficacy of our products, our
business will be harmed. Even if a product from our research and development
programs performs favorably in clinical trials, the FDA may not approve it.
If Luxiq and OLUX do not achieve or sustain market acceptance, our revenues will
not increase and may not cover our operating expenses.
Our future revenues will depend upon dermatologist and patient acceptance of
Luxiq, and OLUX if it receives regulatory clearance. Factors that could affect
acceptance of Luxiq and OLUX include:
o satisfaction with existing alternative therapies; ~
o the effectiveness of our sales and marketing efforts;
o undesirable and unforeseeable side effects; and
o the cost of the product as compared with alternative therapies.
Since we have only had approval to sell Luxiq for one year, the potential
long-term patient acceptance of the product is uncertain. OLUX must receive FDA
clearance before we can sell in the United States, and we will be unable to
begin to assess acceptance of OLUX until we begin commercial sales.
If we are unable to develop alternative delivery systems for ConXn, patients
that do not suffer from severe diseases may not be willing to use the current
drug delivery system.
In addition to demonstrating the safety and efficacy of ConXn in our current
clinical trials, we must meet several additional major development objectives
for ConXn. In particular, we may need to develop an alternative means of
delivering the drug. In our current clinical trials, ConXn is being delivered
through the use of an infusion pump. For a serious and life threatening
condition, such as diffuse scleroderma, this method of delivery may be
acceptable. However, we are pursuing other indications for ConXn, such as
treatment of infertility and peripheral vascular disease. For these indications,
we may need to develop an alternative delivery system; however, the known
biological properties of the relaxin molecule may decrease the availability of
certain
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<PAGE> 19
delivery systems. If we are not able to develop a suitable alternative delivery
system for ConXn, we may not be unable to market ConXn effectively for
indications that are not life threatening, such as infertility, and the
commercial potential of ConXn would be seriously harmed. Our inability to
develop ConXn to its full commercial potential would harm our future prospects
and revenue growth and our stock price would likely decline.
We rely on third parties to conduct clinical trials for our products, and those
third parties may not perform satisfactorily.
We do not have the ability to independently conduct clinical studies, and we
rely on third parties to perform this function. If these third parties do not
perform satisfactorily, we may not be able to locate acceptable replacements or
enter into favorable agreements with them, if at all. If we are unable to rely
on clinical data collected by others, we could be required to repeat clinical
trials, which could significantly delay commercialization and require
significantly greater capital.
If we cannot maintain our regulatory approvals, we will be unable to sell our
products for their intended diseases.
The process of obtaining and maintaining regulatory approvals for
pharmaceutical and biological drug products, and obtaining and maintaining
regulatory approvals to market these products for new indications, is lengthy,
expensive and uncertain. The manufacturing and marketing of drugs are subject to
continuing FDA and foreign regulatory review, and later discovery of previously
unknown problems with a product, manufacturing process or facility may result in
restrictions, including withdrawal of the product from the market.
If we get approval, whether in the United States or internationally, we
will continue to be subject to extensive regulatory requirements. If we fail to
comply or maintain compliance with such laws and regulations, we may be fined
and barred from selling our products. In addition, governmental authorities
could seize our inventory of products or force us to recall our products already
in the market if we fail to comply with FDA regulations.
Manufacturing difficulties could delay commercialization of our products.
We depend on third parties to manufacture our products and each product is
manufactured by a sole source manufacturer. These parties must comply with the
applicable FDA good manufacturing practice regulations, which include quality
control and quality assurance requirements as well as the corresponding
maintenance of records and documentation. Manufacturing facilities are subject
to ongoing periodic inspection by the FDA and corresponding state agencies,
including unannounced inspections, and must be licensed before they can be used
in commercial manufacturing of our products. If our sole source manufacturers
cannot provide us with our product requirements in a timely and cost-effective
manner, or if the product they are able to supply cannot meet commercial
requirements for shelf life, or if they are not able to comply with the
applicable good manufacturing practice regulations and other FDA regulatory
requirements, our sales of marketed products could be reduced and we could
suffer delays in the progress of clinical trials for products under development.
We do not have control over our third-party manufacturers' compliance with these
regulations and standards. CCL will need to pass an FDA inspection before we can
be approved to sell OLUX. The fact that a facility has passed inspection in the
past does not guarantee that it will pass future inspections.
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<PAGE> 20
If we are unable to contract with third parties to manufacture and distribute
our products in sufficient quantities, on a timely basis, or at an acceptable
cost, we may be unable to meet demand for our products and may lose potential
revenues.
We have no manufacturing or distribution facilities for any of our products.
Instead, we contract with third parties to manufacture our products for us. If
these third parties are unable or unwilling to produce our products in
sufficient quantities, with appropriate quality for our clinical trials and
subsequent commercialization, if any, and under commercially reasonably terms,
our business will suffer.
In addition, we have entered into an agreement with CORD Logistics, Inc. to
distribute Luxiq, Ridaura and Actimmune. CORD's inability to continue to
distribute our products in an effective manner or our inability to maintain
sufficient personnel with the appropriate levels of experience to manage this
function would seriously harm our business.
RISKS RELATED TO OUR INDUSTRY
If we do not obtain governmental approvals for our products in development, we
cannot sell these products.
All of our products under development must be approved by the FDA before we
are permitted to sell them in the United States. To obtain approval, we must
show in preclinical and clinical trials that our products are safe and
effective. Clinical trial data can be the subject of differing interpretation,
and the FDA has substantial discretion in the approval process. The FDA may not
interpret our clinical data the way we do. The FDA may also require additional
clinical data to support approval.
After we complete the clinical trials for a product, we will be required to
file a new drug application if the product is classified as a new drug, or a
biologics license application if the product is classified as a biologic, which
is a drug based on natural substances. The requirements for submission of these
applications and the FDA approval processes require substantial time and effort,
and the FDA may not grant approval on a timely basis or at all. The FDA can take
between one and two years to review new drug applications and biologics license
applications, or longer if significant questions arise during the review
process. In addition, delays or rejections may be encountered during FDA review.
Even after such time and expenditures, we may not obtain regulatory approval.
Any regulatory approval of a product that is granted may limit the indicated
uses for which the product may be marketed.
If the FDA modifies existing guidelines for product development, the
time and costs associated with the development of products in our product line
may increase, in which case we may not be able to successfully develop our
products at the rate we anticipate or we may not be able to develop them at all.
To market our products in countries outside of the United States, we and our
partners are required to obtain similar approvals from foreign regulatory
bodies. The foreign regulatory approval process includes all of the risks
associated with obtaining FDA approval, and approval by the FDA does not ensure
approval by the regulatory authorities of any other country. The process of
obtaining these approvals is time consuming and requires the expenditure of
substantial resources.
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<PAGE> 21
We face intense competition, which may limit our commercial opportunities and
our ability to become profitable.
The pharmaceutical and biotechnology industries are highly competitive.
Products and therapies currently on the market or under development could
compete directly with some of our products. Numerous pharmaceutical and
biotechnology companies and academic research groups throughout the world are
engaged in research and development efforts with respect to therapeutic products
targeted at diseases or conditions addressed by us. Our commercial opportunities
will be reduced or eliminated if our competitors develop and market products
that are more effective, have fewer or less severe adverse side effects or are
less expensive than our products. In addition, many of our existing or potential
competitors, particularly large pharmaceutical companies, have substantially
greater financial, technical and human resources than we have. Many of these
competitors have more collective experience than we do in undertaking
preclinical testing and human clinical trials of new pharmaceutical products and
obtaining regulatory approvals for therapeutic product. Accordingly, our
competitors may succeed in developing and marketing products either that are
more effective than those that we may develop, alone or with our collaborators,
or that are marketed before any products we develop are marketed.
If third party payors will not provide coverage or reimburse patients for
the use of our products, our revenues and profitability will suffer.
Our products' commercial success is substantially dependent on whether
third-party reimbursement is available for the use of our products by hospitals,
clinics and doctors. Medicare, Medicaid, health maintenance organizations and
other third-party payers may not authorize or otherwise budget for the
reimbursement of our products. In addition, they may not view our products as
cost-effective and reimbursement may not be available to consumers or may not be
sufficient to allow our products to be marketed on a competitive basis.
