<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1996
REGISTRATION NO. 333-02400
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MICROCIDE PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 8731 94-3186021
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
850 MAUDE AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(415) 428-1550
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES E. RURKA
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR
MICROCIDE PHARMACEUTICALS, INC.
850 MAUDE AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(415) 428-1550
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
MICHAEL J. O'DONNELL, ESQ. THOMAS C. JANSON, JR.
WILSON SONSINI GOODRICH & ROSATI, P.C. SKADDEN, ARPS, SLATE,
650 PAGE MILL ROAD MEAGHER & FLOM
PALO ALTO, CALIFORNIA 94304 300 SOUTH GRAND AVENUE
(415) 493-9300 LOS ANGELES, CALIFORNIA 90071
(213) 687-5000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following
box. / /
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO TO BE PRICE OFFERING REGISTRATION
BE REGISTERED REGISTERED PER SHARE(2) PRICE(2) FEE(3)
- --------------------------------
Common Stock, par value $0.001
per share..................... 2,875,000 shares(1) $14.00 $40,250,000 $13,879
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 375,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Fee previously paid in connection with original filing on March 18, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
MICROCIDE PHARMACEUTICALS, INC.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM AND HEADING IN
FORM S-1 REGISTRATION STATEMENT PROSPECTUS LOCATION IN PROSPECTUS
------------------------------------------ ------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus ............................ Inside Front Cover Page; Outside Back
Cover Page
3. Summary Information and Risk Factors...... Prospectus Summary; Risk Factors; The
Company
4. Use of Proceeds........................... Use of Proceeds
5. Determination of Offering Price........... Underwriting
6. Dilution.................................. Dilution
7. Selling Security Holders.................. Not Applicable
8. Plan of Distribution...................... Outside and Inside Front Cover Pages;
Underwriting
9. Description of Securities to be
Registered................................ Prospectus Summary; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and Counsel.... Legal Matters
11. Information with Respect to the
Registrant................................ Outside and Inside Front Cover Pages;
Prospectus Summary; Risk Factors; The
Company; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Stockholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OF QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 14, 1996
PROSPECTUS
2,500,000 SHARES
LOGO
MICROCIDE PHARMACEUTICALS, INC.
COMMON STOCK
------------------------
All of the 2,500,000 shares of Common Stock offered hereby are being issued
and sold by Microcide Pharmaceuticals, Inc. ("Microcide" or the "Company").
Prior to this offering (the "Offering"), there has been no public market for the
Common Stock. It is currently estimated that the initial public offering price
per share of Common Stock will be between $12.00 and $14.00. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price. Application has been made to have the Company's
Common Stock quoted on the Nasdaq National Market under the symbol "MCDE."
SEE "RISK FACTORS" (BEGINNING ON PAGE 5) FOR A DISCUSSION OF CERTAIN
MATERIAL RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------
Per Share......................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3).......................... $ $ $
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against, and to
provide contribution with respect to, certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated expenses of $800,000 payable by the Company.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days after the date hereof, to purchase up to 375,000 additional shares of
Common Stock, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York, on or
about , 1996.
------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
------------------------
The date of this Prospectus is , 1996.
<PAGE> 4
[GRAPHIC APPEARS HERE]
[Narrative description: Graphic description of the stages
of the Company's research programs]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
Microcide(TM), Microcide Pharmaceuticals(TM) and the Microcide logo are
claimed as trademarks of the Company. This Prospectus also includes names and
marks of companies other than the Company.
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements appearing elsewhere in this
Prospectus. Investors should carefully consider the information set forth under
the heading "Risk Factors."
THE COMPANY
Microcide is a biopharmaceutical company founded to discover, develop and
commercialize novel antibiotics for the treatment of serious bacterial
infections. The Company's discovery and development programs address the growing
problem of bacterial drug resistance through two principal themes: (i) Targeted
Antibiotics, which focuses on developing novel antibiotics and antibiotic
potentiators, and (ii) Targeted Genomics, which utilizes bacterial genetics to
discover new classes of antibiotics and other novel treatments for bacterial
disease.
The Company believes that the antibiotics market provides an attractive
opportunity for its research and development activities because (i) it is the
third largest pharmaceutical market, totaling $22.9 billion in worldwide sales,
including $6.3 billion in the United States, for the twelve months ended
September 1995; (ii) there are significant unmet clinical needs, caused by
growing bacterial resistance problems, that require new antibacterial therapies;
and (iii) the preclinical and clinical development process for antibiotics
generally follows an efficient and well-defined path to the market.
Microcide's Targeted Antibiotics programs seek to rapidly develop
clinically useful antibiotics tailored to treat specific bacterial infections,
as well as antibiotic potentiators, which will overcome resistance pathways and
restore usefulness to existing antibiotics that have been rendered ineffective.
The specific problematic bacteria being addressed by the Company (staphylococci,
enterococci, Pseudomonas aeruginosa and Streptococcus pneumoniae) are
responsible for 44% of the approximately two million hospital-acquired
infections occurring annually in the United States. These infections are
estimated to result in approximately eight million days of extended hospital
stay and account for more than $4.0 billion in additional health care costs each
year.
Microcide's Targeted Genomics programs seek to identify the
pharmaceutically relevant portion of bacterial genomes that are essential to
bacterial viability in vitro (the Essential Genes Program) or to bacterial
growth and virulence in vivo (the Pathogenesis Program). In the Essential Genes
Program, Microcide has identified approximately 80 essential gene targets which
are being incorporated into the Company's high-throughput, multi-channel
screening system to discover new classes of antibiotics. In the Pathogenesis
Program, Microcide is developing and utilizing new molecular genetics
technologies to identify pathogenesis genes in order to discover and develop
novel therapeutic agents.
The Company has entered into collaborative agreements with three major
pharmaceutical companies to enhance certain of its discovery and development
programs. To date, the Company's collaborative partners have provided the
Company with $11.3 million of license fees and research support payments and
$10.0 million in equity investments. Assuming each of the collaborative
agreements continues until its scheduled expiration, the Company will be
entitled to receive an additional $34.2 million of research support payments.
The Company has retained rights to products which may result from its internal
programs.
Ortho/J&J. Microcide is collaborating with Ortho Pharmaceutical
Corporation, a Johnson & Johnson company ("Ortho/J&J"), to discover and develop
novel beta-lactam antibiotics, antibiotic potentiators and inhibitors of
bacterial signal transduction targeted at problematic Gram-positive bacteria,
including staphylococci and enterococci. The Company expects to select with
Ortho/J&J its initial product candidate, a Gram-positive beta-lactam, in 1996
and to enter into clinical trials during 1997. If specified research and
development milestones are achieved, the Company will be entitled to receive up
to $16.5 million for the initial product and up to $15.5 million for each
subsequent product developed within the collaboration.
Daiichi. Microcide is collaborating with Daiichi Pharmaceutical Co., Ltd.
("Daiichi") to discover and develop bacterial efflux pump inhibitors to be used
in combination with Daiichi's quinolone antibiotics to target Gram-negative
bacteria, including pseudomonas. The Company expects to select with Daiichi its
first quinolone potentiation candidate by mid-1997 for clinical development. If
specified research and development milestones are achieved, Microcide will be
entitled to receive up to $13.0 million for each product developed within the
collaboration.
Pfizer. Microcide is collaborating with Pfizer Inc ("Pfizer") to implement
its essential gene and multi-channel screening system to discover novel classes
of antibiotics. If specified research and development milestones are achieved,
Microcide will be entitled to receive milestone payments of up to $32.5 million
for each product developed within the collaboration.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered............................. 2,500,000 shares
Common Stock to be outstanding after the
Offering....................................... 10,256,981 shares(1)
Use of proceeds.................................. To fund certain of the Company's
research and development activities and
for general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market symbol........... MCDE
</TABLE>
- ---------------
(1) Based upon shares of Common Stock outstanding as of March 31, 1996, on a
fully converted basis. Excludes 160,187 shares of Common Stock issuable upon
exercise of warrants and 690,600 shares of Common Stock issuable upon
exercise of options outstanding as of March 31, 1996. See
"Business -- Collaborative Agreements," "Management -- Employee Benefit
Plans," "Description of Capital Stock," and Note 8 of Notes to Financial
Statements.
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(DECEMBER 11, YEAR ENDED ENDED
1992) DECEMBER 31, MARCH 31,
TO DECEMBER 31, ----------------- ----------------
1993 1994 1995 1995 1996
------------------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees............................... $ -- $ -- $ 3,000 $ -- $1,000
Research revenue........................... -- -- 1,985 -- 1,625
------- ------- -------
Total revenues.......................... -- -- 4,985 -- 2,625
Operating expenses:
Research and development................... 1,685 5,180 6,400 1,324 1,780
General and administrative................. 1,251 1,823 2,080 479 526
------- ------- -------
Total operating expenses................ 2,936 7,003 8,480 1,803 2,306
------- ------- -------
Income (loss) from operations................ (2,936) (7,003) (3,495) (1,803) 319
Interest income.............................. 32 218 257 85 137
Interest expense............................. (13) (249) (278) (70) (73)
------- ------- -------
Net income (loss)....................... $ (2,917) $(7,034) $(3,516) $(1,788) $ 383
======= ======= =======
Pro forma net income (loss) per share(1)..... $ (0.44) $ (0.22) $ 0.04
=======
Shares used in computing pro forma net loss
per share(1)............................... 8,052 8,039 8,563
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $15,093 $ 44,518
Working capital..................................................... 11,020 40,445
Total assets........................................................ 20,691 50,116
Long-term obligations............................................... 1,810 1,810
Deficit accumulated during development stage........................ (13,084) (13,084)
Total stockholders' equity.......................................... 14,596 44,021
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma net loss per share.
(2) As adjusted to reflect the sale of 2,500,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $13 per
share and the receipt of the estimated net proceeds therefrom. See "Use of
Proceeds."
------------------------
Unless otherwise indicated, all information in this Prospectus (i) assumes
the Underwriters' over-allotment option is not exercised, (ii) assumes the
Company's reincorporation in the State of Delaware, which will be completed
prior to the consummation of the Offering, (iii) reflects a 1-for-5 reverse
stock split effective April 5, 1996, and (iv) assumes the issuance of 6,880,791
shares of Common Stock upon the conversion of outstanding shares of Convertible
Preferred Stock, which will occur in accordance with the terms thereof upon
completion of the Offering. See "Capitalization," "Description of Capital Stock"
and "Underwriting."
4
<PAGE> 7
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities and Exchange Act of 1934
(the "Exchange Act"). Actual results and the timing of certain events could
differ materially from those projected in the forward-looking statements as a
result of the risk factors set forth below and other factors discussed elsewhere
in this Prospectus. An investment in the shares of Common Stock being offered
hereby involves a high degree of risk. Accordingly, prospective investors should
consider carefully the following risk factors, as well as all other information
contained in this Prospectus, before purchasing the shares of Common Stock
offered hereby.
ABSENCE OF DEVELOPED PRODUCTS; EARLY STAGE OF PRODUCT DEVELOPMENT. The
Company was founded in December 1992, has not commenced clinical development of
any drugs and does not expect that any drugs resulting from its and its
collaborative partners' research and development efforts will be commercially
available for a significant number of years, if at all. Since inception, the
Company has focused its activities on the development of a gene function-based
technology platform and other proprietary information to identify and
commercialize novel antibiotics for the treatment of serious bacterial
infections. It is difficult to predict when, if ever, the Company will be able
to successfully discover novel lead compounds for potential development as
product candidates. All compounds discovered by the Company will require
extensive preclinical and clinical testing prior to submission of any regulatory
application for commercial use. Extensive preclinical and clinical testing
required to establish safety and efficacy will take a number of years, and the
time required to commercialize new drugs cannot be predicted with accuracy.
There can be no assurance that the Company's approach to drug discovery, or the
efforts of any collaborative partner of the Company, will result in the
development of any drugs, or that any drugs, if successfully developed, will be
proven to be safe and effective in clinical trials, meet applicable regulatory
standards, be capable of being manufactured in commercial quantities at
reasonable costs or be successfully commercialized. Product development of new
pharmaceuticals is highly uncertain, and unanticipated developments, clinical or
regulatory delays, unexpected adverse effects or inadequate therapeutic efficacy
would slow or prevent product development efforts of the Company or its
collaborative partners and have a material adverse effect on the Company's
operations. See "Business."
DEPENDENCE ON COLLABORATIVE PARTNERS AND OTHERS. Part of the Company's
business strategy is to enhance its research and development capabilities, and
to fund in part its capital requirements by entering into collaborative and
licensing arrangements with major pharmaceutical companies. The Company has
entered into two Research and License Agreements, dated as of October 24, 1995,
with Ortho/J&J and the R.W. Johnson Pharmaceutical Research Institute (the
"Ortho/J&J Agreements"), a Joint Research Agreement, dated as of November 6,
1995, with Daiichi (the "Daiichi Agreement"), and a Collaborative Research
Agreement and License and Royalty Agreement, dated as of March 1, 1996, with
Pfizer (the "Pfizer Agreements" and, together with the Ortho/J&J Agreements and
the Daiichi Agreement, the "Collaborative Agreements"). Under the Collaborative
Agreements, which cover three of the Company's programs, each of Ortho/J&J,
Daiichi and Pfizer is responsible for (i) selecting compounds discovered in its
collaboration with the Company for subsequent development, (ii) conducting
preclinical testing, clinical trials and obtaining required regulatory approvals
of such drug candidates, and (iii) manufacturing and commercializing resulting
drugs. As a result, the Company's receipt of revenues (whether in the form of
continued research funding, product development milestones or royalties on
sales) under the Collaborative Agreements is dependent upon the decisions made
and activities undertaken by its collaborative partners and upon the
development, manufacturing and marketing resources of its collaborative
partners. The amount and timing of resources dedicated by the Company's
collaborative partners to their respective collaborations with the Company is
not within the Company's control. Moreover, certain compounds discovered by the
Company may be viewed by the Company's collaborative partners as competitive
with such partners' products or potential products. Accordingly, there can be no
assurance that the Company's collaborators will elect to proceed with the
development of compounds which the Company believes to be promising, or that
they will not pursue their existing or alternative technologies in preference to
such compounds. There can be no assurance that the interests of the Company will
continue to coincide with those of its collaborative partners, that some of the
5
<PAGE> 8
Company's collaborative partners will not develop independently or with third
parties drugs that could compete with drugs of the types covered by the
collaborations, or that disagreements over rights or technology or other
proprietary interests will not occur.
The Company is dependent on its collaborative partners to fund a
substantial portion of its activities over the next several years. However,
Ortho/J&J can terminate its collaboration with the Company at any time upon six
months' prior written notice, Daiichi can terminate its collaboration with the
Company at any time after July 1, 1997 upon six months' prior written notice,
and Pfizer can terminate its collaboration with the Company at any time after
February 1999 upon six months' prior written notice. If any of the Company's
collaborative partners terminates or breaches its Collaborative Agreement with
the Company, or fails to devote adequate resources to or to conduct in a timely
manner its collaborative activities, the research program under the applicable
Collaborative Agreement or the development and commercialization of drug
candidates subject to such collaboration would be materially adversely affected.
Further, there can be no assurance that the Company's collaborations with
Ortho/J&J, Daiichi and Pfizer will be successful. Nor can there be any assurance
that the Company will be able to enter into acceptable collaborative or
licensing arrangements with other pharmaceutical companies in the future, or
that, if negotiated, such arrangements would be successful. See
"Business -- Collaborative Agreements."
The Company intends to rely on its collaborative partners for the
manufacturing and marketing of any products which result from such
collaborations. In addition, as part of its business strategy, the Company plans
to retain rights to certain research programs not currently covered by the
Collaborative Agreements for internal product development and subsequent
commercialization by the Company in North America. Outside North America, the
Company anticipates entering into collaborations with third parties for
distribution and commercialization of any products developed internally by the
Company. See "Business -- Microcide's Research Programs." There can be no
assurance that the Company will be able either to successfully commercialize any
internally developed products in North America itself or to enter into any such
collaborations for distribution and commercialization of such products outside
North America on acceptable terms, if at all.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The operation of
the Company's business will require substantial capital resources. The Company
believes that the anticipated net proceeds from this Offering, together with its
existing capital resources, interest income and future payments due under the
Collaborative Agreements, will be sufficient to enable it to satisfy its current
funding requirements through 1998. However, there is no assurance that such
funds will be sufficient to meet the capital needs of the Company during such
period. Moreover, a significant amount of the future payments due under the
Collaborative Agreements is contingent upon achieving various milestones, and
there can be no assurance that the Company will receive the expected level of
payments under the Collaborative Agreements. In the event that the Company
requires additional funding, the Company will seek to raise such additional
funding from other sources, including other collaborative partners and
licensees, and through public or private financings, including sales of equity
or debt securities. Any such collaborative or licensing arrangement could result
in limitations on the Company's ability to control the research and development
of potential drugs and the commercialization of resulting drugs, if any, and
could limit profits, if any, therefrom. Any such equity financing could result
in dilution to the Company's then-existing stockholders. There can be no
assurance that additional funds will be available on favorable terms or at all,
or that such funds, if raised, would be sufficient to permit the Company to
continue to conduct its operations. If adequate funds are not available, the
Company may be required to curtail significantly or eliminate one or more of its
research programs. See "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Collaborative Agreements."
HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT; NO PRODUCT
REVENUE. The Company has incurred net losses every year since its inception in
December 1992. At March 31, 1996, the Company's accumulated deficit was
approximately $13.1 million. Losses have resulted principally from costs
incurred in connection with the Company's research and development activities
and from general and administrative costs associated with the Company's
operations. The Company expects to continue to incur operating losses. The only
revenues generated by the Company to date have resulted from license fees and
research support payments under the Collaborative Agreements. Microcide's right
to receive research support payments under
6
<PAGE> 9
the Ortho/J&J Agreements, the Daiichi Agreement and the Pfizer Agreements are
scheduled to expire in October 1998, March 1998 and February 2001, respectively,
unless the research programs under such agreements are extended or earlier
terminated. Research support payments under each of the Collaborative Agreements
will terminate if Ortho/J&J, Daiichi or Pfizer terminates its research program
with the Company earlier than the scheduled expiration date of such research
program. See "Business -- Collaborative Agreements." The Company will not
receive revenues or royalties from drug sales unless it or one of its
collaborative partners successfully completes clinical trials with respect to a
drug candidate, obtains regulatory approvals for that drug candidate and
commercializes the resulting drug. The Company will not receive revenues or
royalties from sales of drugs for a significant number of years, if at all.
Failure to receive significant revenue or achieve profitable operations could
impair the Company's ability to sustain operations, and there can be no
assurance that the Company will ever receive significant revenues or achieve
profitable operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF PATENT
PROTECTION. The Company's success depends, in part, on its ability to
establish, protect and enforce its proprietary rights relating to its lead
compounds, gene discoveries, screening technology and certain other proprietary
technology. The Company has filed approximately 30 patent applications in the
United States, in addition to applications filed in other countries, in order to
protect lead compounds, gene discoveries and screening technology, but no United
States or foreign patent has been issued to the Company to date. The patent
position of biotechnology and pharmaceutical companies is highly uncertain and
involves many complex legal and technical issues. There can be no assurance that
patents will be granted with respect to any of the Company's patent applications
currently pending in the United States or in other countries, or with respect to
applications filed by the Company in the future. The failure by the Company to
obtain patents pursuant to the applications referred to herein and any future
applications could have a material adverse effect on the Company. Furthermore,
no assurance can be given that any patents which may be issued to the Company
will not be infringed, challenged, invalidated or circumvented by others, or
that the rights granted thereunder will provide competitive advantages to the
Company. In particular, it is difficult to enforce patents covering methods of
use of screening and other similar technologies. Litigation to establish the
validity of patents, to defend against patent infringement claims and to assert
infringement claims against others can be expensive and time-consuming, even if
the outcome is favorable to the Company. If the outcome of patent prosecution or
litigation is not favorable to the Company, the Company could be materially
adversely affected.
The commercial success of the Company also depends on the Company's ability
to operate without infringing patents and proprietary rights of third parties.
There can be no assurance that the Company's products will not infringe on the
patents or proprietary rights of others. The Company may be required to obtain
licenses to patents or other proprietary rights of others. No assurance can be
given that any such licenses would be made available on terms acceptable to the
Company, if at all. The failure to obtain such licenses could result in delays
in the Company's or its collaborative partners' activities, including the
development, manufacture or sale of drugs requiring such licenses, or preclude
such development, manufacture or sale. See "Business -- Collaborative
Agreements" and "Business -- Patents, Proprietary Technology and Trade Secrets."
In addition to patent protection, the Company relies on trade secrets,
proprietary know-how and technological advances which it seeks to protect, in
part, by confidentiality agreements with its collaborative partners, employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company would have adequate remedies for any such breach, or
that the Company's trade secrets, proprietary know-how and technological
advances will not otherwise become known or be independently discovered by
others.
RISK OF TECHNOLOGICAL OBSOLESCENCE; HIGHLY COMPETITIVE INDUSTRY. The
Company operates in a field in which new developments are occurring at an
increasing pace. Competition from biotechnology and pharmaceutical companies,
joint ventures, academic and other research institutions and others is intense
and is expected to increase. Many of the Company's competitors have
substantially greater financial, technical and personnel resources than the
Company. Although the Company believes that it has identified new and distinct
approaches to drug discovery, there are other companies with drug discovery
programs, at least some of the
7
<PAGE> 10
objectives of which are the same as or similar to those of the Company.
Competing technologies may be developed which would render the Company's
technologies obsolete or non-competitive. The Company is aware of many
pharmaceutical and biotechnology companies that are engaged in efforts to treat
each of the infectious diseases for which the Company is seeking to develop
therapeutic products. There can be no assurance that competitors of the Company
will not develop competing drugs that are more effective than those developed by
the Company and its collaborative partners or obtain regulatory approvals of
their drugs more rapidly than the Company and its collaborative partners,
thereby rendering the Company's and its collaborative partners' drugs obsolete
or noncompetitive. Moreover, there can be no assurance that the Company's
competitors will not obtain patent protection or other intellectual property
rights that would limit the Company's or its collaborative partners' ability to
use the Company's technology or commercialize its or their drugs. See
"Business -- Competition."
NO ASSURANCE OF MARKET ACCEPTANCE OR THIRD PARTY REIMBURSEMENT. There can
be no assurance that any products successfully developed by the Company or its
collaborative partners, if approved for marketing, will achieve market
acceptance. The antibiotic products which the Company is attempting to develop
will compete with a number of well-established traditional antibiotic drugs
manufactured and marketed by major pharmaceutical companies. The degree of
market acceptance of any products developed by the Company will depend on a
number of factors, including the establishment and demonstration in the medical
community of the clinical efficacy and safety of the Company's product
candidates, their potential advantage over existing treatment methods, and
reimbursement policies of government and third-party payors. There is no
assurance that physicians, patients or the medical community in general will
accept and utilize any products that may be developed by the Company or its
collaborative partners.
The ability of the Company and its collaborative partners to receive
revenues and income with respect to drugs, if any, developed through the use of
the Company's technology will depend, in part, upon the extent to which
reimbursement for the cost of such drugs will be available from third-party
payors, such as government health administration authorities, private health
care insurers, health maintenance organizations, pharmacy benefits management
companies and other organizations. Third-party payors are increasingly
challenging the prices charged for pharmaceutical products. There can be no
assurance that third-party reimbursement will be available or sufficient to
allow profitable price levels to be maintained for drugs developed by the
Company or its collaborative partners. The inability to maintain profitable
price levels for such drugs could adversely affect the Company's business.
LACK OF MANUFACTURING, MARKETING OR SALES CAPABILITIES. The Company does
not have any experience in the manufacture of commercial quantities of drugs,
and its current facilities and staff are inadequate for the commercial
production or distribution of drugs. The Company intends to rely on its
collaborative partners for the manufacturing, marketing and sales of any
products which result from such collaborations. The Company will be required to
contract with third parties for the manufacture of other products or to acquire
or build production facilities before it can manufacture any such products
itself. There can be no assurance that the Company will be able to enter into
such contractual manufacturing arrangements with third parties on acceptable
terms, if at all, or acquire or build such production facilities itself. To date
the Company has no experience with sales, marketing or distribution.
Consequently, in order to market any of its products, the Company will be
required to develop marketing and sales capabilities, either on its own or in
conjunction with others. There can be no assurance that the Company will be able
to develop any of these capabilities.
STRINGENT GOVERNMENT REGULATION AND NEED FOR PRODUCT APPROVALS. The
preclinical testing and clinical trials of any compounds developed by the
Company or its collaborative partners and the manufacturing and marketing of any
drugs resulting therefrom are subject to regulation by numerous federal, state
and local governmental authorities in the United States, the principal one of
which is the United States Food and Drug Administration (the "FDA"), and by
similar agencies in other countries in which drugs developed by the Company or
its collaborative partners may be tested and marketed (each of such federal,
state, local and other authorities and agencies, a "Regulatory Agency"). Any
compound developed by the Company or its collaborative partners must receive
Regulatory Agency approval before it may be marketed as a drug in a particular
country. The regulatory process, which includes preclinical testing and clinical
trials of each
8
<PAGE> 11
compound in order to establish its safety and efficacy, can take many years and
requires the expenditure of substantial resources. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent Regulatory Agency approval. In addition,
delays or rejections may be encountered based upon changes in Regulatory Agency
policy during the period of drug development and/or the period of review of any
application for Regulatory Agency approval for a compound. Delays in obtaining
Regulatory Agency approvals could adversely affect the marketing of any drugs
developed by the Company or its collaborative partners, impose costly procedures
upon the Company's and its collaborative partners' activities, diminish any
competitive advantages that the Company or its collaborative partners may attain
and adversely affect the Company's ability to receive royalties. There can be no
assurance that, even after such time and expenditures, Regulatory Agency
approvals will be obtained for any compounds developed by or in collaboration
with the Company. Moreover, if Regulatory Agency approval for a drug is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed that could limit the potential market for any such drug. Furthermore,
approved drugs and their manufacturers are subject to continual review, and
discovery of previously unknown problems with a drug or its manufacturer may
result in restrictions on such drug or manufacturer, including withdrawal of the
drug from the market. In addition, Regulatory Agency approval of prices is
required in many countries and may be required for the marketing of any drug
developed by the Company or its collaborative partners in such countries. See
"Business -- Government Regulation."
UNCERTAINTY OF PHARMACEUTICAL PRICING; IMPACT OF HEALTH CARE REFORM
MEASURES. The levels of revenue and profitability of pharmaceutical companies
may be affected by continuing governmental efforts to contain or reduce the
costs of health care through various means. For example, in certain foreign
markets pricing or profitability of prescription pharmaceuticals is already
subject to governmental control. In the United States, there have been, and the
Company expects that there will continue to be, a number of federal and state
proposals to implement similar governmental control. Cost control initiatives
could decrease the price that the Company or its collaborative partners receive
for any products which it or they may develop in the future and have a material
adverse effect on the Company's business, financial condition and results of
operations. Further, to the extent that such proposals or initiatives have a
material adverse effect on the Company's collaborative partners or potential
collaborative partners, the Company's ability to commercialize its potential
products may be materially adversely affected.
POTENTIAL PRODUCT LIABILITY CLAIMS; ABSENCE OF INSURANCE. The Company
faces an inherent business risk of exposure to potential product liability
claims in the event that drugs, if any, developed through the use of its
technology are alleged to have caused adverse effects on patients. Such risk
exists for products being tested in human clinical trials, as well as products
that receive regulatory approval for commercial sale. The Company does not carry
product liability insurance. The Company will, if appropriate, seek to obtain
product liability insurance with respect to drugs developed by it and by its
collaborative partners. However, there can be no assurance that the Company will
be able to obtain such insurance. Even if such insurance is obtainable, there
can be no assurance that it can be acquired at a reasonable cost or in a
sufficient amount to protect the Company against liability that could have an
adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent on its
management and scientific staff, including James E. Rurka, its President and
Chief Executive Officer, and Keith A. Bostian, Ph.D., its Chief Operating
Officer, as well as members of its scientific advisory board. Loss of the
services of any key individual could have an adverse effect on the Company. The
Company does not carry key-man life insurance on any of its executives. The
Company believes that its future success will depend, in part, on its ability to
attract and retain highly talented managerial and scientific personnel and
consultants. The Company faces intense competition for such personnel from,
among others, biotechnology and pharmaceutical companies, as well as academic
and other research institutions. There can be no assurance that the Company will
be able to attract and retain the personnel it requires on acceptable terms. See
"Management -- Executive Officers, Directors and Key Employees,"
"Business -- Scientific Consultants" and "Certain Transactions."
STRINGENT REGULATIONS RELATING TO HAZARDOUS MATERIALS. As with many
biotechnology and pharmaceutical companies, the Company's activities involve the
use of radioactive compounds and hazardous materials. As a consequence, the
Company is subject to numerous environmental and safety laws and regulations.
Any
9
<PAGE> 12
violation of, and the cost of compliance with, these regulations could
materially adversely affect the Company's operations. The Company is subject to
periodic inspections, and has not received notice of any material violations of
any environmental or safety law or regulation. See "Business -- Government
Regulation."
CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS. Upon completion of the
Offering, management of the Company, including executive officers and key
employees, will own or control approximately 4% of the outstanding shares of
Common Stock, and the existing stockholders of the Company will own or control
approximately 76% of the outstanding shares of Common Stock (approximately 73%
if the Underwriters' over-allotment option is exercised in full) and will be
able to continue to elect the Company's Board of Directors and take other
corporate actions requiring stockholder approval, as well as dictate the
direction and policies of the Company. See "Principal Stockholders" and
"Underwriting."
EFFECT OF CERTAIN CHARTER AND BYLAWS PROVISIONS; CERTAIN ANTI-TAKEOVER
PROVISIONS. Certain provisions of the Restated Certificate of Incorporation and
Bylaws to be adopted by the Company prior to the completion of the Offering in
connection with its reincorporation in Delaware (the "Restated Certificate" and
"Bylaws", respectively) may have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from attempting to
acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the Common
Stock. Certain of these provisions allow the Company to issue Preferred Stock
without any vote or further action by the stockholders, provide for staggered
elections of the Company's Board of Directors and specify procedures for
director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings. None of these provisions provide for
cumulative voting in the election of directors. Certain provisions of Delaware
law applicable to the Company could also delay or make more difficult a merger,
tender offer or proxy contest involving the Company, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any stockholder owning fifteen
percent or more of Company's outstanding voting stock ("interested stockholder")
for a period of three years from the date a stockholder becomes an interested
stockholder unless certain conditions are met. The possible issuance of
Preferred Stock, the procedures required for director nominations and
stockholder proposals and Delaware law could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of Common Stock. These provisions could also
limit the price that investors might be willing to pay in the future for shares
of Common Stock. See "Description of Capital Stock."
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE. Sales
of substantial amounts of the Common Stock in the public market after the
Offering could adversely affect the market price of the Common Stock. Upon
completion of the Offering, the Company will have outstanding 10,256,981 shares
of Common Stock (including shares to be issued upon conversion of the
Convertible Preferred Stock upon completion of the Offering). All of the
2,500,000 shares sold in the Offering will be freely transferable as of the date
of this Prospectus by persons other than "affiliates" of the Company without
restriction or further registration under the Securities Act. The remaining
7,756,981 shares of Common Stock that will be outstanding upon completion of the
Offering (the "Restricted Shares") will be held by officers, directors,
employees, consultants and other stockholders of the Company. The Restricted
Shares were sold by the Company in reliance on exemptions from the registration
requirements of the Securities Act and are "restricted securities" under the
Securities Act. The officers, directors, employees and certain stockholders of
the Company, who together hold the Restricted Shares, have agreed not to sell
their shares without the consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated for a period of 180 days from the date of this Prospectus. Certain
holders of shares of Common Stock and securities convertible into or exercisable
for shares of Common Stock have certain registration rights under a registration
rights agreement among such holders and the Company. The shares of Common Stock
covered by these registration rights include: the 6,880,791 shares of Common
Stock which will be issued upon conversion of the Convertible Preferred Stock
upon completion of the Offering; and the 160,187 shares of Common Stock issuable
upon conversion of the Convertible Preferred Stock for which warrants are
exercisable. These registration rights have been waived in connection with the
Offering but will, subject to the agreements not to sell referred to above,
continue to apply
10
<PAGE> 13
to the aforementioned shares of Common Stock upon completion of the Offering. In
addition, the Company intends to register approximately 1,380,000 shares of
Common Stock subject to outstanding stock options or reserved for issuance under
the Company's stock option plans and employee stock purchase plan following
completion of the Offering. See "Management -- Employee Benefit Plans" and
"Shares Eligible for Future Sale."
ABSENCE OF PRIOR TRADING MARKET; DETERMINATION OF PUBLIC OFFERING PRICE;
POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the Offering, there has been no
public market for the Common Stock, and there can be no assurance that an active
trading market will develop or be sustained or that shares of Common Stock can
be resold at or above the initial public offering price after the Offering. The
initial public offering price of the Common Stock has been established by
negotiation between the Company and the Representatives of the Underwriters.
Such price should not, however, be considered indicative of the actual value of
the Common Stock. See "Underwriting." There has been a history of significant
volatility in the market prices for shares of biotechnology companies, and it is
likely that the market price of the Common Stock will be similarly volatile.
Prices for the Common Stock following the Offering may be influenced by many
factors, including the depth of the market for the Common Stock, investor
perception of the Company, fluctuations in the Company's operating results and
market conditions relating to the biotechnology and pharmaceutical industries.
In addition, the market price of the Common Stock may be influenced by
announcements of technological innovations, new commercial drugs or clinical
progress or the lack thereof by the Company, its collaborative partners or its
competitors. In addition, announcements concerning regulatory developments,
developments with respect to proprietary rights and the Company's collaborations
may also affect the market price of the Common Stock. Period-to-period
fluctuations in financial results and general market conditions could also have
a significant impact on the Company's business and on the market price of the
Common Stock. Finally, future sales of substantial amounts of Common Stock by
existing stockholders could also adversely affect the prevailing price of the
Common Stock. See "Description of Capital Stock," "Shares Eligible for Future
Sale" and "Underwriting."
DILUTION. The initial public offering price is expected to be
substantially higher than the net tangible book value per share of Common Stock.
Investors purchasing shares of Common Stock in the Offering will, therefore,
incur immediate and substantial dilution. Assuming an initial public offering
price of $13 per share, the immediate dilution to purchasers of shares of Common
Stock in the Offering is $8.71 per share of Common Stock, or 67%. Additional
dilution is likely to occur upon the exercise of options and warrants granted by
the Company. See "Dilution."
ABSENCE OF CASH DIVIDENDS. The Company has never paid any cash dividends
and does not anticipate paying cash dividends in the foreseeable future. See
"Dividend Policy."
11
<PAGE> 14
THE COMPANY
The Company originally was incorporated in California in December 1992, and
anticipates that it will reincorporate in Delaware prior to the completion of
the Offering. The Company's offices are located at 850 Maude Avenue, Mountain
View, California 94043, and its telephone number is (415) 428-1550.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common
Stock offered hereby, after deducting estimated offering expenses payable by the
Company, are estimated to be approximately
$29.4 million ($34.0 million if the Underwriters exercise their over-allotment
option in full).