Likewise, legislative proposals to reform health care or reduce government
programs could result in lower prices for or rejection of our products. Changes
in reimbursement policies or health care cost containment initiatives that limit
or restrict reimbursement for our products may cause our revenues to decline.
If product liability lawsuits are brought against us, we may incur substantial
costs.
The testing and marketing of pharmaceutical products entails an inherent
risk of product liability. Our insurance may not provide adequate coverage
against potential product liability claims or losses, and insurance coverage may
not continue to be available to us on reasonable terms or at all. Even if we are
ultimately successful in product liability litigation, the litigation would
consume substantial amounts of our financial and managerial resources, and might
create adverse publicity, all of which would impair our ability to generate
sales.
RISKS RELATED TO OUR STOCK
Our stock price is volatile and the value of your investment in our stock could
decline in value.
The market prices for securities of biotechnology companies like our company
have been and are likely to continue to be highly volatile. As a result,
investors in these companies often buy at very high prices only to see the price
drop substantially a short time later, resulting in an extreme
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<PAGE> 22
drop in value in the stock holdings of these investors. In addition, the
volatility could result in securities class action litigation. Any litigation
would likely result in substantial costs, and divert our management's attention
and resources.
If our officers, directors and principal stockholders act together, they may be
able to control our management and operations and they may make decisions that
are not in the best interests of other stockholders.
Our directors, executive officers and principal stockholders and their
affiliates currently beneficially own in the aggregate approximately 65% of our
outstanding common stock. Accordingly, they collectively have the ability to
determine the election of all of our directors and to determine the outcome of
most corporate actions requiring stockholder approval. They may exercise this
ability in a manner that advances their best interests and not necessarily those
of other stockholders. This concentration of ownership may also have the effect
of delaying, deferring or preventing a change in control of our company, even if
the change in control would be beneficial to other stockholders.
Our charter documents and Delaware law contain provisions that could delay or
prevent an acquisition of us, even if the acquisition would be beneficial to our
stockholders.
Our certificate of incorporation authorizes our board of directors to issue
undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of the preferred stock without further vote or
action by our stockholders. The issuance of preferred stock could make it more
difficult for third parties to acquire a majority of our outstanding voting
stock. We also have a stockholder rights plan, which entitles existing
stockholders to rights, including the right to purchase shares of preferred
stock, in the event of an acquisition of 15% or more of our outstanding common
stock, or an unsolicited tender offer for such shares. The existence of the
rights plan could delay, prevent, or make more difficult a merger or tender
offer or proxy contest involving us. Other provisions of Delaware law and of our
charter documents, including a provision eliminating the ability of stockholders
to take actions by written consent, could also delay or make difficult a merger,
tender offer or proxy contest involving us. Further, our stock option and
purchase plans generally provide for the assumption of such plans or
substitution of an equivalent option of a successor corporation or,
alternatively, at the discretion of the board of directors, exercise of some or
all of the option stock, including non-vested shares, or acceleration of vesting
of shares issued pursuant to stock grants, upon a change of control or similar
event.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have supply contracts with Boehringer Ingelheim for Relaxin and CCL
Pharmaceuticals for Luxiq and OLUX. We also have a collaboration agreement with
Suntory for the development and commercialization of relaxin for the treatment
of scleroderma in Japan. As payments under these contracts are payable in local
currency, our financial results could be affected by changes in foreign currency
exchange rates. We have a bank loan that is sensitive to movement in interest
rates. Interest income from our investments is sensitive to changes in the
general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. Due to the nature of our short-term
investments, we have concluded that we face no material market risk exposure.
Therefore, no quantitative tabular disclosures are required.
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<PAGE> 23
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1* Relaxin Development, Commercialization and License Agreement between
Connetics and F.H. Faulding & Co., Limited, dated April 7, 2000.
27.1 Financial Data Schedule (EDGAR - filed version only)
* Confidential treatment has been requested for portions of this Agreement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended March 31, 2000.
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<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONNETICS CORPORATION
By: /s/ JOHN L. HIGGINS
-------------------------
John L. Higgins
Exec. Vice President, Finance and
Administration and Chief Financial
Officer
Date: May 15, 2000
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<PAGE> 25
Index of Exhibits
<TABLE>
<CAPTION>
Exhibit number Description
- -------------- -----------
<S> <C>
10.1* Relaxin Development, Commercialization and License Agreement
between Connetics and F.H. Faulding & Co., Limited, dated
April 7, 2000.
27.1 Financial Data Schedule
</TABLE>
* Confidential treatment has been requested for portions of this Agreement.
<PAGE> 1
EXHIBIT 10.1
RELAXIN
DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT
This DEVELOPMENT, COMMERCIALIZATION AND LICENSE AGREEMENT, effective as
of April 7, 2000 ("EFFECTIVE DATE") is made by and between F. H. Faulding & Co.
Limited, having its principal place of business at 115 Sherriff Street,
Underdale, SA 5032, AUSTRALIA ("FAULDING"), ACN 007 870 984, and Connetics
Corporation, a Delaware corporation, having its principal place of business at
3400 West Bayshore Road, Palo Alto, California, 94303, 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 Faulding desire to collaborate to develop and
commercialize Product in the Territory (all as defined in this
Agreement).
C. Connetics and Faulding have entered into a Letter of Understanding dated
February 7, 2000, pursuant to which they agreed to negotiate a
definitive license agreement on substantially the terms set forth in the
Letter, and pursuant to which Faulding paid Connetics [*****] which
amount is creditable as set forth in SECTION 4.1.1 of this Agreement.
THEREFORE, the Parties agree as follows:
ARTICLE I
DEFINITIONS
The following terms shall be deemed to have the meanings stated below:
"ADDITIONAL INDICATION(S)" means all human therapeutic indications except
Scleroderma and Reproductive Indications; provided, however, that Reproductive
Indications shall be included in the definition of Additional Indications upon
the events set forth in SECTION 3.5.
"ADJUSTED PRICE TO FAULDING" means the revised price to Faulding that the
Parties agree to based on the provisions of SECTION 5.1.2 of this Agreement.
"ADVERSE EXPERIENCE" shall have the meaning set forth in EXHIBIT D 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.
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 2
"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.
"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 the
Territory.
"CLINICAL DEVELOPMENT" means all activities subsequent to the Effective Date
relating to human clinical trials including pre-clinical and additional studies
commercially reasonably required to support Regulatory Filings for the purpose
of obtaining Regulatory Approval to market and sell Product in the Territory.
"COGS" means a Party's cost of producing the Product and/or Relaxin Material,
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.
"COMMERCIALLY REASONABLE EFFORTS" means the effort by Faulding 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 Faulding 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 8.2.1 of
this Agreement.
"CONNETICS BREACH" 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 Faulding of the details of such Connetics Improvements as soon as
possible
"CONTRACT MANUFACTURER" means any Third Party contracted by Connetics 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
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 pursuant to any applicable law or by any
Regulatory Authority.
"DEVELOPMENT COMMITTEE" shall have the meaning set forth in SECTION 3.1.1 of
this Agreement.
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 3
"DEVELOPMENT PLAN" means the plan as amended from time to time which sets forth,
in one or more sections, (a) Connetics' strategies, plans, activities, estimated
time schedules and responsibilities for commercializing Relaxin in the U.S.A.,
and (b) Faulding's strategies, plans, activities, estimated time schedules and
responsibilities with regard to Clinical Development and Regulatory Filings for
the Territory. Faulding shall develop a plan for the Territory as appropriate
after the Effective Date, which shall be subject to approval by Connetics prior
to its implementation, which approval shall not be unreasonably withheld.
"ENFORCING PARTY" shall have the meaning set forth in SECTION 2.5 of this
Agreement.
"FDA" means the U.S. Food and Drug Administration or successor agency.
"FAULDING BREACH" shall have the meaning set forth in SECTION 9.2.2 of this
Agreement.