The Company expects to use approximately $18 million of the net proceeds of
the Offering to fund its research and development activities, including the
Company's Targeted Genomics programs and Cell Wall Program; approximately $6
million of the net proceeds of the Offering for leasehold improvements to the
Company's facilities, the purchase of additional laboratory equipment and other
capital expenditures; and the balance of the net proceeds of the Offering for
working capital and general corporate purposes. The amount and timing of these
expenditures will depend on numerous factors, including the progress of the
Company's research and development programs. Pending application of the net
proceeds of the Offering as described above, the Company intends to invest such
proceeds in United States government securities and investment grade,
interest-bearing instruments.
The Company believes that its existing capital resources, together with the
net proceeds from the Offering, interest income and future payments due under
the Collaborative Agreements, will be sufficient to satisfy its current and
projected funding requirements at least through 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently expects to retain future earnings to fund the growth and development
of its operations.
12
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1996, after giving effect to the 1-for-5 reverse stock split of the
Common Stock and the Convertible Preferred Stock, (ii) on a pro forma basis
after giving effect to the automatic conversion of all outstanding Convertible
Preferred Stock into Common Stock and the authorization of 5,000,000 shares of
undesignated Preferred Stock upon the closing of the Offering, and (iii) as
adjusted to give effect to the receipt of the estimated net proceeds from the
sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $13 per share:
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations.................................... $ 1,810 $ 1,810 $ 1,810
Stockholders' equity:
Preferred Stock, no par value, 7,810,000 shares
authorized, 6,880,791 shares issued and outstanding,
actual, 5,000,000 shares authorized, $0.001 par
value, no shares issued and outstanding, pro forma
and as adjusted..................................... 27,425 -- --
Common Stock, no par value, 10,000,000 shares
authorized,
876,190 shares issued and outstanding, actual,
50,000,000 shares authorized, $0.001 par value,
7,756,981 shares issued and outstanding pro forma,
and 10,256,981 shares issued and outstanding as
adjusted(1)......................................... 2,266 29,691 59,116
Stockholder note receivable............................ (35) (35) (35)
Deferred compensation.................................. (1,974) (1,974) (1,974)
Net unrealized loss on securities available-for-sale... (2) (2) (2)
Deficit accumulated during development stage........... (13,084) (13,084) (13,084)
-------- --------
Total stockholders' equity.......................... 14,596 14,596 44,021
-------- --------
Total capitalization.............................. $ 16,406 $ 16,406 $ 45,831
======== ========
</TABLE>
- ---------------
(1) Excludes as of March 31, 1996, 690,600 shares of Common Stock issuable upon
exercise of stock options outstanding as of March 31, 1996 with a weighted
average exercise price of $0.97 per share, of which options to purchase
236,696 shares of Common Stock are exercisable. Also excludes warrants to
purchase 160,187 shares of various series of Convertible Preferred Stock at
an average exercise price of $2.85 per share. See "Management -- Employee
Benefit Plans."
13
<PAGE> 16
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
March 31, 1996, was approximately $14.6 million, or $1.88 per share. "Pro forma
net tangible book value" represents the amount of the Company's total tangible
assets reduced by the amount of its total liabilities and divided by the pro
forma total number of shares of Common Stock outstanding (reflecting the
conversion of all outstanding Preferred Stock into shares of Common Stock upon
the closing of the Offering). Without taking into account any changes in such
pro forma net tangible book value after March 31, 1996, other than to give
effect to the receipt by the Company of the net proceeds from the sale of the
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13 per share, the adjusted pro forma net tangible book value
of the Company as of March 31, 1996 would have been $44.0 million, or $4.29 per
share. This represents an immediate increase in pro forma net tangible book
value of $2.41 per share to existing stockholders and an immediate dilution of
$8.71 per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $13.00
Pro forma net tangible book value per share at March 31, 1996... $1.88
Increase per share attributable to new investors................ 2.41
--
Pro forma net tangible book value per share after the 4.29
Offering...................................................... --
Dilution per share to new investors............................. $ 8.71
==
</TABLE>
The following table summarizes on a pro forma basis, as of March 31, 1996,
the differences between existing stockholders and new investors (at an assumed
initial public offering price of $13 per share and before deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company) with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 7,756,981 75.6% $27,579,000 45.9% $ 3.56
New investors............. 2,500,000 24.4 32,500,000 54.1 13.00
---- ----
Total..................... 10,256,981 100.0% $60,079,000 100.0%
==== ====
</TABLE>
The foregoing computations assume no exercise of stock options or warrants
after March 31, 1996. As of March 31, 1996, there were outstanding options to
purchase 690,600 shares of Common Stock, with a weighted average exercise price
of $0.97 per share and warrants to purchase 160,187 shares of various series of
Convertible Preferred Stock at an average price of $2.85 per share. In addition,
as of March 31, 1996, 485,450 shares of Common Stock were reserved for future
issuance under the Company's stock plans. If all options and warrants
outstanding at March 31, 1996 were exercised for cash, the pro forma net
tangible book value per share immediately after completion of the Offering would
be $4.06 per share. See "Management -- Employee Benefit Plans" and "Description
of Capital Stock."
14
<PAGE> 17
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1994 and
1995, for the period from inception (December 11, 1992) to December 31, 1993,
the years ended December 31, 1994 and 1995 have been derived from the Company's
financial statements, which have been audited by Ernst & Young LLP, independent
auditors, and are included elsewhere herein. The selected financial data set
forth below as of March 31, 1996, for the three month periods ended March 31,
1995 and 1996 and for the period from inception (December 11, 1992) to March 31,
1996 have been derived from unaudited financial statements included elsewhere
herein and include, in the opinion of the Company, all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation of the
Company's financial position at that date and results of operations for those
periods. The results for the three months ended March 31, 1996 are not
necessarily indicative of the results for any future period. The selected
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Financial Statements of the Company and related notes thereto and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(DECEMBER 11, YEAR ENDED THREE MONTHS ENDED (DECEMBER 11,
1992) TO DECEMBER 31, MARCH 31, 1992) TO
DECEMBER 31, ------------------------------- ------------------- MARCH 31,
1993 1994 1995 1995 1996 1996
------------- ------------- ------------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
License fees..................... $ -- $ -- $ 3,000 $ -- $ 1,000 $ 4,000
Research revenue................. -- -- 1,985 -- 1,625 3,610
------- ------- ------- --------
Total revenues................. -- -- 4,985 -- 2,625 7,610
Operating expenses:
Research and development......... 1,685 5,180 6,400 1,324 1,780 15,045
General and administrative....... 1,251 1,823 2,080 479 526 5,680
------- ------- ------- --------
Total operating expenses....... 2,936 7,003 8,480 1,803 2,306 20,725
------- ------- ------- --------
Income (loss) from operations...... (2,936) (7,003) (3,495) (1,803) 319 (13,115)
Interest income.................... 32 218 257 85 137 644
Interest expense................... (13) (249) (278) (70) (73) (613)
------- ------- ------- --------
Net income (loss).............. $(2,917) $ (7,034) $ (3,516) $(1,788) $ 383 $ (13,084)
======= ======= ======= ========
Pro forma net income (loss) per
share(1)......................... $ (0.44) $ (0.22) $ 0.04
======= ========
Shares used in computing pro forma
net income (loss) per share(1)... 8,052 8,039 8,563
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
------------------- 31,
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 5,810 $ 8,517 $ 15,093
Working capital........................................................ 4,845 6,388 11,020
Total assets........................................................... 11,340 13,493 20,691
Long-term obligations.................................................. 2,530 2,075 1,810
Deficit accumulated during development stage........................... (9,951) (13,467) (13,084)
Total stockholders' equity............................................. 7,506 9,151 14,596
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
calculation of pro forma net loss per share.
15
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Microcide is a biopharmaceutical company founded to discover, develop and
commercialize novel antibiotics for the treatment of serious bacterial
infections. The Company's discovery and development programs address the growing
problem of bacterial drug resistance through two principal themes: (i) Targeted
Antibiotics, which focus on developing novel antibiotics and antibiotic
potentiators, and (ii) Targeted Genomics, which utilize bacterial genetics to
discover new classes of antibiotics and other novel treatments for bacterial
disease.
As part of the Company's strategy to enhance its research and development
capabilities and to fund, in part, its capital requirements, Microcide has
entered into collaborative agreements with three major pharmaceutical companies.
See "Business -- Strategy" and "Business -- Collaborative Agreements." Pursuant
to the Collaborative Agreements, the Company has received license fees and
research support payments, and can potentially receive additional research
support payments, milestone payments and royalty payments. License payments are
typically nonrefundable up-front payments for licenses to develop, manufacture
and market products, if any, that are developed as a result of the
collaboration. Research support payments are typically contractually obligated
payments to fund research and development over the term of the collaboration.
Milestone payments are payments contingent upon the achievement of specified
milestones, such as selection of candidates for drug development, the
commencement of clinical trials or receipt of regulatory approvals. If drugs are
successfully developed and commercialized as a result of the Collaborative
Agreements, the Company will receive royalty payments based upon the net sales
of such drugs.
Through March 31, 1996, the Company had received in the aggregate $4.0
million in license payments and $5.6 million in research support payments under
the Collaborative Agreements. Assuming none of the Collaborative Agreements is
terminated prior to its scheduled expiration, the Company will be entitled to
receive an additional $35.9 million of research support payments in the
aggregate from Ortho, Daiichi and Pfizer. In addition, in the event that any of
the Collaborative Agreements are extended beyond their current terms, the
Company will be entitled to receive additional research support payments. See
"Risk Factors -- Dependence on Collaborative Partners and Others" and
"Business -- Collaborative Agreements."
No milestone or royalty payments have yet been received. In the event that
the Company achieves the specified research and product development milestones,
the Company will be entitled to receive milestone payments as follows: up to
$16.5 million for the first product, and up to $15.5 million for each additional
product developed pursuant to the Ortho/J&J Agreements, up to $13.0 million for
each product developed pursuant to the Daiichi Agreement and up to $32.5 million
for each product developed pursuant to the Pfizer Agreements. Receipt of these
milestone payments are contingent upon achieving specified research and product
development milestones, a number of which may not be achieved for several years,
if ever. The Company does not expect to receive royalties based upon net sales
of drugs for a significant number of years, if at all. See "Risk
Factors -- Absence of Developed Products; Early Stage of Product Development."
Quarterly results of operations are subject to significant fluctuations
based on the timing and amount of certain revenues earned under the
Collaborative Agreements. The Company expects to continue to incur operating
losses in the future.
In addition to the revenues received under the Collaborative Agreements,
the Company received $5.0 million from the sale of equity to an affiliate of
Ortho/J&J in October 1995 in conjunction with the execution of the Ortho/J&J
Agreements, and an additional $5.0 million from the sale of equity to Pfizer in
March 1996 in conjunction with the execution of the Pfizer Agreements.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
16
<PAGE> 19
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Revenues. Total revenues for the first quarter of 1996 were $2.6 million,
consisting of $1.0 million in license fees from Pfizer and $1.6 million in
revenues earned for research performed under the Collaborative Agreements.
Although the Company received $3.1 million in research support payments in the
first quarter of 1996, only $1.6 million was recognized as revenue in that
quarter, with the balance to be recognized as related research services are
performed under the Daiichi Agreement and the Pfizer Agreements. No revenues
were recognized for the first quarter of 1995 as no collaborative agreements
were in effect at that time. The Company expects revenues to increase in the
future due to scheduled research support payments from the Collaborative
Agreements.
Research and Development Expenses. Research and development expenses for
the first quarter increased approximately 34% from $1.3 million in 1995 to $1.8
million in 1996, primarily due to increased compensation and supplies expenses
resulting from a 35% increase in the number of research personnel. The Company
expects research and development expenses to increase in the future due to the
hiring of additional research personnel to support its internal and
collaborative research programs, further expenditures for research materials,
additional utilization of outside research services and amortization of deferred
compensation.
General and Administrative Expenses. General and administrative expenses
for the first quarter increased 10% from $479,000 in 1995 to $526,000 in 1996,
primarily due to increased compensation expenses resulting from the amortization
of deferred compensation expense. The Company expects general and administrative
expenses to increase in the future due to the hiring of additional
administrative personnel to support the expansion of its research activities and
amortization of deferred compensation.
Interest Income and Expense. Interest income for the first quarter
increased 61% from $85,000 in 1995 to $137,000 in 1996, primarily due to an
increase in average cash balances in 1996 related to proceeds received from the
sale of equity and cash received from the Collaborative Agreements. The Company
expects interest income to increase in the future due to an increase in average
cash balances related to net proceeds received from the Offering. Interest
expense for the first quarter increased 4% from $70,000 in 1995 to $73,000 in
1996 due to an increase in capital lease balances outstanding. The Company
expects interest expense to remain constant for 1996.
Net Income (Loss). Net income (loss) for the first quarter increased $2.2
million from a loss of $1.8 million in 1995 to a profit of $383,000 in 1996
primarily as a result of the items discussed above.
FISCAL YEARS ENDED DECEMBER 31, 1994 AND 1995
Revenues. The Company began receiving revenues upon the signing of the
Ortho/J&J Agreements in October 1995 and the Daiichi Agreement in November 1995.
Revenues recognized for research performed during 1995 totaled $5.0 million,
consisting of $3.0 million in license fees and $2.0 million in research revenue.
Although the Company received $2.4 million in research support payments in 1995,
only $2.0 million was recognized as revenue in that year, with the balance to be
recognized as revenue over the life of the Daiichi Agreement.
Research and Development Expenses. The Company's research and development
expenses increased approximately 24% from $5.2 million for 1994 to $6.4 million
for 1995. This increase was largely due to higher compensation expenses,
purchases of research materials and outside research service payments.
General and Administrative Expenses. General and administrative expenses
increased approximately 14% from $1.8 million for 1994 to $2.1 million for 1995.
This increase was primarily due to increased compensation expense and legal,
travel and other expenses related to business development activities in 1995, in
particular the negotiation of the Collaborative Agreements. See
"Business -- Collaborative Agreements."
Interest Income and Expense. Interest income increased 18% from $218,000
for 1994 to $257,000 for 1995. This increase was due to an increase in average
cash balances in 1995 related to proceeds received from the sale of equity and
cash received from the Collaborative Agreements. Interest expense increased 12%
from
17
<PAGE> 20
$249,000 for 1994 to $278,000 for 1995. This increase was due to an increase in
capital lease balances outstanding in 1995.
Net Loss. Net loss decreased by 50% from $7.0 million for 1994 to $3.5
million for 1995, primarily from the receipt of license fees and research
revenues used to support existing research programs.
PERIOD FROM INCEPTION (DECEMBER 11, 1992) TO DECEMBER 31, 1993 AND
FISCAL YEAR ENDED DECEMBER 31, 1994
Revenues. No revenues were received during this period.
Research and Development Expenses. The Company's research and development
expenses increased 207% from $1.7 million in the period from inception to
December 31, 1993 to $5.2 million for 1994. This increase was primarily due to
additional personnel hired to support the Company's increased research efforts.
Depreciation related to increased capital equipment purchases increased by
$850,000, supply costs increased by $405,000, and other costs also increased as
a result of these increased research activities.
General and Administrative Expenses. The Company's general and
administrative expenses increased 46% from $1.3 million in the period from
inception to December 31, 1993 to $1.8 million for 1994. This increase was
primarily due to additional personnel which increased compensation expense,
benefit costs, relocation and recruiting expenses.
Interest Income and Expense. Interest income increased from $32,000 in the
period from inception to December 31, 1993 to $218,000 in 1994. This increase
was due to an increase in average cash balances in 1994 related to proceeds
received from the sale of equity. Interest expense increased from $13,000 in the
period to December 31, 1993 to $249,000 in 1994. This increase was due to an
increase in capital lease balances outstanding.
Net Loss. Net loss increased 141% from $2.9 million for the period from
inception to December 31, 1993 to $7.0 million for 1994, primarily as a result
of the items discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the sale of equity, through funds provided under the Collaborative Agreements
and through equipment financing. As of March 31, 1996, the Company had received
approximately $27.4 million in net proceeds from the sale of equity and
approximately $9.6 million in cash for license fees and research support
payments under the Collaborative Agreements.
Cash and cash equivalents at March 31, 1996 were $15.1 million compared to
$8.5 million at December 31, 1995. The increase during the first quarter of 1996
was due primarily to the proceeds received from the sale of equity and payments
received under the Collaborative Agreements.
Net cash used in the Company's operations was $2.7 million, $6.2 million
and $1.2 million for the period from inception to December 31, 1993 and for 1994
and 1995, respectively. The cash used in operations was primarily used to fund
research and development expenses and for general and administrative expenses to
support the Company's activities. Net cash provided by the Company's operations
was $2.8 million for the first quarter of 1996. The cash provided by operations
was primarily due to prepayments of research support payments due under the
Collaborative Agreements which are included in deferred revenue.
Through March 31, 1996, the Company had invested approximately $7.7 million
in property and equipment, including $4.6 million in equipment and leasehold
improvements under capital leases. The present value of obligations under
capital leases at March 31, 1996 was $2.8 million. Minimum annual principal
payments due under capital leases total $1.1 million in 1996 and decline each
year thereafter until expiration in the year 2000. The Company made principal
payments under capital lease obligations in the period from inception to
December 31, 1993, and in 1994 and 1995 of $29,000, $569,000 and $927,000,
respectively. The Company expects its capital expenditures in 1996 to be $3.3
million, consisting of $1.2 million of leasehold improvements and $2.1 million
of laboratory and other equipment purchases.
18
<PAGE> 21
Of the $3.3 million in expected capital equipment expenditures in 1996,
approximately $120,000 is expected to be spent on environmental control
equipment required by federal, state and local health statutes and regulations.
Ongoing environmental control expenses, which include hazardous material
removal, are expected to total approximately $50,000 in 1996 and approximately
$60,000 in each of 1997 and 1998.
The Company believes that the anticipated net proceeds from the Offering,
together with its existing capital resources, interest income and future
revenues due under the Collaborative Agreements, will be sufficient to satisfy
its funding requirements at least through 1998. These funding requirements
include continued expenditures for research and development activities, as well
as expenditures related to leasehold improvements and the purchase of additional
laboratory and other equipment. The Company has not entered into any formal
commitments to use the proceeds from the Offering for increased personnel,
capital expenditures or any other purpose. See "Use of Proceeds."
The Company has not generated significant taxable income to date. At
December 31, 1995, the net operating losses available to offset future taxable
income for federal income tax purposes were approximately $13.0 million. Because
the Company has experienced ownership changes, future utilization of the
carryforwards may be limited in any one fiscal year pursuant to Internal Revenue
Code regulations. The carryforwards expire at various dates beginning in 2008
through 2010 if not utilized. As a result of the annual limitation, a portion of
these carryforwards may expire before becoming available to reduce the Company's
federal income tax liabilities.
19
<PAGE> 22
BUSINESS
INTRODUCTION
Microcide is a biopharmaceutical company founded to discover, develop and
commercialize novel antibiotics for the treatment of serious bacterial
infections. The Company's discovery and development programs address the growing
problem of bacterial drug resistance through two principal themes: (i) Targeted
Antibiotics, which focuses on developing novel antibiotics and antibiotic
potentiators, and (ii) Targeted Genomics, which utilizes bacterial genetics to
discover new classes of antibiotics and other novel treatments for bacterial
disease.
The Company believes that the antibiotics market provides an attractive
opportunity for its research and development activities because (i) it is the
third largest pharmaceutical market, totaling $22.9 billion in worldwide sales,
including $6.3 billion in the United States, for the twelve months ended
September 1995; (ii) there are significant unmet clinical needs, caused by
growing bacterial resistance problems, that require new antibacterial therapies;
and (iii) the preclinical and clinical development process for antibiotics
generally follows an efficient and well-defined path to the market.
Microcide's Targeted Antibiotics programs seek to rapidly develop
clinically useful antibiotics tailored to treat specific bacterial infections,
as well as antibiotic potentiators, which will overcome resistance pathways and
restore usefulness to existing antibiotics that have been rendered ineffective.
The specific problematic bacteria being addressed by the Company (staphylococci,
enterococci, Pseudomonas aeruginosa and Streptococcus pneumoniae) are
responsible for 44% of the approximately two million hospital-acquired
infections occurring annually in the United States. These infections are
estimated to result in approximately eight million days of extended hospital
stay and account for more than $4.0 billion in additional health care costs each
year.
Microcide's Targeted Genomics programs seek to identify the
pharmaceutically relevant portion of bacterial genomes that are essential to
bacterial viability in vitro (the Essential Genes Program) or to bacterial
growth and virulence in vivo (the Pathogenesis Program). In the Essential Genes
Program, Microcide has identified approximately 80 essential gene targets, which
are being incorporated into the Company's high-throughput, multi-channel
screening system to discover new classes of antibiotics. In the Pathogenesis
Program, Microcide is developing and utilizing new molecular genetics
technologies to identify pathogenesis genes in order to discover and develop
novel therapeutic agents.
The Company has entered into collaborative agreements with three major
pharmaceutical companies to enhance certain of its discovery and development
programs. To date, the Company's collaborative partners have provided the
Company with $11.3 million of license fees and research support payments and
$10.0 million in equity investments. Assuming each of the collaborative
agreements continues until its scheduled expiration, the Company will be
entitled to receive an additional $34.2 million of research support payments.
The Company has retained rights to products which may result from its internal
programs.
Ortho/J&J. Microcide is collaborating with Ortho/J&J to discover and
develop novel beta-lactam antibiotics, antibiotic potentiators and inhibitors of
bacterial signal transduction targeted at problematic Gram-positive bacteria,
including staphylococci and enterococci. The Company expects to select with
Ortho/J&J its initial product candidate, a Gram-positive beta-lactam, in 1996
and to enter into clinical trials during 1997. If specified research and
development milestones are achieved, the Company will be entitled to receive up
to $16.5 million for the initial product and up to $15.5 million for each
subsequent product developed within the collaboration.
Daiichi. Microcide is collaborating with Daiichi to discover and develop
bacterial efflux pump inhibitors to be used in combination with Daiichi's
quinolone antibiotics to target Gram-negative bacteria, including pseudomonas.
The Company expects to select with Daiichi its first quinolone potentiation
candidate by mid-1997 for clinical development. If specified research and
development milestones are achieved, Microcide will be entitled to receive up to
$13.0 million for each product developed within the collaboration.
Pfizer. Microcide is collaborating with Pfizer to implement its essential
gene and multi-channel screening system to discover novel classes of
antibiotics. If specified research and development milestones are achieved,
Microcide will be entitled to receive milestone payments of up to $32.5 million
for each product developed within the collaboration.
20
<PAGE> 23
INFECTIOUS DISEASE ENVIRONMENT
BACTERIAL INFECTIONS AND ANTIBIOTICS OVERVIEW
Bacterial infections are a significant and growing medical problem. They
occur when the body's immune system cannot prevent the invasion and colonization
of the body by disease-causing bacteria. These infections may either be confined
to a single organ or tissue, or disseminated throughout the body by blood stream
infections, and can cause many serious diseases, including pneumonias,
endocarditis, osteomyelitis, meningitis, deep-seated soft tissue infections,
bacteremia and complicated urinary tract infections.
According to estimates from the United States Centers for Disease Control
and Prevention (the "CDC") for the period 1980 to 1992, approximately two
million hospital-acquired infections occur annually in the United States,
accounting for more than eight million days of extended hospital stay and
causing more than $4.0 billion in additional health care costs each year. While
overall per capita mortality rates declined in the United States from 1980 to
1992, the per capita mortality rate due to infectious diseases increased 58%
over this period, making infectious diseases the third leading cause of death in
the United States. The Company believes that bacterial infections, especially
infections caused by difficult-to-treat, antibiotic-resistant bacteria, cause or
contribute to a substantial majority of these deaths.
Antibiotics are administered both to prevent bacterial infections and to
treat established bacterial disease. When administered to prevent an infection,
antibiotics are given prophylactically, before any clinical signs or symptoms of
an infection are present. When administered to treat an established infection,
antibiotics are often chosen and administered empirically, before diagnostic
testing has established the causative bacterium and its susceptibility to
specific antibiotics.
Antibiotics work by interfering with a vital bacterial cell function at a
specific cellular target, either killing the bacteria or arresting their
multiplication, thereby allowing the patient's immune system to clear the
bacteria from the body. Currently available antibiotics work on relatively few
targets, through mechanisms such as inhibiting protein or cell wall synthesis.
These targets tend to be present in all bacteria and are highly similar in
structure and function, such that certain antibiotics kill or inhibit growth of
a broad range of bacterial species (i.e., broad-spectrum antibiotics).
Major structural classes of antibiotics include beta-lactams,
fluoro-quinolones, macrolides, tetracyclines, aminoglycosides, glycopeptides and
trimethoprim combinations. Penicillin, a member of the beta-lactam class (which
also includes extended-spectrum penicillins, cephalosporins and carbapenems),
was first developed in the 1940s. Nalidixic acid, the earliest member of the
quinolone class, was discovered in the 1960s. The creation of broad-spectrum
antibiotics began in the 1970s and 1980s, with major advances seen in the 1970s
with the development of newer beta-lactams, and in the 1980s with the
development of fluoro-quinolones. These antibiotics are still being used
extensively. No major new class of antibiotics has been discovered and
commercialized in the last 20 years.
ANTIBIOTICS MARKET
According to sales data compiled by IMS International, an independent
pharmaceutical industry research firm, the market for systemic (orally or
parenterally administered) antibiotics constitutes the third largest worldwide
pharmaceutical market, generating $22.9 billion in worldwide sales for the 12
months ended September 1995, including $6.3 billion in the United States. The
in-hospital antibiotic market, where bacterial resistance poses the most serious
threat, totaled $7.7 billion worldwide during this period, including $2.2
billion in the United States. Worldwide systemic antibiotic sales, aggregated by
major antibiotic class, are shown below, along with a listing of the top 20
systemic antibiotic products, shown in rank order of sales within each class.
21
<PAGE> 24
WORLDWIDE SALES OF SYSTEMIC ANTIBIOTICS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------
<TABLE>
<CAPTION>
WORLDWIDE TOP 20
SALES(1) ANTIBIOTICS
DRUG CLASS ($ MILLIONS) (WITHIN CLASS)
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Beta-lactams--Cephalosporins..................... $ 8,446 Cefaclor
Cefuroxime/axetil
Ceftriaxone
Ceftazidime
Cephalexin
Cefixime
Cefazolin
Beta-lactams--Broad-spectrum Penicillins......... 3,804 Amoxicillin/clavulanate
Amoxicillin
Ampicillin/sulbactam
Fluoro-quinolones................................ 3,309 Ciprofloxacin
Ofloxacin
Levofloxacin
Macrolides....................................... 2,927 Clarithromycin
Erythromycin
Azithromycin
Tetracyclines.................................... 744 Minocycline
Aminoglycosides.................................. 729 (2)
Beta-lactams--Medium/Narrow-spectrum
Penicillins................................... 609 (2)
Glycopeptides.................................... 462(3) Vancomycin
Beta-lactams--Carbapenems........................ 443 Imipenem
Trimethoprim Combinations........................ 381 TMP/SMX
All Other Systemic Antibiotics................... 1,049 (2)
- --------------------------------------------------------------------------------------------------
TOTAL....................................... $ 22,903
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) For the 12-month period ended September 1995.
(2) No single antibiotic in this class ranks among the top 20 antibiotics.
(3) Includes Vancomycin only.
ANTIBIOTIC RESISTANCE PROBLEMS
One of the key contributors to the increase in mortality and morbidity due
to bacterial infections is the increasing prevalence of drug-resistant bacteria.
Evidence of bacterial resistance to penicillin was first seen in the 1940s
shortly after its introduction. Methicillin and subsequent second-generation
penicillins were developed to overcome these penicillin-resistant organisms, but
resistance to methicillin in turn began to occur in the 1970s shortly after its
release, and has continued to increase. Similar resistance problems are now seen
with a number of clinically important bacteria targeted by the Company's initial
products, including staphylococci, enterococci, pseudomonas and pneumococci.
Strains of these bacteria have become resistant to all but a few antibiotics.
According to estimates based on CDC data, these four bacteria are responsible
for 44% of all hospital-acquired infections and for 63% of hospital-acquired
blood stream infections in the United States.
A number of factors are believed to contribute to the increased rate of
bacterial drug resistance: (i) physician reliance on broad-spectrum antibiotics
for empiric treatment of an infection before it is definitively diagnosed; (ii)
repeated exposure of bacteria to long-term antibiotic therapy, providing a
competitive advantage to bacteria harboring drug resistance; (iii) the
increasing number of immunosup-
22
<PAGE> 25
pressed patients (from cancer chemotherapy, AIDS and organ transplants); (iv)
the growing number of institutionalized, often elderly, patients receiving
multiple courses of antibiotics; (v) the increased frequency of invasive medical
procedures; and (vi) societal and technological changes, including air travel,
that accelerate the spread of drug-resistant bacteria.
One example of the seriousness of antibiotic resistance is
methicillin-resistant staphylococci ("MRS"), which have become resistant to
virtually all currently used antibiotics, except vancomycin. The heavy use of
vancomycin to treat MRS infections has in turn contributed to the emergence of
new strains of enterococci, the third most prevalent cause of bacterial
infection in hospitals in the United States, which are resistant to vancomycin.
Infections caused by these vancomycin-resistant enterococci ("VRE") frequently
do not respond to any current therapies, and in many cases prove fatal. The
transfer of vancomycin resistance from enterococci to staphylococci has been
demonstrated experimentally. If vancomycin resistance is transferred in the
clinical setting by VRE to staphylococci, the leading cause of hospital-acquired
bacterial infections, no effective antibiotic therapy will remain to treat MRS
infections.
As a result of increasing bacterial resistance to existing antibiotics,
numerous clinical infections occur that resist first-line therapy. When bacteria
develop resistance to established first-line antibiotics, it is often necessary
to use a combination of two drugs, or multiple antibiotic therapy of three or
more drugs, to treat these resistant infections. Such combination or multiple
antibiotic therapy is generally more costly, potentially less effective, and
more toxic to the patient due to additive and sometimes synergistic side
effects. The table below outlines some of the major problematic drug-resistant
bacteria, the classes of antibiotics to which they already show clinically
significant levels of resistance, and the remaining recommended treatments:
PROBLEMATIC DRUG-RESISTANT BACTERIA
- ------------------------------------------
- ----------------------------
- ------------------------------------------
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
BACTERIA CLINICALLY REMAINING
SIGNIFICANT RECOMMENDED TREATMENT
RESISTANCE PROBLEMS
- ---------------------------------------------------------------------------------------------
Staphylococci Beta-lactams Vancomycin
(Staphylococcus aureus) Fluoro-quinolones Combination Therapy
(coagulase-negative Aminoglycosides
staphylococci)
Macrolides
- ---------------------------------------------------------------------------------------------
Enterococci Beta-lactams Multiple Antibiotic Therapy
Aminoglycosides
Glycopeptides
- ---------------------------------------------------------------------------------------------
Pseudomonas aeruginosa Beta-lactams Combination Therapy
Fluoro-quinolones
Aminoglycosides
- ---------------------------------------------------------------------------------------------
Streptococcus pneumoniae Beta-lactams Cephalosporin or Carbapenem
Macrolides Vancomycin
Tetracyclines
- ---------------------------------------------------------------------------------------------
</TABLE>
STRATEGY
The Company believes that the antibiotics market provides an attractive
opportunity for its research and development activities because (i) there are
significant unmet clinical needs, caused by growing bacterial resistance
problems, that require new antibacterial therapies and (ii) the preclinical and
clinical development process for antibiotics typically follows an efficient and
well-defined path to the market, and early testing is generally predictive of
later stage results. The Company believes these factors will lead to shorter
overall development timelines and higher approval rates for its products.
Microcide's strategy is to focus near-term preclinical research activities on
drug resistance pathways and to conduct longer-term drug discovery using
23
<PAGE> 26
novel antibacterial targets identified through its Targeted Genomics programs.
This strategy is comprised of the following five key elements:
Develop Novel Antibiotics by Targeting Drug Resistance
Pathways. Microcide's near-term research programs focus on rapidly identifying
and optimizing proprietary compounds that are effective against problematic
antibiotic-resistant bacteria, notably MRS, VRE, penicillin-resistant
pneumococci and quinolone-resistant pseudomonas. Since antibiotic resistance
problems are often due to a single defined pathway, the Company believes that
targeting those pathways will enable it to rapidly develop novel antibiotics
tailored to specific resistant bacteria, as well as to develop antibiotic
potentiators that overcome resistance pathways and restore the usefulness of
established antibiotics that have been rendered ineffective. The Company's
Gram-Positive, Efflux Pump and Cell Wall Programs are focused in this area.
Accelerate the Discovery of New Antibiotic Classes through Targeted
Genomics. Microcide has developed a technology platform which utilizes
bacterial genetics to discover the genes which are essential for a bacterium's
in vitro survival or in vivo pathogenecity. Microcide is utilizing essential
bacterial genes discovered in its Essential Genes Program as the basis for
identifying and characterizing novel antibiotic targets. The Company has
developed an innovative methodology for parallel high- throughput screening of
these targets to identify a large number of lead compounds. The Company believes
that this genetics technology platform will enable it to rapidly identify drug
candidates within new classes of antibiotics.
Extend Targeted Genomics to Pathogenesis Genes, Creating Novel Therapeutic
Approaches. Microcide has extended its molecular genetics technologies in
targeted genomics to identify and characterize genes that are critical to
bacterial growth or virulence in vivo. The Company believes that inhibitors of
such targets have not been previously sought in antibiotic discovery programs,
and that its Pathogenesis Program utilizes novel methods to discover inhibitors
of pathogenesis genes for development as new treatment approaches for bacterial
disease.
Enhance Research and Development and Reduce Capital Requirements
through Collaborative Agreements. The Company has entered into collaborations
with three major pharmaceutical companies to develop its initial products. Such
collaborations are expected to provide Microcide with funding, discovery
technologies, research staffing, access to molecular diversity, and development
and commercialization capabilities. By utilizing the resources of its
collaborators, Microcide expects to lower its capital requirements and reduce
the time needed to commercialize its products worldwide.
Retain the Ability to Independently Develop and Market Certain
Products. Microcide's long-term development strategy is to continue to utilize
strategic collaborations selectively to complement internal efforts. Microcide
plans to retain rights to market products resulting from specific programs,
including the Company's Pathogenesis and Cell Wall Programs, and to enter into
collaborative relationships where appropriate for distribution and
commercialization.
MICROCIDE'S RESEARCH PROGRAMS
Microcide's research programs employ an interdisciplinary approach that
incorporates several drug discovery and research technologies, including
targeted genomics, high-throughput and multi-channel screening, combinatorial
and medicinal chemistry, computer-assisted drug design and bioinformatics. The
Company believes that its interdisciplinary approach more effectively utilizes a
broader range of novel bacterial targets for new compound discovery than
traditional biochemical approaches. Microcide believes that drug resistance
genes, essential genes and pathogenesis genes can be developed into screens for
selective inhibitors and widely employed in the lead discovery process.