"FAULDING IMPROVEMENTS" means any inventions, discoveries, improvements or
enhancements relating to Relaxin, whether patentable or not, conceived or first
reduced to practice by Faulding during the Term and any and all intellectual
property rights therein and thereto. Faulding shall notify Connetics of the
details of such Faulding Improvements as soon as possible.
"FIELD" means the treatment of Scleroderma and all Additional Indications.
"FORECAST" mean the forecast supplied by Faulding no later than [*****] before
the beginning of each Year, which forecast shall reflect Faulding's good faith
estimate of the total Net Sales of Product in the Territory for the upcoming
Year on a quarterly basis.
"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 6.6
of this Agreement.
"LAUNCH DATE" means the first date upon which the Product is first sold
commercially by Faulding in the Territory.
"LICENSED IP" means the Relaxin Patents, Relaxin Information and Third Party
Licenses.
"LOSSES" shall have the meaning set forth in SECTION 6.4 of this Agreement.
"MEDEVA" means Medeva Pharmaceuticals, Inc. and any successor corporation.
"MEDEVA AGREEMENT" means the Relaxin Development, Commercialization and License
Agreement effective as of January 11, 1999, by and between Medeva and Connetics.
"NET SALES" means gross amounts invoiced by Faulding (and/or an Affiliate of
Faulding or a distributor appointed by Faulding, excluding wholesalers)
ex-factory on a commercial arms-length basis, for sales of Product in the
Territory by Faulding (and/or an Affiliate of Faulding or a
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 4
distributor appointed by Faulding, excluding wholesalers) to a Third Party, less
deductions for the following amounts directly chargeable to such Product:
(1) customary trade, quantity or cash discounts and rebates
(including non-cash rebates), actually allowed and taken;
(2) credits actually granted upon, or allowances for estimated
amounts for, returns, claims, rejections, rebates and
chargebacks;
(3) an allowance for uncollectible amounts or bad debts;
(4) recalls; and
(5) charges for delivery and handling.
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 Faulding and/or an Affiliate of Faulding
or a distributor appointed by Faulding, calculated on a per milligram basis (or
such other unit as the Parties may agree) in respect of Product sold in the
Territory to a Third Party
"NON-ENFORCING PARTY" shall have the meaning set forth in SECTION 2.5 of this
Agreement.
"PRICE TO FAULDING" means [*****] calculated on a [*****] basis (or such other
unit as the Parties may agree) plus [*****], unless otherwise adjusted pursuant
to the provisions of SECTION 5.1.2.
"PRODUCT" means a commercial pharmaceutical product containing Relaxin for use
in the Field.
"REGULATORY APPROVAL" means all approvals, including pricing approvals for
reimbursement purposes, from the appropriate Regulatory Authorities (a) in the
United States or (b) 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
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 5
the extent licensed to Faulding pursuant to SECTION 2.1.3, relating to the
development and commercialization of Relaxin, Relaxin Materials and the Product,
including but not limited to any pre-clinical, clinical and regulatory
information that Faulding 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 Faulding and its Affiliates under this Agreement.
"RELAXIN MATERIALS" means bulk Relaxin or formulated Relaxin for use in Clinical
Development and/or procuring Regulatory Approval for the Product.
"RELAXIN PATENTS" means the patents and patent applications in the Territory
and/or in the U.S.A., including any reissues, renewals, extensions,
substitutions, divisionals, continuations and continuations-in-part of such
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.
"REPRODUCTIVE INDICATIONS" means the diagnosis and treatment of human diseases
or disorders primarily related to the facilitation of human reproduction, such
as cervical ripening, the facilitation of delivery in humans, and fertilization.
For the avoidance of doubt, "Reproductive Indications" is intended to cover the
full spectrum of the term "Relaxin Reproductive Field," as that term is used in
the Amendment to License Agreement dated as of July 14, 1994, between Genentech,
Inc. and Connective Therapeutics, Inc.
"SCLERODERMA" means limited sclerosis, systemic sclerosis, diffuse systemic
sclerosis, progressive systemic sclerosis, and/or systemic sclerosis with
diffuse scleroderma.
"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.
"SUPPLY AGREEMENT" means the agreement to be entered into at a future date
pursuant to SECTION 5.1.2.
"TERM" shall have the meaning set forth in SECTION 9.1 of this Agreement.
"TERRITORY" means Australia.
"THIRD PARTY LICENSES" means all 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
Faulding 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 Faulding, Connetics, or
an Affiliate of Faulding or Connetics.
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 6
"THIRD PARTY WORK" shall have the meaning set forth in SECTION 7.1.6 of this
Agreement.
"YEAR" means Faulding's fiscal year.
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 Faulding 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, use, market, distribute, sell, offer for sale and import the Product
for Scleroderma and Additional Indications.
2.1.2 TRADEMARKS. Except as expressly permitted in this Agreement,
no right or license is granted to Faulding 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 Faulding and its Affiliates an exclusive
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 sale of Product, for no additional royalty obligations beyond those
already set forth in this Agreement. 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
Faulding of the details of any Connetics Improvement to the extent and during
the period that such disclosure would adversely affect the patentability of the
matters disclosed.
2.1.4 SUBLICENSES. Faulding shall have the right to grant
sublicenses under the license set forth in SECTIONS 2.1.1 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 Faulding's obligations under this Agreement, and Faulding shall remain
primarily liable for such obligations, (b) Faulding 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 within five (5) business days after
execution, and (c) Faulding shall only grant a sublicense to any Affiliate or
Third Party which undertakes to perform those obligations of this Agreement
relevant to such sublicense in accordance with the terms of this Agreement,
including specifically the obligation under SECTION 7.2.1.
2.2 LICENSE TO FAULDING IMPROVEMENTS. Subject to the terms and
conditions of this Agreement, Faulding 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
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 7
any Faulding 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 Faulding
Improvement does not relate exclusively to the Licensed IP or Product, Faulding
shall have the right to use or license such Faulding Improvement for any purpose
in any territory in the world. Faulding shall have no duty to notify Connetics
of the details of any Faulding Improvement to the extent that such disclosure
would adversely affect the patentability of the matters disclosed.
2.3 THIRD PARTY TECHNOLOGY.
2.3.1 The Parties acknowledge that the licenses granted to Faulding
in this Agreement include sublicenses under Third Party Licenses. Connetics
shall be solely responsible for all payments under the Third Party Licenses
entered into prior to the Effective Date and all amendments, restatements or
renewals thereof. Connetics shall promptly disclose to Faulding any knowledge
that Connetics acquires during the Term of this Agreement relating to any
patents or patent applications by Third Parties other than the Relaxin Patents.
2.3.2 Connetics shall abide by the terms and conditions of all Third
Party Licenses to maintain the Third Party Licenses to which Faulding has taken
a sublicense for Faulding 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 to which Faulding has taken a sublicense,
nor to amend or by act or omission permit the amendment of any such Third Party
Licenses to the extent such an amendment would adversely affect Faulding's
rights under this Agreement, without Faulding's prior written consent, which
consent may be granted or withheld in Faulding's sole discretion. Within [*****]
entering into any amendment of a Third Party License, Connetics shall notify
Faulding and provide Faulding 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.
2.5 ENFORCEMENT OF LICENSED IP.
2.5.1. 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. Connetics shall use
Commercially Reasonable Efforts, at its sole expense, to protect the exclusive
license granted to Faulding 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.
2.5.2. If Connetics (a) decides not to enforce the Licensed IP, or
having commenced an action fails to pursue it, or (b) does not bring such action
within sixty (60) days after receipt of Faulding's request to enforce the
Licensed IP, then Faulding may do so at its own
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 8
expense, and Connetics shall sign all documents and do all things necessary to
facilitate Faulding's exercising its rights under this subsection.
2.5.3. 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 [*****] to
the Enforcing Party and [*****] 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.
2.5.4. 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.
2.6 OTHER COUNTRIES. 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 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.