Access to molecular diversity libraries for screening against targets is
critical to drug discovery. In some instances, the Company's collaborative
partners are providing molecular diversity libraries to support the screening
process. However, the Company is committed to establishing a stand-alone
molecular diversity capability for its programs, and is actively building
strategically defined libraries of synthetic compounds and natural product
extracts for this purpose. The Company's natural products program provides
access to broad-based molecular diversity not possible in synthetic compound
libraries alone. The Company believes that both its libraries contain
significant structural diversity. These libraries currently provide more than
50,000 samples
24
<PAGE> 27
for high-throughput screening. The Company is in the process of expanding its
libraries to more than 100,000 samples by the end of 1996.
The Company's discovery and preclinical research activities center on two
themes: Targeted Antibiotics and Targeted Genomics. The Company's Targeted
Antibiotics programs focus on overcoming bacterial drug resistance, either by
interfering with resistance pathways to potentiate existing antibiotics, or by
developing novel lead compounds which avoid such resistance pathways. The
Company's Targeted Genomics programs utilize bacterial genetics and genomics
approaches to discover inhibitors of novel drug targets for further development
as effective antibiotics.
MICROCIDE'S RESEARCH PROGRAMS
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------
- ---------------------------------------------------
- ----------------
- -------------
<TABLE>
<S> <C> <C> <C> <C>
CURRENT
PROGRAM PROGRAM GOAL STAGE(1) PARTNER
- --------------------------------------------------------------------------------------------------------
TARGETED ANTIBIOTICS
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
Gram-Positive Program
Novel Beta-lactams Novel antibiotics for treatment of Gram- Candidate Ortho/J&J
positive bacteria, including resistant Selection
strains (MRS, VRE and penicillin-resistant
Streptococcus pneumoniae)
- --------------------------------------------------------------------------------------------------------
Antibiotic Potentiators which restore efficacy to Drug Ortho/J&J
Potentiators existing classes of antibiotics through Design
inhibition of resistance mechanisms
- --------------------------------------------------------------------------------------------------------
Signal Transduction Anti-virulence adjunct to existing Leads Ortho/J&J
antibiotics for treatment of resistant and Identified
susceptible staphylococci
- --------------------------------------------------------------------------------------------------------
Efflux Pump Program Potentiators for use with existing Drug Daiichi
quinolones against resistant Gram-negative Design
bacteria, including Pseudomonas aeruginosa
- --------------------------------------------------------------------------------------------------------
Cell Wall Program
First Generation Narrow-spectrum antibiotics Drug Internal
Design
Second Generation Broad-spectrum antibiotics Drug Internal
Design
- -------------------------
- --------------------------------------------------------------------------------------------------------
TARGETED GENOMICS
- --------------------------------------------------------------------------------------------------------
Essential Genes Program Novel classes of broad- and narrow-spectrum Screening Pfizer
antibiotics
- --------------------------------------------------------------------------------------------------------
Pathogenesis Program Novel anti-virulence or anti-pathogenesis Gene Internal
bacterial therapeutics Identification
- --------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) The Company's preclinical research programs generally consist of the
following stages, listed chronologically:
"Gene Identification" -- development and implementation of methods to
identify appropriate gene targets to be used in screening.
"Screening" -- development and implementation of assay technologies to
identify selective target inhibitors ("leads").
"Leads Identified" -- lead compounds have been identified whose in vitro and
in vivo characteristics are being evaluated in biochemical, microbiological,
pharmacological and toxicological tests for entry into drug design programs.
"Drug Design" -- structure-activity relationships of selected compounds are
being defined and such compounds optimized through medicinal chemistry
efforts.
"Candidate Selection" -- optimized leads are being scaled-up and evaluated
in key efficacy, toxicological and pharmacological tests in the final stage
of preclinical research for selection as clinical development candidates.
25
<PAGE> 28
TARGETED ANTIBIOTICS
Microcide's Targeted Antibiotics programs involve two approaches: (i) the
development of novel antibiotics which overcome bacterial resistance by
interfering with resistance pathways to potentiate existing antibiotics, and
(ii) the development of novel lead compounds which avoid such resistance
pathways. The Company's Targeted Antibiotics programs include the Gram-Positive,
Efflux Pump and Cell Wall programs.
GRAM-POSITIVE PROGRAM
Microcide's Gram-Positive Program is focused on discovering and developing
novel antibiotics and antibiotic potentiators for the treatment of infections
caused by drug-resistant Gram-positive bacteria, including MRS, VRE and
pneumococci. Gram-positive and Gram-negative bacteria have fundamentally
different surface characteristics. These surface properties greatly affect the
ability of an antibiotic to penetrate the bacterium and reach its target site.
As a result, antibiotics that are effective against Gram-positive bacteria are
often less effective against Gram-negative bacteria, and vice versa. The
problematic Gram-positive bacteria targeted by this program cause serious
infections, including endocarditis, osteomyelitis, meningitis, deep-seated soft
tissue infections, bacteremia, complicated urinary tract infections and
pneumonias.
The Gram-Positive Program is being conducted in collaboration with
Ortho/J&J and consists of the following major areas: (i) discovery of
beta-lactam antibiotics with specific efficacy against resistant Gram-positive
bacteria; (ii) discovery of novel antibiotic potentiators of existing
beta-lactams or vancomycin for use against MRS and VRE, respectively; and (iii)
discovery of inhibitors of signal transduction in bacteria.
Novel Beta-lactams
Traditional beta-lactam antibiotics work by inhibiting enzymes
(penicillin-binding proteins, or PBPs) that carry out crucial steps in the
synthesis of the bacterial cell wall. Resistance to beta-lactam antibiotics in
MRS is primarily caused by bacterial production of PBP2a, an enzyme capable of
conducting cell-wall synthesis in the presence of such antibiotics, as well as
by the production of beta-lactamases, which render beta-lactams ineffective.
Microcide's beta-lactam program seeks initially to develop a novel
beta-lactam antibiotic which is beta-lactamase-stable and inhibits PBPs,
including PBP2a, thereby gaining efficacy against MRS. Compounds emerging from
the Company's beta-lactam program are expected to be active against
staphylococci, including MRS, enterococci, including VRE, and possibly other
Gram-positive bacteria. The Company has prepared over 400 new synthetic analogs
and has made advances in drug design, resulting in several leads with desirable
in vitro potency, in vivo efficacy, favorable pharmacokinetics and solubility,
and low toxicity.
Antibiotics developed within this program are expected to be parenterally
administered in the institutional setting to prevent or treat infections caused
by Gram-positive bacteria, including those resistant to other antibiotics. Such
newly developed antibiotics could potentially be clinically adopted for the
following uses: as a single agent following treatment failure in patients with a
documented drug-resistant infection, or empirically as a single agent or in
combination with a broad-spectrum antibiotic to extend coverage to resistant
bacterial strains. The Company believes that the clinical adoption of such
antibiotics could be similar to that of vancomycin as a single agent, or
ceftazidime or an aminoglycoside in combination use for empiric therapy.
The Company, in collaboration with Ortho/J&J, expects to select its first
beta-lactam drug candidate for clinical development in 1996 and enter into
clinical trials during 1997. There can be no assurance that such selection will
occur, or that the Company will begin clinical trials, by such dates, or ever.
The Company has filed patent applications on ten series of lead structures
discovered in this program in the United States and elsewhere. See "Risk
Factors -- Dependence on Collaborative Partners and Others" and "Risk Factors --
Dependence on Proprietary Technology and Unpredictability of Patent Protection."
Antibiotic Potentiation
The loss of utility of an antibiotic class in the treatment of bacteria is
often due to a single, defined resistance pathway, as is the case in MRS and
VRE. The goal of the Company's antibiotic potentiation program is to discover
compounds that directly interfere with methicillin or vancomycin resistance
pathways in these organisms, in order to restore the effectiveness of
beta-lactams or glycopeptides in the treatment of
26
<PAGE> 29
MRS or VRE infections. Microcide has developed novel screening technologies to
discover inhibitors of these pathways, and has discovered leads from these
screens which show desirable characteristics in vitro and in vivo. Several of
the methicillin potentiator leads, tested in combination with a number of
currently marketed beta-lactams, demonstrate control of MRS infection in animal
models at doses where the beta-lactams alone are ineffective.
Potentiators resulting from this program may be developed for use with oral
or parenteral antibiotics, with the goal of creating a combination product which
either targets a specific resistance problem (for example, in combination with
an anti-staphylococcal penicillin) or alternatively provides broad-spectrum
empiric coverage (such as in combination with imipenem). The Company believes
that the clinical adoption of such potential products could be similar to that
of vancomycin as a targeted narrow-spectrum potentiator, or
amoxicillin/clavulanate or imipenem as a broad-spectrum potentiator.
The Company, in collaboration with Ortho/J&J, is designing compounds based
on methicillin potentiation leads, and expects to select its first candidate
from this program in 1997 for clinical development. There can be no assurance
that such selection will occur in 1997 or ever. The Company has filed patent
applications covering two series of lead structures originating from this
program in the United States. See "Risk Factors -- Dependence on Collaborative
Partners and Others" and "Risk Factors -- Dependence on Proprietary Technology
and Unpredictability of Patent Protection."
Inhibitors of Bacterial Signal Transduction
Signal transduction is a mechanism by which a cell senses and responds to
changes in its external environment and which occurs when a sensor protein,
usually at the cell surface, receives and transmits a signal that results in the
expression of a specific set of genes. A wide range of bacteria use signal
transduction systems to regulate a variety of cellular functions. For example,
it is generally believed that disease-causing bacteria are able to use such
mechanisms to establish infections in different sites of the body. Signal
transduction systems are also utilized by staphylococci and enterococci to
express methicillin and vancomycin resistance. Elements of these regulatory
systems are conserved within bacteria and across bacterial species, but are
dissimilar to signal transduction mechanisms found in mammalian cells. For that
reason, the Company believes that bacterial-specific signal transduction
inhibitors can be developed into effective therapeutic agents.
Microcide is initially focused on a specific signal-transduction system in
staphylococci, which controls the expression of a large number of bacterial
toxins and surface proteins produced during infection. The Company has developed
screening and lead evaluation technologies and has identified compounds which
block signal transduction control in staphylococci. These compounds are
currently undergoing biochemical, microbiological and pharmacological testing in
vitro and in vivo.
Any products resulting from the bacterial signal transduction program will
represent a new therapeutic approach, in that they will be anti-pathogenesis or
anti-virulence agents. Potential initial products will be targeted at
Gram-positive bacteria, and are expected to be used independently or in
combination to enhance the potency of existing antibiotics in particularly
difficult-to-treat clinical situations, such as deep-seated soft tissue
infections, endocarditis, osteomyelitis and meningitis.
The Company, in collaboration with Ortho/J&J, is in the process of
selecting lead compounds for drug design efforts. The Company has filed a patent
application covering the screening technology and is preparing to file a patent
application in the United States covering four series of lead structures
discovered to date in this program. See "Risk Factors -- Dependence on
Collaborative Partners and Others" and "Risk Factors -- Dependence on
Proprietary Technology and Unpredictability of Patent Protection."
EFFLUX PUMP PROGRAM
The high intrinsic resistance of Pseudomonas aeruginosa to many
antibiotics, including quinolones, has generally been attributed to the
impermeable outer membrane of this Gram-negative bacterium. Recent information,
however, indicates that this intrinsic resistance is due to the combined effects
of low membrane permeability and the production of membrane proteins (efflux
pumps) which bind to antibiotics of many different types as they enter the
bacterial cell and eject (efflux) them from the bacterium.
27
<PAGE> 30
The Company believes that the combination of bacterial efflux pump
inhibitors with existing antibiotics could increase the susceptibility of
Gram-negative bacteria like pseudomonas to such antibiotics and could increase
the activity of such antibiotics in bacteria expressing efflux pump-mediated
drug resistance ("MDR"). The Company has established a genetics and molecular
biology program which focuses on bacterial efflux systems, and has developed
novel screening and lead evaluation technologies which have resulted in the
discovery of lead compounds with the desired potency, specificity for bacterial
efflux pumps, and low toxicity in mammalian cells. Drug design efforts are being
pursued to identify metabolically stable and pharmacologically suitable efflux
pump inhibitors for selection as clinical development candidates. The Company
expects that any products resulting from this effort will be combined with
Daiichi's oral and parenteral quinolone antibiotics to increase their
effectiveness against Gram-negative bacteria and to overcome efflux
pump-mediated MDR in pseudomonas and other bacteria. The Company believes that
the clinical adoption of such antibiotic/inhibitor combinations could be similar
to that of Daiichi's levofloxacin and other quinolones.
The Company, in collaboration with Daiichi, is designing compounds based on
efflux pump inhibitor leads and expects by mid-1997 to select its first
candidate from this program for clinical development. There can be no assurance
that such selection will occur by such date, or ever. The Company has filed
patent applications related to the initial series of lead structures originating
from this program in the United States and is preparing patent applications
relating to four other series of lead structures. See "Risk Factors --
Dependence on Collaborative Partners and Others" and "Risk Factors -- Dependence
on Proprietary Technology and Unpredictability of Patent Protection."
CELL WALL PROGRAM
Enzymes involved in bacterial cell wall biosynthesis represent attractive
and proven targets for antibiotic development. Many inhibitors of this process,
which is essential and unique to bacteria, have been identified. However,
relatively few of these inhibitors have been developed into commercially usable
antibiotic classes. Microcide's Cell Wall Program is based on unexploited
structural classes of known inhibitors which fall outside existing cell wall
drug classes, and for that reason are not expected to be subject to existing
resistance mechanisms.
One class of inhibitors currently under research at Microcide shows potent
activity against Pseudomonas aeruginosa and certain other bacteria, and is well
tolerated and non-toxic in animal studies. The Company is working toward the
design of a first-generation drug candidate, to be administered orally or
parenterally, and to be targeted against specific, difficult-to-treat
infections. The Company believes that the clinical adoption of the Company's
potential first-generation product from this program could be similar to that of
existing narrow-spectrum antibiotics such as aztreonam, a Gram-negative
beta-lactam. The Company is also pursuing a second-generation antibiotic with an
expanded spectrum of activity which could include Gram-negative and possibly
Gram-positive bacteria.
The Company has retained all commercial rights relating to this program and
expects to fund it internally. The Company expects to select in the second half
of 1997 the initial first-generation candidate for clinical development. There
can be no assurance that such selection will occur by such date, or ever. The
Company is preparing patent applications in the United States related to two
series of lead structures originating from this program. See "Risk
Factors -- Dependence on Collaborative Partners and Others" and "Risk
Factors -- Dependence on Proprietary Technology and Unpredictability of Patent
Protection."
TARGETED GENOMICS
Microcide believes that it has developed a unique approach to antibiotic
research using bacterial genetics as a foundation for drug discovery. The
Company believes that this approach will yield a large number of relevant novel
drug targets that in turn are expected to lead to the development of new classes
of antibiotics. The Company's strategy is to target its gene discovery efforts
to the pharmaceutically relevant portion of bacterial genomes, by identifying
genes that are essential to bacterial viability in vitro (the Essential Genes
Program) or to bacterial pathogenicity in vivo (the Pathogenesis Program). These
target genes, once identified, are incorporated into the Company's
high-throughput screening systems to identify compounds for further development.
The Company believes that its targeted genomics approach may also be applied to
other cellular systems, such as other microbial pathogens or mammalian cells.
The Company believes that this
28
<PAGE> 31
approach offers significant advantages over traditional pharmaceutical company
approaches, as well as the more recent bacterial genomic sequencing approaches.
Traditional approaches to antibiotic drug discovery have centered on
biochemically defined targets. In such approaches, screening assays are
developed based on selectively chosen enzyme or receptor targets. Appropriately
designed assays can be highly effective but have several significant drawbacks.
First, such an approach is limited in its application since it requires
pre-existing data with respect to the function or mechanism of an identified
target, and only identifies inhibitors of that specific target. Since many
targets lack such information, the range of targets that can be employed to find
inhibitors is limited. Second, target-specific assays have relatively high
set-up times and costs. Third, these techniques often employ an extracellular
biochemical approach which may identify compounds that are excellent inhibitors
of essential biochemical enzymes, but subsequently prove not to be good
antibiotic candidates because sufficient concentrations within the bacterium are
not achieved at the target site, or for other reasons.
Drug discovery efforts have recently employed whole-genome sequencing
approaches to antibiotic target identification. Although such approaches reveal
all of the genetic information in a bacterium, the Company believes that only an
estimated 5% - 10% of the total bacterial genetic material encodes proteins that
are pharmaceutically relevant as drug targets. Genome sequencing approaches can
only address gene function through sequence analysis and comparison, and do not
adequately address the issue of the relevance of a particular gene as a drug
target. Thus, while two complete bacterial genomes were sequenced and publicized
in the summer of 1995, considerable research will be necessary to identify the
pharmaceutically relevant target genes from this information, and to develop
screens for potential inhibitors. Such screens will then face many of the same
limitations as traditional screening approaches.
ESSENTIAL GENES PROGRAM
In contrast, Microcide's Essential Genes Program utilizes a targeted
genomic approach to discover the pharmaceutically relevant genes present in
bacterial genomes, and focuses on several important and diverse pathogenic
bacteria. The Company has created unique molecular tools and approaches in
bacterial molecular genetics, which allow it to create and use gene mutants to
quickly and directly clone essential bacterial genes. These same mutants are
then used to characterize and prioritize drug targets. This targeted genomics
approach accelerates the entire discovery process by focusing on the relevant
portions of the genome and bypassing the task of sequencing and characterizing
irrelevant portions of the genome.
To date, Microcide has identified approximately 80 of the estimated
150 - 200 essential genes in its bacterial genomic systems. Because essential
genes are generally common among different bacteria, the Company believes that a
number of the drug targets identified to date could lead to the discovery of new
classes of broad-spectrum antibiotics. The Company has filed patent applications
covering approximately 55 essential genes and related screening methods in the
United States.
The Company has also created a multi-channel screening process that it
believes will accelerate antibiotic discovery in several important ways.