ARTICLE III
CLINICAL DEVELOPMENT AND REGULATORY APPROVAL
3.1 CLINICAL DEVELOPMENT.
3.1.1 DEVELOPMENT COMMITTEE. The obligations and relationship
between the Parties pursuant to this Agreement shall be governed by a
development committee (the "DEVELOPMENT COMMITTEE"). Initially, and until such
time (if any) as Medeva objects, this provision shall be satisfied by the
inclusion of a Faulding representative on the Development Committee established
pursuant to the Medeva Agreement. If at any time Medeva asks that Faulding cease
to be represented on that Committee, then Connetics and Faulding shall, within
thirty (30) days after receipt of notice from Medeva, establish a separate
development committee
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 9
which will have the obligation to monitor progress and manage information
exchange between Connetics and Faulding. At the first meeting of the Development
Committee, the Parties shall establish a regular meeting time and structure.
3.1.2 DEVELOPMENT PLAN. Faulding shall conduct Clinical Development
in accordance with this SECTION 3.1, and the Development Plan, in the Territory.
The Development Plan may be amended from time to time during the Term to reflect
the actual needs of Clinical Development and/or Regulatory Approval. Connetics
shall endeavor to obtain the consent of its other Relaxin licensees to share
their development plans with Faulding.
3.1.3 REGULATORY FILINGS. Connetics shall be responsible for all
Regulatory Filings for the Product in the United States. Faulding shall be
entitled to an update (including any written minutes) of any meeting with the
FDA related to Regulatory Filings for the Product in the United States. Faulding
shall be responsible for all Regulatory Filings for the Product in the
Territory; provided that Connetics may elect to participate in meetings with the
applicable Regulatory Authorities in the Territory for the purpose of obtaining
relevant Regulatory Approval(s), if the Regulatory Authority does not object to
Connetics' attendance and if including Connetics is otherwise practicable. In
any event, Connetics shall be entitled to an update (including any written
minutes) of any meeting with the applicable Regulatory Authorities in the
Territory that Connetics is not able or permitted to attend related to
Regulatory Filings for the Product in the Territory. Each Party shall keep the
other fully informed of all communications with the regulatory authorities.
3.2 DEVELOPMENT COSTS.
3.2.1 GENERAL. Faulding will pay [*****] 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 [*****] after the end of each
calendar quarter, commencing with the quarter ending June 30, 2000, and ending
with the first full calendar quarter after the first Regulatory Approval is
obtained in the Territory, Connetics and Faulding shall exchange quarterly
written progress reports which shall:
(a) summarize the Clinical Development and Regulatory Approval
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.
3.3 ACCESS TO INFORMATION. Faulding will consult with Connetics on the
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 that the Parties cooperate with one another to support Clinical
Development and Regulatory Filings to optimize commercial success in the U.S.
and in the Territory. Connetics will make available to Faulding, promptly upon
request, and Faulding under the license granted under this Agreement shall be
entitled to use in the Field in the Territory, all Relaxin Information (a)
developed by or for Connetics with respect to the submission of the BLA by
Connetics, or (b) elsewhere by or for Connetics' other licensees in respect of
regulatory filings in other countries, to the extent that Connetics is permitted
to make such information available to Faulding. Faulding will make available to
Connetics, and Connetics shall be
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 10
entitled to use and to make available to its licensees, all Relaxin Information
developed by or for Faulding with respect to the submission of the BLA by
Faulding in the Territory; provided that no money is required to be spent or
expenses incurred by Faulding outside of the Territory.
3.4 RECORDS. Connetics shall maintain, and shall cause its Affiliates,
Contract Manufacturers, 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 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.
3.5 REPRODUCTIVE INDICATIONS.
3.5.1 Connetics shall use Commercially Reasonable Efforts to secure
exclusive, rights in the Territory to Reproductive Indications from Genentech,
Inc. If Connetics is successful in securing rights to Reproductive Indications,
Faulding shall have the option to secure the right to commercialize Relaxin in
the Territory for Reproductive Indications on the following terms:
(a) Faulding shall pay to Connetics [*****] of amounts paid to
Third Parties by Connetics to secure the exclusive rights to
Reproductive Indications;
(b) the royalty to be paid by Faulding to Connetics pursuant to
SECTION 5.2 will be increased as to Reproductive Indications
in the Territory by [*****]; and
(c) Reproductive Indications shall be considered Additional
Indications upon the execution of a written amendment to
this Agreement incorporating the payment and royalty terms
with respect to Reproductive Indications.
3.5.2 If Faulding does not elect to license Reproductive Indications
within [*****] after Connetics secures the exclusive rights from Genentech,
Connetics shall have the right to commercialize Product for Reproductive
Indications within the Territory on an exclusive basis without the right to
sublicense.
3.5.3 If Connetics is unable to secure exclusive rights to
Reproductive Indications, Connetics shall not assign its co-exclusive rights in
the Territory to any Third Party without Faulding's consent. Furthermore,
Connetics shall use Commercially Reasonable Efforts to [*****].
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 11
ARTICLE IV
PAYMENTS
4.1 PAYMENTS TO CONNETICS. The Parties agree that in consideration for
the rights granted by Connetics in this Agreement, Faulding will make the
following payments to Connetics in accordance with this ARTICLE IV.
4.1.1 LICENSE FEES. Faulding agrees to pay Connetics an aggregate
amount of US$500,000, payable as follows: (a) [*****] of the amount previously
paid in connection with the Letter of Understanding between the Parties shall be
credited against the payment of the development fee upon execution of the
Agreement (with the understanding that Connetics is entitled to keep the balance
of [*****] without further encumbrance), and (b) [*****] shall be due on
[*****].
4.1.2 MILESTONE PAYMENTS. At the time Faulding submits a BLA in the
Territory for each Additional Indication other than Scleroderma, Faulding shall
pay Connetics [*****] cash.
4.2 PAYMENT TERMS. Faulding shall notify Connetics in writing within
[*****] after a milestone under SECTION 4.1.2 is achieved. The payments pursuant
to SECTION 4.1.2 shall be made within [*****] after the milestone is achieved.
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 Faulding
receives Regulatory Approval to market the Product in the Territory, use
Commercially Reasonable Efforts to manufacture for and supply to Faulding, and
Faulding shall (subject to the terms of this Agreement) purchase, all Faulding's
required quantities of Relaxin Materials for use in Clinical Development;
including quantities required for any special access schemes or compassionate
use programs in the Territory, provided that Faulding shall not transfer the
Relaxin Materials or Product to any Third Party at any time except to the extent
transfer is required for Clinical Development, Regulatory Filings or Regulatory
Approval or compassionate use programs or special access schemes related to the
Product in the Field and Territory. The price for Product and/or Relaxin
Materials pursuant to this Section shall equal [*****].
5.1.2 PRODUCT FOR COMMERCIAL SALE. Commencing upon Faulding's
initial purchase order and continuing 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 Faulding
all of Faulding's requirements for Product (based on Faulding's Annual Sales
Forecast) on the terms set forth in a Supply Agreement to be entered into as
soon as practicable after [*****]. The Supply Agreement shall include, in
addition to the terms set forth in this ARTICLE V, such additional
representations, warranties, terms and conditions as are customary in the
industry for
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 12
similar types of products, and such additional terms and conditions as the
Parties may agree upon. If the Price to Faulding to purchase commercial supply
of Product exceeds forty percent (40%) of the Net Selling Price, then the
Parties shall recalculate the Price to Faulding and agree on a new price (the
"ADJUSTED PRICE TO FAULDING"). The Adjusted Price to Faulding shall equal the
original Price to Faulding minus the lesser of (1) fifty percent of the
difference between the original Price to Faulding and [*****] of the [*****],
and (2) [*****] of the [*****].
Example 1. Solely for purposes of this Agreement, and by way of
illustration, if the [*****] is [*****] and the Price to
Faulding is [*****], then the Adjusted Price to Faulding shall
equal [*****]. The calculated reduction in the Price to Faulding
is determined by the formula [*****]
Example 2. Solely for purposes of this Agreement, and by way of
illustration, if the [*****] is [*****] and the Price to
Faulding is [*****], then the Adjusted Price to Faulding shall
equal [*****]. The reduction in the Price to Faulding is limited
to [*****], or [*****], which is less than the product of the
calculation [*****]
Subject to SECTION 5.1.5 below, during the Term, Faulding shall purchase all its
requirements for Product from Connetics. Upon Faulding's request, during the
[*****] 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 Faulding.
5.1.3 CONTRACT MANUFACTURING. Connetics may contract with one or
more Contract Manufacturers to perform any or all of its obligations under this
Agreement and the Supply Agreement.
5.1.4 INABILITY TO SUPPLY. If Connetics fails for any reason,
including without limitation a force majeure event described in SECTION 11.7, to
deliver Relaxin Materials and/or Product to Faulding, and such inability to
supply continues for more than [*****] without a plan (acceptable to Faulding)
by which Connetics proposes to cure the inability to supply within [*****] after
the inability first impacted Faulding, then Connetics hereby agrees to allocate
to Faulding a percentage of available Product equivalent to the percentage of
sales of Product in the Territory compared to sales of Product throughout the
world in the preceding [*****]. Alternatively, Faulding shall have the right
under such circumstances to contract with another supplier.
5.1.5 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
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 13
soon as practicable after the first Regulatory Approval and during the remainder
of the Term of this Agreement.
5.1.6 RISK OF LOSS. All shipments shall be [*****], as defined by
the [*****], and Faulding shall bear the risk of loss and cost of transportation
of the Relaxin Materials and/or Product upon delivery by Connetics to [*****].
The Parties agree that the Supply Agreement shall include additional detail on
the risk of loss.
5.2 ROYALTY.
5.2.1 ROYALTY OBLIGATION. Faulding shall pay Connetics a royalty
equal to a percentage of Faulding's Net Sales in the Territory for each Year, as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
IF NET SALES IN THE YEAR ARE: THEN THE ROYALTY DUE IS:
---------------------------------------------------------------------------------
<S> <C>
(a) less than [*****] [*****]
(b) more than [*****] and less than [*****] [*****] plus [*****]
(c) more than [*****] and less than [*****] [*****] plus [*****]
(d) more than [*****] and less than [*****] [*****] plus [*****]
(e) more than [*****] and less than [*****] [*****] plus [*****]
(f) more than [*****] [*****] plus [*****]
</TABLE>
5.2.2 QUARTERLY PROGRESS ROYALTY PAYMENTS. Faulding shall provide
Connetics with a forecast of projected total annual Net Sales of Relaxin in the
Territory on quarterly basis for each Year, no later than [*****] before the
beginning of the Year. [*****]
5.2.3 QUARTERLY ADJUSTMENTS TO FORECAST. No later than [*****] after
each fiscal quarter, if Net Sales are above or below the Forecast for that
quarter by [*****], the Parties shall revise the Forecast and adjust the [*****]
accordingly for the remainder of the Year.
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 14
5.2.4 ANNUAL ADJUSTMENTS TO ROYALTY PAYMENTS BASED ON ACTUAL NET
SALES. At the end of each Year, if Net Sales are above the Forecast, Faulding
shall pay Connetics an amount equal to the difference between the Royalty
calculated and paid according to the Forecast for that Year, as it may have been
adjusted from time to time through the Year, and the Royalty owing on the actual
Net Sales for that Year. At the end of each Year, if Net Sales are below the
Forecast, Connetics shall refund to Faulding an amount equal to the difference
between the Royalty calculated and paid according to the Forecast for that Year,
as it may have been adjusted from time to time through the Year, and the Royalty
owing on the actual Net Sales for that Year. At the end of each Year the actual
royalty payable for the year will be calculated in accordance with SECTION 5.2.1
above. Faulding will make a final royalty payment (or if necessary request a
credit) so that the total royalty paid for the Year equals the amount payable in
accordance with SECTION 5.2.1.
5.2.5 INITIAL PERIOD OF SALES. During the period of time between the
Launch Date in the Territory and the beginning of the next Year, Faulding shall
pay Connetics Royalties in accordance with SECTIONS 5.2.1. TO 5.2.4 above,
except that, for the determination of the average percentage royalty rate for
quarterly royalty payments, Faulding's forecast shall be annualized (scaled up
to an annual equivalent amount), and to determine the actual royalty rate
payable for the total period, Faulding's actual sales shall be annualized.
5.2.6 ANNUAL SALES FORECAST. Faulding shall provide Connetics with a
projected total annual Net Sales of Relaxin in the Territory for each Year, no
later than ninety (90) days before the beginning of the Year.
5.3 PAYMENT TERMS.
5.3.1 ROYALTY PAYMENTS. Faulding shall remit royalty payments to
Connetics quarterly, within [*****] after the end of each calendar quarter with
respect to Faulding's Net Sales in the Territory during that quarter.
5.3.2 TIMING, FORM OF PAYMENT. All payments payable by Faulding to
Connetics pursuant to this ARTICLE V shall be made in accordance with SECTION
11.2. Upon shipment of Relaxin Materials and/or Product pursuant to SECTION
5.1.1, Connetics shall invoice Faulding, and Faulding shall pay the invoice
within thirty (30) days after receipt of the invoice.
5.3.3 NONCONFORMING CLINICAL SUPPLIES.
(a) Within [*****] after the delivery of Relaxin Materials and
the accompanying Certificate of Analysis to Faulding, Faulding shall
submit to Connetics in writing any claim that Relaxin Materials do not
conform with the Specifications, accompanied by a report of Faulding'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. Faulding 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 [*****] after the receipt by Connetics of the report
and sample from Faulding,
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and provide the results to Faulding. If, after analysis, Connetics
agrees with the claim of nonconformity, Connetics shall replace the
nonconforming Relaxin Materials with conforming Relaxin Materials at
Faulding's request, in which case Faulding shall be obligated to pay
only for such replacement Relaxin Materials. Faulding shall not be
obligated to pay for the nonconforming Relaxin Materials, and Connetics
shall credit Faulding for any amounts already paid for the nonconforming
Relaxin Materials, and/or cancel its invoice to Faulding for such
nonconforming Relaxin Materials if Faulding has not yet paid. If, after
its own analysis, Connetics disagrees with the claim of nonconformity or
determines that Faulding is responsible for the nonconformity, the
Parties shall in good faith discuss and agree upon a settlement of the
issue, and Faulding 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 the nonconformity is not the fault of
Faulding, then Faulding 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,
Faulding will remain obligated to pay Connetics for such Relaxin
Materials. At Connetics' request, Faulding shall return such unsuitable
Relaxin Materials to Connetics. Otherwise, Faulding shall destroy it in
the most environmentally safe and appropriate manner available,
consistent with federal, state and local laws and regulations.
5.3.4 PAYMENTS FOR COMMERCIAL SUPPLY. All payments by Faulding for
commercial supplies shall be made in accordance with the Supply Agreement.
5.4 PRODUCT MARKINGS. Faulding shall market and sell Product in the
Territory as Faulding's products under trademarks selected and owned or
controlled by Faulding; and each Product marketed and sold by Faulding under
this Agreement shall be marked (a) with a notice that such Product is sold under
a license from Connetics Corporation; and (b) with all patent and other
intellectual property notices relating to the Licensed IP as may be required by
applicable law; provided, however, in addition, to the extent Faulding
determines to use any trademarks owned by Connetics Faulding shall display the
marks in accordance with Connetics' style guide for such marks, and in a style
or size of print distinguishing the mark from any accompanying wording or text.
Where feasible, Faulding 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. Faulding will not, without Connetics' prior written consent,
publish or distribute any promotional material (or other material) with respect
to the Product that (a) does not present Connetics as the originator of the
Product or (b) use trademarks and tradenames in a format that Connetics has not
approved in writing.