Foremost is the ability to move directly and rapidly from gene identification to
drug screen using gene mutants. Using genetic rather than biochemical assays,
many targets can be utilized simultaneously to evaluate compounds, as opposed to
the traditional screening approach which utilizes few targets in single assay
format. This multi-channel process creates a multi-dimensional profile or
"phenoprint" of each compound tested. Both multiple targets and multiple
biological properties of compounds can thus be simultaneously evaluated during
primary screening. Using defined testing algorithms and statistical analyses of
resulting data, many compounds are tested in high-throughput mode. Collectively,
the resulting compound phenoprints, along with other data on the properties of
the genes and the compounds, form a database of information correlating
biological effects of compounds and their structures to the various targets
early in the development process. This facilitates and enhances the selection of
optimal hits and most promising leads prior to commitment to drug design
efforts.
29
<PAGE> 32
[GRAPHIC APPEARS HERE]
[Narrative description: Graphic showing the Company's targeted genomic
approach and multi-channel screening process.]
The Company's multi-channel screening method has the following benefits:
(i) it is broadly applicable to all of the pharmaceutically relevant essential
genes identified; (ii) it identifies compounds that can enter cells and effect
inhibitory action, given its whole-cell based nature; (iii) it utilizes more
sensitive assays than traditional whole-cell screens, allowing for the
identification of a broader range of potential drug candidates; and (iv) it can
be applied even before the novel genes or biochemical targets are fully
characterized. The database created by the Company's Essential Genes Program is
expected to grow in information content and ability to discriminate among
compounds as each new gene or compound is evaluated and added to the database.
The Company believes this database represents a significant competitive
advantage in antibiotic development.
The Company, in collaboration with Pfizer, is implementing its essential
gene and multi-channel screening systems to discover and develop multiple new
antibiotic drug classes. In addition, Microcide and Pfizer will select between
four and six essential gene targets of high interest for biochemical screening.
The molecular diversity libraries of the Company and Pfizer will be selectively
applied to these screening efforts. Potential products resulting from the drug
design efforts of this program are expected to constitute new classes of
broad-spectrum antibiotics. The Company believes that the clinical adoption of
such compounds could be similar to that of clarithromycin, ciprofloxacin or
imipenem. In addition to patent applications covering essential genes, the
Company has filed patent applications covering its multi-channel screening
technology in the United States and elsewhere. See "Risk Factors -- Dependence
on Proprietary Technology and Unpredictability of Patent Protection."
30
<PAGE> 33
PATHOGENESIS PROGRAM
Bacterial pathogenesis is a complex process by which bacteria enter the
host, locate and establish an appropriate growth niche, evade host defenses,
circumvent host clearing mechanisms, and amplify at the site of infection.
Specialized bacterial genes are required for survival in the host that are not
required for growth in the laboratory environment. Damage to the host arises
from bacterial products produced during growth, and from the bacterium's ability
to modify and destroy host tissue. The bacterial gene products causing this
damage contribute to bacterial virulence. The Company believes that cellular
functions underlying these processes of pathogenicity and virulence are
conserved among many disease-causing bacteria, and inhibitors of these cellular
functions may be broadly acting and detrimental to the bacterium and its
disease-causing ability.
Microcide's Pathogenesis Program is targeted to the genetic determinants
underlying bacterial pathogenicity and virulence. The genetic basis of bacterial
pathogenicity is largely unknown and unexplored for drug targeting. The Company
has developed novel molecular and genetic methods to identify pathogenesis gene
targets in vitro and in animal models, and to genetically assess the effect of
target inhibition in vivo. These methods are being employed to create a library
of such genes for drug discovery research. To date, the Company has identified
37 pathogenesis gene mutants, and cloned and sequenced at least eight potential
pathogenesis gene targets, which are being examined in vitro and in animal
systems. Specific screens will be devised and implemented to identify inhibitors
of the most attractive pathogenesis gene targets, in which inhibition of the
target function will prevent the bacterium's proliferation or virulence in vivo.
Inhibition of genetic processes underlying pathogenesis is expected to
constitute a novel approach to the prevention and treatment of bacterial
disease, and potentially offer therapeutic advantages over traditional
antibiotic therapy.
The Company has retained all commercial rights to this program and intends
to fund this program internally. The Company has filed patent applications in
the United States covering methods for discovery and characterization of
pathogenesis genes.
COLLABORATIVE AGREEMENTS
The Company's strategy is to enter into collaborations with major
pharmaceutical companies to develop its initial products. Such collaborations
are expected to provide the Company with funding, discovery technologies,
research staffing, access to molecular diversity, and development and
commercialization capabilities. To date the Company has entered into
Collaborative Agreements with three major pharmaceutical companies: Ortho/J&J
with regard to the Gram-Positive Program; Daiichi with regard to the Efflux Pump
Program; and Pfizer with regard to the Essential Genes Program. The Company has
certain rights to co-promote in North America products developed pursuant to
these collaborations.
ORTHO/J&J -- GRAM-POSITIVE PROGRAM
In October 1995, Microcide and Ortho/J&J entered into the Ortho/J&J
Agreements pursuant to which they agreed to collaborate to discover and develop
certain antibiotics and antibiotic potentiators targeted at Gram-positive
bacteria. The term of the Ortho/J&J Agreements is three years, subject to
Ortho/J&J's right to earlier terminate the Ortho/J&J Agreements on six months
prior written notice, and with Ortho/J&J having an option to extend the term for
an additional one-year period. Ortho/J&J has made a $3.0 million up-front
license payment to the Company and an affiliate of Ortho/J&J has made a $5.0
million equity investment in the Company. Ortho/J&J is obligated to provide the
Company with $3.5 million per year in research support payments throughout the
term of the Ortho/J&J Agreements. Microcide may also receive from Ortho/J&J
milestone payments of up to $16.5 million for the first product and $15.5
million for each subsequent product upon the achievement of product development
milestones and, in addition, royalties on the worldwide sale of drugs resulting
from the collaboration. The Ortho/J&J Agreements provide Ortho/J&J with
exclusive worldwide rights to products developed during the collaboration. The
development, manufacture and sale of drugs resulting from the collaboration will
be conducted by Ortho/J&J, provided that Microcide has the right to undertake
certain co-promotion activity in North America subject to Ortho/J&J's approval.
There can be no assurance that any potential products will be discovered during
the collaboration or that, if discovered, Ortho/J&J will elect to proceed with
the development of such potential products. As a result,
31
<PAGE> 34
there can be no assurance that any of the milestone or royalty payments
contemplated by the Ortho/J&J Agreements will be made. See "Targeted
Antibiotics -- Gram-Positive Program."
DAIICHI -- EFFLUX PUMP PROGRAM
In November 1995, Microcide and Daiichi entered into the Daiichi Agreement
pursuant to which they agreed to collaborate to discover and develop antibiotics
and antibiotic potentiators, acting through inhibition of the efflux pump
mechanism, primarily targeted at pseudomonas. The term of the research program
under the Daiichi Agreement is two years and nine months commencing as of July
1, 1995 subject to Daiichi's right to earlier terminate the research program
under the Daiichi Agreement after July 1, 1997 upon six months prior notice, and
with Daiichi having an option to extend the term of the research program under
the Daiichi Agreement for an additional six months or one year. Daiichi is
obligated to provide research support funding to Microcide of $3.0 million for
the first nine months and $3.5 million for each subsequent year during the term
of the research program. Daiichi has the right to enter into a license agreement
(the "Daiichi License Agreement") for exclusive worldwide rights to products
developed during the collaboration. Pursuant to the Daiichi License Agreement,
Microcide is entitled to receive from Daiichi milestone payments of up to $13.0
million for each product developed during the collaboration upon the achievement
of certain drug development milestones and, in addition, royalties on the
worldwide sale of drugs resulting from the collaboration. The development,
manufacture and sale of drugs resulting from the collaboration will be conducted
by Daiichi subject to Microcide's right to co-promote such drugs in North
America, for which Microcide shall receive reasonable compensation. There can be
no assurance that any potential products will be discovered during the
collaboration or that, if discovered, Daiichi will elect to proceed with the
development of such potential products. As a result, there can be no assurance
that any of the milestone or royalty payments contemplated by the Daiichi
License Agreement will be made. See "Targeted Antibiotics -- Efflux Pump
Program."
PFIZER -- ESSENTIAL GENES PROGRAM
In March 1996, Microcide and Pfizer entered into the Pfizer Agreements
pursuant to which they agreed to collaborate to implement genetics-based
screening technology to identify and subsequently develop antibacterial
products. The term of the Pfizer Agreements is five years, subject to Pfizer's
right to earlier terminate after February 1999 with six months prior written
notice. Pfizer has made a $1.0 million up-front license payment to the Company
and a $5.0 million equity investment in the Company. Pfizer is obligated to
provide Microcide with $4.2 million per year in research support payments during
the term of the Pfizer Agreements. Microcide may also receive from Pfizer
milestone payments of up to $32.5 million for each product developed during the
collaboration upon the achievement of product development milestones and, in
addition, royalties on the worldwide sale of drugs resulting from the
collaboration. The Pfizer Agreements provide Pfizer with exclusive worldwide
rights to products developed during the collaboration. The development,
manufacture and sale of drugs resulting from the collaboration will be conducted
by Pfizer, subject to Microcide's right to co-promote such products in North
America. There can be no assurance that any potential products will be
discovered during the collaboration or that if discovered, Pfizer will elect to
proceed with the development of such potential product. As a result, there can
be no assurance that any of the milestone or royalty payments contemplated by
the Pfizer Agreements will be made. See "Targeted Genomics -- Essential Genes
Program."
The Company is dependent on its collaborative partners for drug
development, obtaining regulatory approvals, funding and other resources for
products emerging from these collaborations. See "Risk Factors -- Dependence on
Collaborative Partners and Others" and "Risk Factors -- Future Capital Needs;
Uncertainty of Additional Funding."
PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS
Protection of the Company's proprietary compounds and technology is
essential to the Company's business. The Company's policy is to seek, when
appropriate, protection for its lead compounds, gene discoveries, screening
technologies and certain other proprietary technology by filing patent
applications in the
32
<PAGE> 35
United States and other countries. The Company has filed approximately 30 patent
applications in the United States, in addition to applications filed in other
countries, covering its inventions. To date, the Company has not been issued any
United States or foreign patents. See "Risk Factors -- Dependence on Proprietary
Technology and Unpredictability of Patent Protection."
Patent law as it relates to inventions in the biotechnology field is still
evolving, and involves complex legal and factual questions for which legal
principles are not firmly established. Accordingly, there can be no assurance
that patents will be granted with respect to any of the Company's pending patent
applications or with respect to any patent applications filed by the Company in
the future. Moreover, because patent applications in the United States are
maintained in secrecy until patents issue, because patent applications in
certain other countries generally are not published until more than eighteen
months after they are filed, because publication of technological developments
in the scientific or patent literature often lags behind the date of such
developments, and because searches of prior art may not reveal all relevant
prior inventions, the Company cannot be certain that it was the first to invent
the subject matter covered by its patent applications or that it was the first
to file patent applications for such inventions.
The commercial success of the Company will depend in part on not infringing
patents or proprietary rights of others. There can be no assurance that the
Company will be able to obtain a license to any third-party technology it may
require to conduct its business or that if obtainable, such technology can be
licensed at reasonable cost. Failure by the Company to obtain a license to
technology that it may require to utilize its technologies or commercialize its
products may have a material adverse effect on the Company. In some cases,
litigation or other proceedings may be necessary to defend against or assert
claims of infringement, to enforce patents issued to the Company, to protect
trade secrets, know-how or other intellectual property rights owned by the
Company, or to determine the scope and validity of the proprietary rights of
third parties. Any potential litigation could result in substantial costs to and
diversion of resources by the Company and could have a material adverse impact
on the Company. There can be no assurance that any of the Company's issued or
licensed patents would ultimately be held valid or that efforts to defend any of
its patents, trade secrets, know-how or other intellectual property rights would
be successful. An adverse outcome in any such litigation or proceeding could
subject the Company to significant liabilities, require the Company to cease
using the subject technology or require the Company to license the subject
technology from the third party, all of which could have a material adverse
effect on the Company's business.
In addition to patent protection, the Company relies upon trade secrets,
proprietary know-how and continuing technological advances to develop and
maintain its competitive position. To maintain the confidentiality of its trade
secrets and proprietary information, the Company requires its employees,
consultants and collaborative partners to execute confidentiality agreements
upon the commencement of their relationships with the Company. In the case of
employees, the agreements also provide that all inventions resulting from work
performed by them while in the employ of the Company will be the exclusive
property of the Company. There can be no assurance, however, that these
agreements will not be breached, that the Company would have adequate remedies
in the event of any such breach or that the Company's trade secrets or
proprietary information will not otherwise become known or developed
independently by others. See "Risk Factors -- Dependence on Proprietary
Technology and Unpredictability of Patent Protection."
COMPETITION
The biotechnology and pharmaceutical industries are intensely competitive.
Many companies, including large, multinational pharmaceutical and biotechnology
companies, are actively engaged in activities similar to those of the Company.
Many of these companies may employ in such activities greater financial and
other resources, including larger research and development staffs and more
extensive marketing and manufacturing organizations, than the Company or its
collaborative partners. There are also academic institutions, governmental
agencies and other research organizations that are conducting research in areas
in which the Company is working. See "Risk Factors -- Highly Competitive
Industry."
The Company also expects to encounter significant competition with respect
to the drugs that it and its collaborative partners plan to develop. Companies
that complete clinical trials, obtain required Regulatory Agency approvals and
commence commercial sale of their drugs before their competitors may achieve a
significant competitive advantage. In order to compete successfully, the
Company's goal is to obtain patent
33
<PAGE> 36
protection for its potential products and to make those available selectively to
pharmaceutical companies through collaborative and licensing arrangements. There
can be no assurance, however, that the Company will obtain patents covering its
potential products that protect them against competitors. Moreover, there can be
no assurance that the Company's competitors will not succeed in developing
technologies and drugs that are more effective than those developed by the
Company and its collaborative partners or that would render technology or drugs
of the Company and its collaborators less competitive or obsolete. See
"-- Patents, Proprietary Technology and Trade Secrets."
GOVERNMENT REGULATION
The development, manufacture and marketing of drugs developed by the
Company or its collaborative partners are subject to regulation by numerous
governmental agencies in the United States and in other countries. The FDA and
comparable Regulatory Agencies in other countries impose mandatory procedures
and standards for the conduct of certain preclinical testing and clinical trials
and the production and marketing of drugs for human therapeutic use. Product
development and approval of a new drug are likely to take a number of years and
involve the expenditure of substantial resources. See "Risk Factors -- Stringent
Government Regulation and Need For Product Approvals."
The steps required by the FDA before new drugs may be marketed in the
United States include: (i) preclinical studies; (ii) the submission to the FDA
of a request for authorization to conduct clinical trials on an investigational
new drug (an "IND"); (iii) adequate and well-controlled clinical trials to
establish the safety and efficacy of the drug for its intended use; (iv)
submission to the FDA of a new drug application (an "NDA"); and (v) review and
approval of the NDA by the FDA before the drug may be shipped or sold
commercially.
In the United States, preclinical testing includes both in vitro and in
vivo laboratory evaluation and characterization of the safety and efficacy of a
drug and its formulation. Laboratories involved in preclinical testing must
comply with FDA regulations regarding Good Laboratory Practices. Preclinical
testing results are submitted to the FDA as part of the IND and are reviewed by
the FDA prior to the commencement of human clinical trials. Unless the FDA
objects to an IND, the IND becomes effective 30 days following its receipt by
the FDA. There can be no assurance that submission of an IND will result in the
commencement of human clinical trials.
Clinical trials, which involve the administration of the investigational
drug to healthy volunteers or to patients under the supervision of a qualified
principal investigator, are typically conducted in three sequential phases,
although the phases may overlap with one another. Clinical trials must be
conducted in accordance with the FDA's Good Clinical Practices under protocols
that detail the objectives of the study, the parameters to be used to monitor
safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND. Further, each clinical study must be
conducted under the auspices of an independent Institutional Review Board (the
"IRB") at the institution where the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution. Compounds must be formulated
according to the FDA's Good Manufacturing Practices ("GMP").
Phase I clinical trials represent the initial administration of the
investigational drug to a small group of healthy human subjects or, more rarely,
to a group of selected patients with the targeted disease or disorder. The goal
of Phase I clinical trials is typically to test for safety (adverse effects),
dose tolerance, absorption, biodistribution, metabolism, excretion and clinical
pharmacology and, if possible, to gain early evidence regarding efficacy.
Phase II clinical trials involve a small sample of the actual intended
patient population and seek to assess the efficacy of the drug for specific
targeted indications, to determine dose tolerance and the optimal dose range and
to gather additional information relating to safety and potential adverse
effects.
Once an investigational drug is found to have some efficacy and an
acceptable safety profile in the targeted patient population, Phase III clinical
trials are initiated to establish further clinical safety and efficacy of the
investigational drug in a broader sample of the general patient population at
geographically dispersed study sites in order to determine the overall
risk-benefit ratio of the drug and to provide an adequate basis for
34
<PAGE> 37
all physician labeling. The results of the research and product development,
manufacturing, preclinical testing, clinical trials and related information are
submitted to the FDA in the form of an NDA for approval of the marketing and
shipment of the drug.
Timetables for the various phases of clinical trials and NDA approval
cannot be predicted with any certainty. The Company, its collaborative partners
or the FDA may suspend clinical trials at any time if it is believed that
individuals participating in such trials are being exposed to unacceptable
health risks. Even assuming that clinical trials are completed and that an NDA
is submitted to the FDA, there can be no assurance that the NDA will be reviewed
by the FDA in a timely manner or that once reviewed, the NDA will be approved.