5.5 COMMERCIALIZATION. After obtaining Regulatory Approval for the
Product in the Territory, Faulding shall use Commercially Reasonable Efforts to
develop and commercialize the Product in the Territory. Connetics and Faulding
shall jointly agree on the copy platform for promotional materials and, subject
to the restrictions on trademark usage set forth in SECTIONS 2.1.2 and 5.4,
Faulding may create and develop promotional materials related to the Product
using, and based on, materials created by or for Connetics; provided, however,
Faulding will not, publish or
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<PAGE> 16
distribute any such promotional material (or other material) with respect to the
Product that Connetics has disapproved (provided that any disapproval by
Connetics results from a reasonable exercise of Connetics' discretion). Except
as otherwise mutually agreed, Faulding shall bear all costs and expenses related
to commercializing the Product in the Territory. In addition, and subject to
availability (including the need to allocate such resources among multiple
licensees), Connetics agrees to sell to Faulding (at Faulding's option) samples,
tradepacks, placebos and other sales and marketing materials relating to the
Product that Connetics develops at a price equal to Connetics' cost of materials
for same. Faulding may, at its option, participate in any training sessions that
Connetics holds for its own sales force regarding the Product, provided that
Faulding shall bear its expenses associated with training the Faulding sales
force.
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, 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 FAULDING'S RECORDS. Upon two (2) weeks notice to
Faulding, Connetics shall have the right to have an independent certified public
accountant, selected by Connetics and reasonably acceptable to Faulding, audit
Faulding's records during normal business hours to verify all records pertaining
to the calculation of Faulding'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.
5.6.3 AUDIT OF CONNETICS' RECORDS. Upon two (2) weeks notice to
Connetics, Faulding shall have the right to have an independent certified public
accountant, selected by Faulding and reasonably acceptable to Connetics, audit
Connetics' records during normal business hours to verify all records pertaining
to the calculation of Connetics' COGS; 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, Faulding shall have no right under this Section to audit records
for periods that 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 [*****] 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 [*****] 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 11.4 of this Agreement. All information resulting from such audits
conducted pursuant to this SECTION 5.6 shall be kept confidential pursuant to
SECTION 8.2. The
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<PAGE> 17
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
WARRANTIES AND INDEMNITIES
6.1 REPRESENTATIONS AND WARRANTIES OF CONNETICS. Connetics represents
and warrants to Faulding as follows:
6.1.1 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.
6.1.2 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 (a)
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 (b) violates
applicable laws, rules or regulations, or any judgment, injunction, order or
decree of any governmental authority having jurisdiction over it.
6.1.3 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 Product
(in bulk or finished form); and Connetics further represents that it has the
right to grant to Faulding the rights and licenses under the Licensed IP in this
Agreement.
6.1.4 NO LAWSUITS, ETC. To the best of Connetics' knowledge, as of
the Effective Date and during the immediately preceding [*****], 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
Product.
6.1.5 THIRD PARTY RIGHTS. The exercise by Faulding of the rights and
licenses granted to Faulding 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 Product.
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<PAGE> 18
6.1.6 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).
6.1.7 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.
6.1.8 INFORMATION. All information relating to Relaxin or the
Product delivered to Faulding 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.
6.1.9 ADVERSE EXPERIENCES. [*****] Connetics and Faulding shall
comply with all the terms of EXHIBIT D with respect to reporting adverse events
related to the Product. After Connetics obtains FDA approval, Adverse Experience
reporting shall be governed by the provisions of ARTICLE X of this Agreement.
6.2 REPRESENTATION AND WARRANTIES OF FAULDING. Faulding represents and
warrants to Connetics as follows:
6.2.1 ORGANIZATION; STANDING. Faulding 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.
6.2.2 NO CONFLICTS. The execution, delivery and performance of the
Agreement have been validly authorized by Faulding; neither the execution and
delivery of, or the performance of its obligations under this Agreement (a)
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 articles of incorporation or bylaws, or (b) violates
applicable laws, rules or regulations, or any judgment, injunction, order or
decree of any governmental authority having jurisdiction over it.
6.3 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,
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<PAGE> 19
FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT OF THIRD PARTY INTELLECTUAL
PROPERTY RIGHTS.
6.4 INDEMNIFICATION BY CONNETICS. Connetics shall indemnify Faulding,
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) any
Adverse Experiences that Connetics should have known about based on its clinical
trials, but which Adverse Experiences were not reported to the FDA or to
Faulding; (c) the manufacture or the storage of the Product prior to [*****],
all except to the extent caused by the negligence or willful misconduct of
Faulding or its officers, agents, employees, Affiliates, sublicensees or
customers; (d) the negligence or willful misconduct of Connetics or its
officers, agents, employees or Affiliates; (e) the use or consumption of the
Product outside of the Territory; or (f) a claim that the Product infringes any
patents, except patents issued after the date of this Agreement.
6.5 INDEMNIFICATION BY FAULDING. Faulding 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 Faulding of its representations, warranties, or
obligations under this Agreement; (b) the storage of the Product after [*****],
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 Faulding or its officers,
agents, employees or Affiliates; (d) the use or consumption of the Product
within the Territory; or (e) false or intentionally misleading statements made
by Faulding or its officers, agents or employees in connection with the
marketing and/or sale of the Product in the Territory.
6.6 INDEMNIFICATION PROCEDURE.
6.6.1 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 6.4 or 6.5. 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.
6.6.2 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.
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<PAGE> 20
6.6.3 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
promptly notifies 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.
6.6.4 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 withheld 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.
6.6.5 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 6.6.5, 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.
6.6.6 COSTS AND EXPENSES. Except as provided in this SECTION 6.6,
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.
6.7 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 VIII, OR AS PROVIDED
IN SECTION 6.4 OR 6.5, 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.
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<PAGE> 21
ARTICLE VII
COVENANTS
7.1 CONNETICS' COVENANTS TO FAULDING. Connetics covenants to Faulding as
follows:
7.1.1 MANUFACTURE. At the time of delivery of Relaxin Materials to
Faulding, the Relaxin Materials (a) will have been manufactured, filled,
packaged, stored and shipped in accordance with all applicable U. S. 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.
7.1.2 COMPLIANCE WITH LAWS. Connetics has conducted or has caused
Connetics' Contract Manufacturers to conduct, and will in the future conduct
Clinical Development and other relevant research and development activities
required to support clinical testing, Regulatory Approvals and commercialization
of the Product in the Field (and any Additional Indications) in accordance with
applicable laws, rules and regulations, including without limitation, known or
published standards of the FDA.
7.1.3 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.
7.1.4 FUTURE PATENTS. Connetics will promptly disclose to Faulding
any knowledge it acquires during the Term of this Agreement relating to any
patents or patent applications owned by Third Parties other than the Relaxin
Patents, required for the production, manufacture or commercialization of
Product in the Field.
7.1.5 INSURANCE. Connetics shall obtain, effect and maintain with a
reputable insurer, product liability insurance with a minimum value of [*****]
for any one loss and in the aggregate, to cover its activities and obligations
(including without limitation indemnified obligations) contemplated under this
Agreement. Connetics shall provide Faulding with evidence of such insurance upon
request.
7.1.6 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 Scleroderma 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 7.1.6, then without limiting any
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<PAGE> 22
other remedies available to Faulding, Connetics shall at its sole expense
contribute the Third Party Work to Faulding for use and exploitation under the
terms of this Agreement and secure for Faulding the exclusive right in the Field
to use and exploit the Third Party Work in the Territory.
7.1.7 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, Faulding and Connetics specifically agree otherwise in
writing. The Parties shall cooperate with each other to the extent necessary to
obtain any available extensions of the term of the Patents in the Territory.
7.2 FAULDING'S COVENANTS TO CONNETICS. Faulding covenants to Connetics
as follows:
7.2.1 COMMERCIALIZATION. Faulding shall use Commercially Reasonable
Efforts to develop and commercialize the Product in the Territory.
7.2.2 PERMITS; LICENSES. Faulding will use Commercially Reasonably
Efforts to 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 Faulding will supply such Relaxin Materials and/or
Product in accordance with such governmental permits, licenses, orders,
applications, and Regulatory Approvals.