The approval process is affected by a number of factors, including the severity
of the targeted indications, the availability of alternative treatments and the
risks and benefits demonstrated in clinical trials. The FDA may deny an NDA if
applicable regulatory criteria are not satisfied, or may require additional
testing or information with respect to the investigational drug. Even if initial
FDA approval is obtained, further studies, including post-market studies, may be
required in order to provide additional data on safety and will be required in
order to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested. The FDA
will also require post-market reporting and may require surveillance programs to
monitor the side effects of the drug. Results of post-marketing programs may
limit or expand the further marketing of the drug. Further, if there are any
modifications to the drug, including changes in indication, manufacturing
process or labeling, an NDA supplement may be required to be submitted to the
FDA.
Each manufacturing establishment for new drugs is also required to receive
some form of approval by the FDA. Among the conditions for such approval is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to GMP, which must be followed at all times. In
complying with standards set forth in these regulations, manufacturers must
continue to expend time, monies and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject to inspections by or under the authority
of the FDA and may be subject to inspections by foreign and other federal, state
or local agencies.
There can be no assurance that the regulatory framework described above
will not change or that additional regulations will not arise that may affect
approval of or delay an IND or an NDA. Moreover, because the Company's present
collaborative partners are, and it is expected that the Company's future
collaborative partners may be, primarily responsible for preclinical testing,
clinical trials, regulatory approvals, manufacturing and commercialization of
drugs, the ability to obtain and the timing of regulatory approvals are not
within the control of the Company.
Prior to the commencement of marketing a product in other countries,
approval by the Regulatory Agencies in such countries is required, whether or
not FDA approval has been obtained for such product. The requirements governing
the conduct of clinical trials and product approvals vary widely from country to
country, and the time required for approval may be longer or shorter than the
time required for FDA approval. Although there are some procedures for unified
filings for certain European countries, in general, each country has its own
procedures and requirements.
The Company is also subject to regulation under other federal laws and
regulation under state and local laws, including laws relating to occupational
safety, laboratory practices, the use, handling and disposition of radioactive
materials, environmental protection and hazardous substance control. Although
the Company believes that its safety procedures for handling and disposing of
radioactive compounds and other hazardous materials used in its research and
development activities comply with the standards prescribed by federal, state
and local regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of any such accident,
the Company could be held liable for any damages that result and any such
liability could exceed the resources of the Company.
SCIENTIFIC CONSULTANTS
The Company has consulting arrangements with a number of leading academic
scientists and clinicians who serve as members of its scientific advisory board
("SAB") or as consultants to the SAB and management. Many of these individuals
are experts in the fields of bacterial pathogenesis, cellular biochemis-
35
<PAGE> 38
try, bacterial genetics and genomics, medicinal chemistry, host-pathogen
signaling and clinical infectious disease. The consultants bring unique insight
into product selection, access to leading academic research in molecular biology
and microbial pathogenesis, and significant experience in clinical trial design
and patient care.
Scientific advisory board members attend periodic SAB meetings as well as
certain project meetings on an ad hoc basis and are frequently contacted by the
Company's scientific staff and management for advice. Members of the SAB
generally provide approximately 10 days of consulting services per year. Members
of the SAB are paid fixed fees on a quarterly basis and per diem fees and travel
expenses for their attendance at SAB meetings. Other scientific consultants are
paid fixed fees for their services on a monthly or quarterly basis.
Many of the Company's consultants, including several of those identified
below, have purchased shares of Common Stock and have written contracts with the
Company pursuant to which they are required to provide to the Company a minimum
number of days per year of consulting services, typically 8 - 10 days. In 1995,
the Company paid its consultants approximately $300,000 in the aggregate. In
1994, such payments aggregated approximately $260,000.
None of the consultants is an employee of the Company. Most of the
consultants have other commitments to, or consulting or advisory contracts with,
their employers and other institutions.
The Company's consultants include the following individuals:
Sydney Brenner, Ph.D., is Honorary Professor of Genetic Medicine in the
Department of Medicine at the University of Cambridge Clinical School. He is
known for his research in molecular genetics and particularly for his work on
the genetic code and on the transfer of information from DNA to proteins. In the
1960's, he was one of the pioneers in the area of the molecular biology of
multicellular organisms, establishing the nematode worm, Caenorhabditis elegans,
as a model for the genetic and cellular basis of development and behavior. Dr.
Brenner was formerly Director of the Laboratory of Molecular Biology in
Cambridge, and a member of the Scripps Research Institute in La Jolla,
California.
Henry Chambers, M.D., is Chief of the Division of Infectious Disease and
Director of the Microbial Pathogenesis Unit at University of California, San
Francisco Hospital and San Francisco General Hospital. He is also an Associate
Professor of Medicine at University of California, San Francisco. Dr. Chambers
is an expert in clinical infectious diseases, serving as Co-Chairman of San
Francisco General Hospital's Infection Control Committee and Chairman of the
Antibiotic Advisory Committee of Pharmacy and Therapeutics. Dr. Chambers has
published widely, and is a member of the editorial board of Antimicrobial Agents
and Chemotherapy.
Burton G. Christensen, Ph.D., was formerly Senior Vice President,
Chemistry, of the Merck Research Laboratories. Dr. Christensen holds over 180
issued United States patents. Dr. Christensen received the Thomas Alva Edison
Patent Award for his discovery of cefoxitin (Mefoxin), and was an inventor of
imipenem (Primaxin). He is a recipient of the Chemical Pioneer Award by the
American Institute of Chemistry for his development of novel synthetic
methodology in beta-lactam chemistry, and led programs at Merck responsible for
the discovery of ivermectin (Ivomec), an animal health product, PedVaxHIB, a
conjugate vaccine for the prevention of H. influenza, and finasteride (Proscar),
for the treatment of benign prostatic hypertrophy.
Patrice Courvalin, M.D., is a Professor at the Pasteur Institute, where he
directs the French National Reference Center for Antibiotics and is the head of
the Antibacterial Agents Unit. He is an internationally recognized expert in the
genetics and biochemistry of antibiotic resistance. His work has defined the
molecular mechanisms of the evolution, dissemination and function of antibiotic
resistance genes, which has led to a revision of the dogma on natural
dissemination of antibiotic resistance. Dr. Courvalin has received numerous
awards and honors including the Jacques Monod Award of the Foundation de France,
the Louis Garrod award of the British Society for Antimicrobial Chemotherapy and
the Hamao Umezawa award of the International Society for Chemotherapy for his
work on antibiotic resistance.
Julian Davies, Ph.D., F.R.S., is Professor and the Head of the Department
of Microbiology and Immunology and Director of the West-East Center at the
University of British Columbia. He has been actively engaged in studies of
antibiotic mode-of-action and resistance mechanisms for more than 25 years. He
received the Hoechst-Roussel Prize for studies of antimicrobial agents and
numerous other awards for his
36
<PAGE> 39
work in this field. He was the first to identify the mechanism-of-action and
resistance of the aminoglycosides. Dr. Davies was formerly Head of the Microbial
Engineering Unit at the Pasteur Institute in Paris, and President and Research
Director of Biogen.
Stanley Falkow, Ph.D., is Professor of Microbiology and Immunology and
Medicine at Stanford University School of Medicine. Dr. Falkow is recognized
internationally for his research related to the molecular mechanisms of
bacterial pathogenesis. Dr. Falkow has been elected to the National Academy of
Sciences and to the American Academy of Arts and Sciences. He is a recipient of
the Squibb Award (Infectious Diseases Society of America), the Becton Dickinson
Award (American Society for Microbiology), and the Paul Ehrlich-Ludwig
Darmstaedter Prize. He has served on the editorial boards of Infection and
Immunology, Molecular Microbiology, the Journal of Infectious Diseases and the
Journal of Bacteriology. Dr. Falkow formerly held faculty appointments at
University of Washington, Georgetown University and Walter Reed Army Institute
of Research.
Robert Moellering, Jr., M.D., is the Shields Warren-Mallinckrodt Professor
of Medical Research at Harvard University Medical School and Physician-in-Chief
at the New England Deaconess Hospital, where he serves as Chairman of the
Department of Medicine. Dr. Moellering is an internationally recognized expert
in clinical infectious diseases and in research on the mechanism of action and
resistance to antimicrobial agents. Dr. Moellering is the recipient of the
Garrod Medal from the British Society for Antimicrobial Chemotherapy, the
Hoechst-Roussel Award from the American Academy of Microbiology and the Feldman
Award from the Infectious Diseases Society of America for which he is a past
President. He is Editor-in-Chief Emeritus of Antimicrobial Agents and
Chemotherapy, Editor of Infectious Disease Clinics of North America and Editor
of the European Journal of Clinical Microbiology and Infectious Diseases.
Hiroshi Nikaido, M.D., Ph.D., is Professor of Biochemistry and Molecular
Biology at University of California, Berkeley. Dr. Nikaido is internationally
recognized for his pioneering work on the structure, function and biosynthesis
of macromolecules that comprise the surface of the bacterial cell. His studies
have dealt mainly with the outer membrane of Gram-negative bacteria; studies of
channel-forming proteins ("porins"); studies of numerous specific transport
channels; and the unusual barrier properties of the lipid bilayer in the
membrane conferred by the presence of lipopolysaccharides. Dr. Nikaido was
awarded the Paul Ehrlich Prize of West Germany for his work on the biosynthesis
of lipopolysaccharides and the Hoechst-Roussel Award of the American Society for
Microbiology for his work on the role of the outer membrane in antibiotic
resistance.
Staffan Normark, M.D., Ph.D., is Professor of Bacteriology at Karolinska
Institute and Head of the Bacteriology Unit at the Swedish Institute for
Infectious Disease Control. Dr. Normark is internationally known for his work on
the molecular mechanisms of microbial attachment to host cells and antibiotic
resistance. He is a member of the Swedish Royal Academy of Sciences, the Nobel
Assembly and the Nobel Committee for Medicine or Physiology. Dr. Normark has
received the Femstrom's Award to Young Scientists (for studies on gene
amplification), the Svedberg's Award in Biochemistry (for studies on bacterial
adhesions), the Axel Hirsch's Award in Bacteriology and the Domagk Award (for
studies on beta-lactams and beta-lactamases), the Goran Gustavsson Award in
Medicine and Jean-Pierre Lecoqc Award in Molecular Medicine. He is a member of
the editorial boards of Molecular Microbiology and Science.
David Relman, M.D., is Assistant Professor of Medicine (Infectious Diseases
and Geographic Medicine) and of Microbiology and Immunology at Stanford
University School of Medicine, and is a staff physician at the Palo Alto
Department of Veterans Affairs Medical Center. Dr. Relman's expertise is in the
molecular mechanisms of bacterial pathogenesis. He discovered two previously
uncharacterized, uncultivated bacterial pathogens, agents of bacillary
angiomatosis and Whipple's disease. Dr. Relman is a recipient of a Biomedical
Scholar Award from the Lucille P. Markey Charitable Trust and the Baxter
Diagnostics MicroScan Young Investigator Award from the American Society for
Microbiology.
Merle Sande, M.D., is Chief of Medical Services at San Francisco General
Hospital, and Professor and Vice Chairman of Medicine at University of
California, San Francisco. Dr. Sande is recognized internationally as a clinical
infectious disease expert, is actively involved in the medical community and has
served on a variety of AIDS and infectious disease advisory boards at the state
and national level. He serves on several editorial boards including AIDS,
Antimicrobial Agents and Chemotherapy, Infectious Diseases in Clinical
37
<PAGE> 40
Practice, Journal of Acquired Immune Deficiency Syndromes and Journal of
Infectious Diseases. He is editor of the premier AIDS textbook and co-editor of
the Sanford Guide to Antimicrobial Therapy. He holds numerous professional
society memberships and honors including the American Association for the
Advancement of Science.
Robert M. Williams, Ph.D., is Professor of Chemistry at Colorado State
University. Dr. Williams is an expert in organic and biological chemistry. He
developed a general method for synthesis of non-proteinogenic amino acids widely
used by industry. He has designed and synthesized numerous antibiotics and
anti-tumor agents, and has advanced synthetic chemistry to probe and discover
molecular mechanisms of small molecule drug interactions with biomacromolecular
targets. Dr. Williams serves on the Editorial Advisory Board of Chemistry and
Biology and is Editor-in-Chief of Amino Acids. His honors and awards include an
Eli Lilly Young Investigator award, a Merck Academic Development Award and an
NIH Research Career Development Award.
EMPLOYEES
As of March 31, 1996, the Company had 68 full-time employees, 27 of whom
hold Ph.D. degrees. Of the Company's full-time employees, approximately 57 are
engaged directly in scientific research and 11 are engaged in general and
administrative functions. The Company believes that its future success will
depend, in part, on its continuing ability to attract, retain and motivate
qualified scientific, technical and managerial personnel. The Company faces
intense competition in this regard from other companies, research and academic
institutions, government entities and other organizations. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. The Company considers its relations with
employees to be good.
FACILITIES
The Company's principal facility consists of approximately 35,500 square
feet of leased laboratory and office space in Mountain View, California under a
lease agreement with an initial term expiring on September 30, 2000. The Company
intends to exercise its option to extend the term of this lease for five
additional years. From the Company's inception through March 31, 1996, the
Company has made capital expenditures aggregating approximately $3.7 million in
constructing and equipping its Mountain View facility. The Company believes that
its facilities are sufficient to accommodate the anticipated research and
administrative needs of the Company through the end of 1996. Thereafter, the
Company believes that it will be able to secure adequate additional facilities
for its continued operations.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
38
<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------
<S> <C> <C>
James E. Rurka..................... 50 President, Chief Executive Officer and
Director
Keith A. Bostian, Ph.D. ........... 44 Chief Operating Officer and Director
Joseph S. Lacob(1)................. 40 Chairman of the Board of Directors
Hugh Y. Rienhoff, Jr., M.D.(1)..... 44 Director
Jon S. Saxe(1)..................... 59 Director
David Schnell, M.D.(2)............. 35 Director
L. James Strand, M.D.(2)........... 54 Director
John P. Walker(2).................. 47 Director
Matthew J. Hogan................... 36 Chief Financial Officer
Ving J. Lee, Ph.D. ................ 45 Vice President, Medicinal Chemistry and
Preclinical Evaluation
James G. Christenson, Ph.D. ....... 53 Executive Director, Project Management
Molly B. Schmid, Ph.D. ............ 42 Director, Discovery Biology
Scott J. Hecker, Ph.D. ............ 37 Associate Director, Chemistry
May D. Lee, Ph.D. ................. 46 Associate Director, Molecular Diversity
Suzanne Chamberland, Ph.D. ........ 35 Assistant Director, In Vitro Pharmacology
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
James E. Rurka, President, Chief Executive Officer and a Director, joined
the Company in February 1994. From August 1983 to December 1993 he was with
Cetus Corporation and Chiron Corporation where he was most recently President of
the Cetus Oncology Division. Prior to joining Cetus Corporation, Mr. Rurka held
several group marketing and product management positions at Bristol Laboratories
and Schering Laboratories. Mr. Rurka holds a B.A. in English with a minor in
Business from Seton Hall University, and he attended Seton Hall University
Graduate School of Business.
Keith A. Bostian, Ph.D., Chief Operating Officer and a Director, is a
Founder of the Company. Dr. Bostian joined the Company in December 1992. From
June 1987 through December 1992 he was employed at Merck Research Laboratories,
where he was Executive Director of Microbiology and Molecular Genetics. Dr.
Bostian was an Assistant and Adjunct Associate Professor of Biology in the
Division of Biology at Brown University from 1982 to 1990 and was elected to the
American Academy of Microbiology in 1993. Dr. Bostian received a B.A. in Biology
and Chemistry from Augustana College and a Ph.D. in Biochemistry from Queen Mary
College, University of London.
Joseph S. Lacob, Chairman of the Board, has served as a Director of the
Company since December 1992. Mr. Lacob, a Partner with Kleiner Perkins Caufield
& Byers since May 1987, has participated in investments of 33 new life science
companies. He is Chairman of the Board of CellPro, Inc. and he is a Director of
Pharmacyclics, Inc., Heartport and Axion, Inc. and several other life science
companies. Mr. Lacob has served as General Manager for FHP International, a
management consultant with Booz, Allen & Hamilton and a Marketing Manager at
Cetus Corporation. Mr. Lacob received a B.S. in Biochemistry from University of
California, Irvine, an M.P.H. from University of California, Los Angeles and an
M.B.A. from Stanford University Graduate School of Business.
Hugh Y. Rienhoff, Jr., M.D., became a Director of the Company in July 1994.
Dr. Rienhoff is a Partner at New Enterprise Associates, where his focus is on
biopharmaceuticals and health information technology. Prior to joining New
Enterprise Associates in July 1992, Dr. Rienhoff was a member of the faculty in
the Department of Molecular Biology and Genetics at The Johns Hopkins University
School of Medicine from
39
<PAGE> 42
July 1989 through June 1992. Dr. Rienhoff trained in internal medicine and human
genetics at The Johns Hopkins Hospital, and received a B.A. in English and
Biology at Williams College and an M.D. from The Johns Hopkins University.
Jon S. Saxe became a Director of the Company in October 1993. Mr. Saxe
performed consulting services for the Company from August 1993 to July 1995. Mr.
Saxe serves as a Director on several corporate boards, including Protein Design
Labs, Inc., Insite Vision, Inc., ID Biomedical Inc. and InCyte Pharmaceuticals,
Inc. Mr. Saxe has served as President of Protein Design Labs, Inc. since January
1995. He was President of Saxe Associates in Boulder, Colorado from April 1993
to January 1995, and was President of Synergen, Inc. from October 1989 to April
1993. He has over 25 years of experience with Hoffmann-LaRoche Inc. primarily in
the areas of patent law, licensing and corporate development. Mr. Saxe received
a B.S. in Chemical Engineering from Carnegie-Mellon University, a J.D. from
George Washington University School of Law and an LL.M. from New York University
School of Law.