7.2.3 FUTURE PATENTS. Faulding 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 Product in the Field.
7.2.4 NON-ENCROACHMENT. Faulding shall not do any of the following
acts: (a) seek approval, directly or indirectly, from the relevant Regulatory
Authorities, to qualify facilities for manufacturing or finishing the Product
outside of the Territory or to label or re-label the Product in a manner that
would permit it to be marketed or sold outside of the Territory, (b) sell or
export the Product to any Third Party for use or resale outside of the
Territory, (c) or sell the Product to any Third Party that Faulding has reason
to believe intends to resell or export the Product outside of the Territory.
7.2.5 INSURANCE. Faulding shall obtain, effect and maintain with a
reputable insurer, product liability insurance with a minimum value of [*****]
for any one loss and in the aggregate, to cover its activities and obligations
(including without limitation indemnified obligations) contemplated under this
Agreement. Faulding shall provide Connetics with evidence of such insurance upon
request.
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 23
ARTICLE VIII
CONFIDENTIALITY AND PUBLICITY
8.1 PUBLIC RELATIONS AND ANNOUNCEMENTS. The Parties shall 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 consent, which
consent will not be unreasonably withheld or delayed.
8.2 CONFIDENTIALITY.
8.2.1 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.
8.2.2 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
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.
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 24
8.3 REMEDY. If either Party breaches any of its obligations with respect
to this ARTICLE VIII, 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.
8.4 AGREEMENT TERMS. Subject to SECTION 8.1 and the exclusions set forth
in SECTION 8.2.2, 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 IX
TERM AND TERMINATION
9.1 TERM. Subject to the preceding sentence, the term of this Agreement
shall commence on the Effective Date and continue in full force and effect until
the later of (a) twenty years after the Effective Date, and (b) the last to
expire of the Relaxin Patents, or any regulatory extensions which provide
exclusivity for the Product in the Territory ("TERM").
9.2 TERMINATION. In addition to and notwithstanding the termination
rights stated elsewhere in this ARTICLE IX and in SECTION 11.8 of this
Agreement, this Agreement may be terminated as follows:
9.2.1 FOR BREACH BY CONNETICS. Upon breach by Connetics of any of
its material obligations contained in this Agreement ("CONNETICS BREACH"),
Faulding 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 sixty (60) days
after Connetics receives such notice (a) if Connetics does not cure the
Connetics Breach to the reasonable satisfaction of Faulding, or (b) if a plan,
reasonably acceptable to Faulding, is not implemented to cure as soon as
practicable after notice of the Connetics Breach.
9.2.2 FOR BREACH BY FAULDING. Upon breach by Faulding of any of its
material obligations contained in this Agreement ("FAULDING BREACH"), Connetics
shall be entitled to give Faulding notice specifying the nature of the Faulding
Breach and stating its intent to terminate this Agreement if the Faulding Breach
is not cured. This Agreement shall terminate sixty (60) days after Faulding
receives such notice (a) if Faulding does not cure the Faulding Breach to the
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
Faulding Breach.
9.2.3 LOSS OF THIRD PARTY LICENSES. Notwithstanding the provisions
of SECTION 9.2.1, Faulding may terminate this Agreement on notice to Connetics
if either of the following
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 25
agreements is terminated resulting in the loss of Faulding'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 Commercially
Reasonable Efforts to obtain from relevant Third Parties an acknowledgement
that, should the relationship contemplated by the Third Party License terminate
through no fault of Faulding, Faulding shall have the right to continue to
commercialize the Product as set forth in this Agreement.
9.2.4 TERMINATION BY FAULDING. Faulding 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.
9.2.5 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.
9.3 EFFECT OF TERMINATION.
9.3.1 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, Faulding 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
Product.
(b) Upon termination pursuant to SECTIONS 9.2.2, 9.2.4, or 11.8,
or termination by Connetics pursuant to SECTION 9.2.5, all rights to the
Product (except to Faulding's trademarks) in the Territory shall revert
to Connetics.
(c) Upon termination by Faulding pursuant to SECTIONS 9.2.1,
9.2.3, or 9.2.5, the license granted to Faulding pursuant to this
Agreement shall become a perpetual, irrevocable, royalty-free (as to
Connetics), transferable, exclusive as to the Territory, license under
the Licensed IP existing as of the date of such termination, to make,
have made, use, offer to sell, and sell Product in the Territory, with
the right to sublicense; provided that Faulding assumes Connetics'
obligations to Third Parties under existing Third Party Licenses with
respect to the Territory.
9.3.2 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
<PAGE> 26
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 9.2.2 by Connetics or SECTION 9.2.4
by Faulding, then Faulding 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 (License to Faulding Improvements), 3.4 (Records), 5.4 (Product
Markings), 5.6 (Audit), 9.3 (Effect of Termination) and 11.4 (Dispute Resolution
and Governing Law), and ARTICLES VI (Warranties and INDEMNITIES), VIII
(Confidentiality and Publicity), and X (Regulatory Compliance and Reporting)
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.
9.3.3 INVENTORY. Notwithstanding the foregoing, upon early
termination of this Agreement pursuant to SECTION 9.2.4, Faulding shall have the
right to sell all remaining Product in its inventory within [*****] the date of
termination, subject to the payment to Connetics of the amounts specified in
SECTIONS 4.1 and 5.2. Thereafter, Faulding agrees to destroy any remaining
supply of Product and Relaxin Materials at Connetics' request and direction.
ARTICLE X
REGULATORY COMPLIANCE AND REPORTING
10.1 GOVERNMENT INSPECTION.
10.1.1 Connetics shall advise Faulding 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 Faulding 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. Faulding may review Connetics' responses to any such
reports and communications, and if practicable, and, insofar as timely received,
Faulding's reasonable views and requests shall be taken into account prior to
submission of such reports and communications to the relevant Regulatory
Authority. Connetics shall also provide Faulding with the notice, information,
documentation, and opportunity to comment provided for above with respect to
Contract Manufacturers.
10.1.2 Each Party shall notify, and shall cause its Affiliates and
sublicensees to notify, the other Party promptly upon receipt of:
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 27
(a) any information regarding any pending or threatened action which
may affect the safety or efficacy claims of the Product or the
continued marketing of the Product in any nation or
jurisdiction,
(b) 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 or
sublicensee of such Party, for a purpose relevant to the
development, manufacture or marketing of the Product.
(c) 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.
10.2 ADVERSE EXPERIENCE REPORTING. Each Party shall comply with the
provisions of EXHIBIT D as though it were fully set forth in this Agreement,
with respect to notification and reporting of adverse drug experiences and/or
adverse events. Without limiting the foregoing, each Party shall make such
reports as are necessary to comply with laws and regulations applicable to it,
at its sole expense.
10.3 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.
Faulding 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.
10.4 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 Faulding, (a) Connetics shall have the option of (i)
replacing the recalled Product, or (ii) reimbursing Faulding for any amounts
paid to Connetics by Faulding under this Agreement for Product which are
recalled and/or cannot be shipped by Faulding due to the condition requiring the
recall, and (b) with respect to Product manufactured by Connetics, Connetics
shall reimburse Faulding for all liabilities incurred by Faulding by virtue of
being unable to meet its supply obligations to its customers because Product
could not be shipped by Connetics or Faulding due to the condition requiring
recall. In the event, however, that a recall is partially caused by Connetics'
actions or omissions and partially
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 28
caused by Faulding'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 XI
MISCELLANEOUS
11.1 TAXES, TARIFFS, FEES. Faulding shall have the right to deduct from
the payments set forth in SECTION 4.1 any withholding tax applicable to
Connetics' income which Faulding is obliged to pay by under applicable law;
provided however that Faulding 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.
11.2 CURRENCY OF PAYMENTS. For purposes of calculating Net Sales and
payments to be made to Connetics in respect of Net Sales, all amounts payable to
Connetics by Faulding pursuant to this Agreement shall be made to Connetics in
U.S. dollars and by wire transfer to the U.S. bank account(s) specified by
Connetics from time to time. Faulding shall apply a conversion rate from
Australian currency to U.S. dollars for amounts payable under this Agreement
equal to the average of the conversion rates in effect on the last day of each
month in the quarterly period for which such payment is due. The conversion
rates to be used in this Agreement shall be the rates reported in the Wall
Street Journal (West Coast Edition).
11.3 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.
11.4 DISPUTE RESOLUTION AND GOVERNING LAW. The Parties shall endeavor to
resolve in good faith any disputes, controversy, conflicts or claims arising
from or relating to the subject matter of this Agreement, or the breach or
termination of this Agreement, failing which the following process shall apply:
11.4.1 MEDIATION. The dispute, controversy or claim shall first be
referred to the chief executive officer of each of Faulding and Connetics for
resolution at a place to be agreed between such chief executive officers and,
failing agreement, at the head office of the Faulding (if Connetics requests the
referral) or Connetics (if Faulding requests the referral).
11.4.2 FORMAL ARBITRATION. If the dispute, controversy or claim is
not settled or agreed between such chief executive officers within a period of
one (1) month, then it shall be settled by arbitration in accordance with the
[*****] then in effect. At the written request of either party, Faulding and
Connetics may each nominate one or more appropriately qualified experts, but
both parties must agree to the expert to be appointed. If the Parties are unable
to agree on an expert or experts, the arbitration will be conducted by a panel
of three (3) arbitrators who are knowledgeable in the subject matter that is at
issue in the dispute, are not affiliated directly or indirectly with either
Party, one of whom is selected by Faulding, one of whom is selected by
Connetics, and one of whom is selected by the mutual agreement of the other two
arbitrators.
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 29
During the arbitration, the Parties shall have such discovery rights as the
arbitrators may allow, consistent with the discovery permitted by the Federal
Code of Civil Procedure.
11.4.3 POWERS OF ARBITRATORS. In any arbitration pursuant to this
section, the arbitrators shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a preliminary or permanent injunction, as well as specific
performance. The arbitrators shall also be able to award direct and indirect
damages, but shall not award any other form of damage (e.g., punitive or
exemplary damages). The reasonable fees and expenses of the arbitrators, the
fees and expenses of a court reporter, and any expenses for a hearing room,
shall be borne equally by the Parties. The decision of the arbitrators shall be
final and will be handed down within a period of sixty days of being appointed.
The Party in whose favor the decision runs may enter, sue on or enforce the
decision in any court of competent jurisdiction at the option of such Party.
11.4.4 GOVERNING LAW. This Agreement shall be governed, controlled,
interpreted and defined by and under the laws of the [*****] without regard to
that body of law known as conflicts of law. The place of arbitration shall be
[*****]. The arbitrators shall apply the law of the [*****] (regardless of that
jurisdiction's or any other jurisdiction's choice of law principles). The
Parties specifically disclaim application to this Agreement of the Convention on
Contracts for the International Sale of Goods.
11.5 SECTION HEADINGS. The section headings contained in this Agreement
are included for convenience of reference only and form no part of the agreement
between the Parties. Therefore, the headings shall not affect in any way the
meaning or interpretation of this Agreement.
11.6 NOTICES. Any notice required or permitted by this Agreement shall
be in writing 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 as follows:
If to Connetics, to:
Connetics Corporation
Attn: President and Chief Executive Officer
3400 West Bayshore Road
Palo Alto, California 94303
U.S.A.
Facsimile 650-843-2899
<PAGE> 30
If to Faulding, to:
F. H. Faulding & Co. Limited
Attn: The Company Secretary
115 Sherriff Street
Underdale, SA 5032
AUSTRALIA
Facsimile +61 8 8234 8230
Either Party may designate a different address by giving notice pursuant to this
Section to the other Party. Any notice given pursuant to this Section shall be
deemed to have been given when delivered or, if delivery is not accomplished by
some fault of the addressee, when tendered.
11.7 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 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.
11.8 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 11.8 shall be deemed ineffective, and either Party shall have the
right to terminate this Agreement, with the effect described in SECTION 9.3.1
with respect to a Connetics Breach or a Faulding Breach, as applicable.
11.9 PARTIAL INVALIDITY. If any provision of this Agreement is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction: (a) such 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; (b) the validity, legality and enforceability of such provision will
not in any way be affected or impaired thereby in any other jurisdiction; and
(c) the remaining provisions of this Agreement will remain 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.
11.10 NO WAIVER. No failure or delay on the part of a party in
exercising any right under this Agreement will operate as a waiver of, or
impair, any such right, unless a waiver is made in writing signed by the waiving
party. No single or partial exercise of any such right will preclude any
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 31
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 under this
Agreement.
11.11 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.
11.12 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 Faulding with respect to such subject matter.
Specifically, this Agreement supercedes in their entirety the Confidential
Disclosure Agreement between the Parties dated August 13, 1999, and the Letter
of Understanding signed by the Parties effective February 7, 2000, both of which
shall have no further force or effect as of the Effective Date. This Agreement
may not be modified except by a writing signed by the Parties' authorized
representatives, and 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.
11.13 INDEPENDENT CONTRACTORS. The Parties to this Agreement are
independent contractors. This Agreement does not establish a relationship of
agency, partnership, joint 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 the Parties as of the
Effective Date.
CONNETICS CORPORATION FAULDING
By: /s/ T. G. Wiggans By: /s/ R. Finder
---------------------------- ------------------------------------
Thomas G. Wiggans Robert Finder
President and Chief Operating Officer,
Chief Executive Officer Oral Pharmaceuticals Australia/China
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 32
LIST OF EXHIBITS
EXHIBIT A-1 Amino Acid Sequence
EXHIBIT A-2 Substances
EXHIBIT A-3 Relaxin Bulk Testing
EXHIBIT B Relaxin Patents
EXHIBIT C Third Party Licenses to Connetics
EXHIBIT D Adverse Event Reporting
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 33
EXHIBIT A-1
[*****]
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 34
EXHIBIT A-2
[*****]
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 35
EXHIBIT A-3
RELAXIN BULK TESTING
CONFIDENTIAL
[*****]
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 36
EXHIBIT B TO AGREEMENT BETWEEN FAULDING AND CONNETICS
<TABLE>
<CAPTION>
Patent No. Issue Date Inventors Title
- ---------- ---------- --------- -----
<S> <C> <C> <C>
[*****] [*****] [*****] [*****]
</TABLE>
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 37
EXHIBIT C
THIRD PARTY LICENSES
1. Grant by the Howard Florey Institute of Experimental Physiology and
Medicine ("FLOREY") to Genentech, Inc. ("GNE") of an exclusive,
worldwide license to certain patents and know-how owned by Florey
pertaining to the hormone(s) known as Relaxin pursuant to the License
Agreement made on December 31, 1982 and re-executed as amended and
varied as of June 30, 1987 (the "FLOREY/GNE AGREEMENT").
2. Grant by Genentech, Inc. to Connetics ("CONNETICS") of an exclusive,
worldwide license to certain patents and know-how owned by Genentech
pertaining to the hormone(s) known as Relaxin and an exclusive
sublicense under its license from Florey pursuant to the License
Agreement, effective September 27, 1993, as amended July 14, 1994 (the
"GNE/CONNETICS AGREEMENT").
3. Grant by Genentech, Inc. to Connetics of an exclusive license to make,
use and sell Relaxin in the territory of Japan, the Republic of Korea
and the Republic of China (the "ASIA TERRITORY") relinquished and
returned to Genentech by Mitsubishi Chemical Corporation (formerly
Mitsubishi Kasei Corporation; "MITSUBISHI"), pursuant to an agreement
dated April 1, 1996.
4. Agreement between the Howard Florey Institute of Experimental Physiology
and Medicine and Connetics with regard to payment terms and obligations
pursuant to Section 4.1.1 (as amended by Paragraph 26) of the
GNE/Connetics Agreement and Clauses 5.1 and 5.2 of the Florey/GNE
Agreement.
[*****] CONFIDENTIAL TREATMENT REQUESTED
<PAGE> 38
EXHIBIT D
REPORTING OF ADVERSE EVENTS BETWEEN CONNETICS AND FAULDING
[*****]
[*****] CONFIDENTIAL TREATMENT REQUESTED
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