David Schnell, M.D., has served as a Director of the Company since December
1992 and is a Founder of the Company. He has been a partner at Kleiner Perkins
Caufield & Byers since January 1994 where he leads the firm's investments in
health care services and information systems. From August 1987 to December 1993,
he was a marketing and business development executive at Sandoz Pharmaceuticals
Corporation. From January 1992 to December 1993, he managed Sandoz' venture
capital activities and with Avalon Medical Partners founded the Company. Dr.
Schnell is the founding President of HealthScape and serves on the Board of
Directors of Neurocrine Biosciences and several other privately-held companies.
Dr. Schnell received a B.S. in Biological Sciences and an A.M. in Health
Services Research from Stanford University and an M.D. from Harvard University.
L. James Strand, M.D., became a Director of the Company in January 1993.
Dr. Strand joined Institutional Venture Partners as a Consultant in 1987, was
named a Venture Partner of Institutional Venture Partners in 1993 and a General
Partner of Institutional Venture Management VI in 1994. Prior to joining IVP
full time, Dr. Strand was President of Advanced Marketing Decisions, a
biomedical marketing and product development consulting company. Previously, he
was Vice President of Medical Affairs and Director of Marketing Planning at
Syntex Laboratories, Medical Director and Chairman of the Product Assessment
Committee at Alza and CEO and Director of both DDI Pharmaceuticals and
Laserscope. He is currently a Director of Accordant Health Services, Aviron and
Prograft. He was Assistant Professor of Medicine at University of Texas
Southwestern Medical School in Dallas. Dr. Strand holds a B.S., M.A. and M.D.
from University of California, San Francisco and an M.B.A. from Santa Clara
University.
John P. Walker became a Director of the Company in December 1995. He has
been President, Chief Executive Officer and a Director of Arris Pharmaceutical
Corporation since February 1993. From September 1991 to January 1993 he was a
General Partner of Alpha Venture Partners. From June 1986 to January 1991, Mr.
Walker was Chairman, President and Chief Executive Officer of Vitaphore
Corporation, a company which was acquired in April 1990 by Union Carbide
Chemicals and Plastics Company Inc. Following that acquisition, Mr. Walker
served as the latter company's Vice President, BioMaterials Systems from January
1991 to September 1991. From 1971 to 1985, Mr. Walker was employed by American
Hospital Supply Corporation in a variety of general management, sales, and
marketing positions, most recently serving as President of the American Hospital
Company. Mr. Walker received a B.A. from State University of New York at Buffalo
and conducted graduate business studies at Northwestern University Institute for
Management. He serves as a director of several private companies.
Matthew J. Hogan, Chief Financial Officer, joined the Company in May 1996.
Prior to joining the Company, he held various positions since 1986 in the
investment banking group at Merrill Lynch & Co., most recently as a Director
focusing on the biotechnology and pharmaceutical sectors. Mr. Hogan holds a B.A.
in Economics from Dartmouth College and an M.B.A. from the Amos Tuck School of
Business Administration.
Ving J. Lee, Ph.D., Vice President, Medicinal Chemistry and Preclinical
Evaluation, joined the Company in December 1993. He held various positions at
Lederle Laboratories, Division of American Cyanamid, from September 1977 to
December 1993, most recently Head of the Department of Chemistry for Infectious
Diseases and Molecular Biology Research. He was a recipient of the Cyanamid
Scientific Achievement
40
<PAGE> 43
Award in 1981 for research in Natural Products. Dr. Lee received a B.A. in
Chemistry from Ohio State University, Columbus, and an M.S. in Organic Chemistry
and a Ph.D. in Organic Chemistry from University of Illinois, Champaign-Urbana.
James G. Christenson, Ph.D., Executive Director, Project Management, joined
the Company in August 1995. Prior to joining the Company, Dr. Christenson was an
independent consultant from November 1994 to August 1995. Dr. Christenson held a
series of research positions at Hoffmann-LaRoche from June 1968 to November
1994, most recently as International Project Director. He was instrumental in
the discovery and development of Rocephin(R) (ceftriaxone). Dr. Christenson
received a B.S. in Chemistry from Stanford University, an S.M. in Biology from
Massachusetts Institute of Technology and a Ph.D. in Biochemistry from City
University of New York for research at the Roche Institute of Molecular Biology.
Molly B. Schmid, Ph.D., Director, Discovery Biology, joined the Company in
June 1994. Dr. Schmid served as a consultant to the Company from December 1993
to May 1994 prior to joining the Company. She was an Associate Professor of
Biology at University of Houston from January 1994 to August 1995, where she was
on leave from May 1994 to August 1995. Dr. Schmid was Assistant Professor of
Molecular Biology at Princeton University from April 1986 to January 1994. She
is a recipient of the Searles Scholar's Award from The Chicago Community Trust.
Dr. Schmid earned a B.S. in Biology from State University of New York, Albany
and a Ph.D. in Biology from University of Utah.
Scott J. Hecker, Ph.D., Associate Director, Chemistry, joined the Company
in December 1993. From November 1985 to December 1993 he was employed at Pfizer
Inc. Dr. Hecker received a B.A. in Chemistry from Wesleyan University and a
Ph.D. in Chemistry from University of California, Berkeley.
May D. Lee, Ph.D., Associate Director, Molecular Diversity, joined the
Company in May 1994. Prior to joining the Company, Dr. Lee was with American
Cyanamid Co., Medical Research Division, from September 1977 to March 1994. She
was a recipient of the Cyanamid Scientific Achievement Award in 1986. Dr. Lee
received a B.Sc. in Honors Chemistry from University of British Columbia and an
M.S. and a Ph.D. in Organic Chemistry from University of Illinois,
Champaign-Urbana.
Suzanne Chamberland, Ph.D., Assistant Director, In Vitro Pharmacology,
joined the Company in March 1994. From July 1991 to March 1994, Dr. Chamberland
was Assistant Professor at Universite Laval and a Scholar of the Health Research
Foundation of the Pharmaceutical Manufacturer Association of Canada and the
Medical Research Council of Canada. Dr. Chamberland received a B.S. in
Microbiology at Universite de Sherbrooke (Canada), an M.S. in Microbiology and
Immunology at Universite de Montreal (Canada) and a Ph.D. in Medical Science
(Medical Microbiology) from University of Calgary (Canada).
The Company's Restated Certificate provides for a Board of Directors that
is divided into three classes. The directors in Class I hold office until the
first annual meeting of stockholders following this Offering, the directors in
Class II hold office until the second annual meeting of stockholders following
this Offering, and the directors in Class III hold office until the third annual
meeting of stockholders following this Offering (or, in each case, until their
successors are duly elected and qualified or their earlier resignation, removal
from office or death), and, after each such election, the directors in each such
case will then serve in succeeding terms of three years and until their
successors are duly elected and qualified. Officers of the Company serve at the
discretion of the Board of Directors. There are no family relationships among
the Company's directors and executive officers. However, Ving J. Lee, Ph.D. and
May D. Lee, Ph.D., key employees of the Company, are husband and wife.
The Board of Directors currently has an Audit Committee and a Compensation
Committee. The Audit Committee oversees the actions taken by the Company's
independent auditors and reviews the Company's internal financial and accounting
controls and policies. The Compensation Committee is responsible for determining
salaries, incentives and other forms of compensation for officers and other
employees of the Company and administers various incentive compensation and
benefit plans.
DIRECTOR COMPENSATION
Except as described below, members of the Company's Board of Directors do
not receive compensation for their services as directors.
41
<PAGE> 44
Non-employee directors are entitled to participate in the 1996 Director
Option Plan (the "Director Plan"). The Director Plan was adopted by the Board of
Directors in March 1996, and will be submitted to the shareholders for approval
at the Company's 1996 annual stockholders meeting. The Director Plan has a term
of ten years, unless terminated sooner by the Board of Directors. A total of
80,000 shares of Common Stock have been reserved for issuance under the Director
Plan.
The Director Plan provides for the automatic grant of an option (the "First
Option") to purchase 12,000 shares of Common Stock to each non-employee director
who first becomes a non-employee director after the effective date of the
Director Plan, provided that such director was not an employee director of the
Company immediately prior to becoming a non-employee director. Each non-employee
director, whether or not eligible to receive a First Option, shall automatically
be granted an option to purchase 4,000 shares of Common Stock (a "Subsequent
Option") each year on the date of the Company's annual stockholders meeting, if
on such date he or she has served on the Board for at least six months. First
Options and Subsequent Options have terms of ten years. First Options vest and
become exercisable as to 1/6th of the shares subject to the option six months
after the date of grant, and as to 1/36th of the shares each month thereafter.
Subsequent Options vest as to 1/12th of the shares subject to the option each
month after the date of grant. The exercise prices of First Options and
Subsequent Options are 100% of the fair market value per share of the Common
Stock, generally determined with reference to the closing price of the Common
Stock as reported on the Nasdaq National Market on the date of grant.
In the event of a merger of the Company or the sale of substantially all of
the assets of the Company, each option granted under the Director Plan may be
assumed or an equivalent option substituted by the successor corporation. If an
option is assumed or substituted, it will continue to vest as provided in the
Director Plan. However, if a non-employee director's status as a director of the
Company or the successor corporation, as applicable, is terminated other than
upon a voluntary resignation by the non-employee director, each option granted
to such non-employee director will become fully vested and exercisable. If the
successor corporation does not agree to assume or substitute the option, each
option will also become fully vested and exercisable for a period of 30 days
from the date the Board of Directors notifies the optionee of the option's full
exercisability, after which period the option will terminate. Options granted
under the Director Plan must be exercised within three months of the end of the
optionee's tenure as a director of the Company, or within twelve months after
such director's termination by death or disability, but in no event later than
the expiration of the option's ten-year term. No option granted under the
Director Plan is transferable by the optionee other than by will or the laws of
descent and distribution, and each option is exercisable, during the lifetime of
the optionee, only by such optionee.
The administration and other terms of the Director Plan have been
structured so that options granted to any non-employee directors who administer
the Company's stock plans will qualify as transactions exempt from Section 16(b)
of the Exchange Act, pursuant to Rule 16b-3 promulgated thereunder.
Pursuant to a letter agreement dated August 2, 1993, as revised and
superseded by letter agreements dated August 30, 1993 and September 20, 1993,
Director Jon S. Saxe has received options to purchase 20,000 shares of Common
Stock at an exercise price of $0.25 per share which vest over a four-year period
at a rate of 1/48th of the total number of shares subject to the option for each
month Mr. Saxe serves as a Director of the Company.
Pursuant to a stock purchase agreement dated January 29, 1996, Director
John Walker purchased 20,000 shares of Common Stock at a price of $0.375 per
share, subject to a repurchase option by the Company with 1/48th of the total
number of shares being released from the Company's repurchase option for each
month Mr. Walker serves as a Director of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors is responsible for
determining salaries, incentives and other forms of compensation for officers
and other employees of the Company and administers various incentive
compensation and benefit plans. The Compensation Committee consists of Directors
Schnell, Strand and Walker. Mr. Rurka, President and Chief Executive Officer of
the Company, participates in all discussions and decisions regarding salaries
and incentive compensation for all employees and
42
<PAGE> 45
consultants of the Company, except that Mr. Rurka is excluded from discussions
regarding his own salary and incentive compensation.
EXECUTIVE COMPENSATION
The following table sets forth total compensation for the year ended
December 31, 1995 for the Chief Executive Officer and each of the other
executive officers of the Company whose total salary and bonus for such fiscal
year exceeded $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
1995 COMPENSATION ------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
- ---------------------------------- --------- -------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
James E. Rurka.................... $ 254,166 $50,000 $35,721(1) 60,000(2) --
President and Chief
Executive Officer
Keith A. Bostian, Ph.D. .......... 244,391 50,000 70,433(3) -- --
Chief Operating Officer
</TABLE>
- ---------------
(1) Represents the portion of a forgivable loan for moving, housing and other
expenses incurred by Mr. Rurka in connection with relocating to the
Company's geographic region attributed to 1995 compensation.
(2) Pursuant to the Company's 1993 Amended Incentive Stock Plan, an option to
purchase 60,000 shares of Common Stock at a price of $0.375 per share was
granted to Mr. Rurka in December 1995. At December 31, 1995, such option was
vested with respect to 27,500 shares of Common Stock. Such option vested at
the rate of 1/4th of the shares on the first anniversary of Mr. Rurka's date
of hire and vests at the rate of an additional 1/48th of the shares each
month thereafter. As of December 31, 1995, Mr. Rurka held 75,833 shares of
Common Stock which were subject to repurchase rights by the Company having a
value of $985,829 based upon an assumed initial public offering price of $13
per share.
(3) Represents reimbursement for taxes incurred by Dr. Bostian as a result of
the payment by the Company in 1994 of $100,908 of moving, housing and other
expenses incurred by Dr. Bostian in connection with relocating to the
Company's geographic region.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning each grant of options
to purchase Common Stock made during the year ended December 31, 1995 to the
Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE MINUS
INDIVIDUAL GRANTS EXERCISE PRICE AT
------------------------------------------------- ASSUMED ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION
UNDERLYING GRANTED TO PRICE FOR OPTION TERM(1)
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION -----------------------
NAME GRANTED FISCAL YEAR (2)(3) DATE 5%($) 10%($)
- ---------------------------- --------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
James E. Rurka.............. 60,000 41% $ 0.375 12/07/2005 $1,248,038 $2,000,619
</TABLE>
- ---------------
(1) Potential realizable value is based on the assumption that the Common Stock
appreciates at the annual rate shown (compounded annually) from the date of
grant until the expiration of the ten-year option term, assuming an initial
public offering price of $13 per share. These numbers are calculated based
on the requirements promulgated by the Securities and Exchange Commission
and do not reflect the Company's estimate of future stock price growth.
(2) The option granted to Mr. Rurka in 1995 became exercisable as to 1/4th on
the first anniversary of Mr. Rurka's date of hire and becomes exercisable as
to an additional 1/48th each month thereafter with full vesting occurring on
the fourth anniversary of the date of hire. Under the 1993 Amended Incentive
Stock Plan, the Board of Directors retains the discretion to reduce the
exercise price of outstanding options in certain limited circumstances.
(3) Options were granted at an exercise price equal to the fair market value of
the Common Stock, as determined by the Board of Directors on the date of
grant.
43
<PAGE> 46
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding stock options
held as of December 31, 1995 by the Named Executive Officers. No options were
exercised by such individuals in 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1995 (#) DECEMBER 31, 1995 ($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James E. Rurka............................. 27,500 32,500 $ 347,188 $ 410,312
Keith A. Bostian, Ph.D..................... 4,375 5,625 55,234 71,016
</TABLE>
- ---------------
(1) Based upon an assumed initial public offering price of $13 per share minus
the exercise price.
EMPLOYEE BENEFIT PLANS
1993 AMENDED INCENTIVE STOCK PLAN
The Company's 1993 Amended Incentive Stock Plan (the "Option Plan") was
adopted by the Board of Directors in April 1993 and approved by the shareholders
in April 1994. A total of 1,380,000 shares of Common Stock has been reserved for
issuance under the Option Plan. The Option Plan provides for grants of incentive
stock options within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") to employees (including officers and employee
directors), and nonstatutory stock options and stock purchase rights ("SPRs") to
employees (including officers and employee directors) and consultants.
Non-employee directors are not eligible to participate in the Option Plan. The
Option Plan may be administered by the Board of Directors or by a committee of
the Board (the "Committee"), which Committee must be constituted to comply with
Rule 16b-3 under the Exchange Act, and applicable laws. The Board of Directors
or the Committee (the "Administrator") determines the grantees and the terms of
options and SPRs to be granted, including the exercise price, number of shares
subject to the option or SPR, and the exercisability thereof.
The terms of options granted under the Option Plan generally may not exceed
10 years. The exercise price of such options granted is determined by the
Administrator, but, in the case of incentive stock options, cannot be less than
100% of the fair market value of the Common Stock on the date of grant. Options
granted under the Option Plan to new employees and consultants generally have
not been immediately exercisable but have vested at the rate of 25% of the
shares subject to option on the first anniversary of the date of hire and 1/48th
of such shares at the end of each calendar month thereafter. Subsequent grants
generally vest as to 1/48th of the option shares at the end of each month after
the date of grant. Shares that may be purchased upon exercise of SPRs generally
vests according to similar schedules. No option or SPR may be transferred by the
grantee other than by will or the laws of descent or distribution. An optionee
whose relationship with the Company or any related corporation ceases for any
reason (other than by death or permanent and total disability) may exercise
options in the 30-day period following such cessation (unless such options
terminate or expire sooner by their terms) or in such longer period determined
by the Administrator. Unvested shares purchased upon exercise of an SPR by a
purchaser whose relationship with the Company ceases generally must be resold to
the Company at the original purchase price.
Shares subject to options and SPRs granted under the Option Plan which have
lapsed or terminated may again be subject to options and SPRs granted under the
Option Plan. Furthermore, the Board of Directors may offer to exchange new
options for existing options, with the shares subject to the existing options
again becoming available for grant under the Option Plan. Upon any merger or
consolidation in which the Company is not the surviving corporation, or upon a
sale of substantially all of the Company's assets, all outstanding options and
SPRs may either be assumed or substituted for by the surviving entity.
As of March 31, 1996, 203,950 shares of Common Stock had been issued upon
the exercise of options or SPRs granted under the Option Plan, options to
purchase 690,600 shares of Common Stock at a weighted
44
<PAGE> 47
average exercise price of $0.965 per share were outstanding and 485,450 shares
remained available for future grants of options and SPRs. The Option Plan
terminates in April 2003, unless terminated sooner by the Board of Directors.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "1996 Purchase Plan")
was adopted by the Board of Directors in March 1996 and will be submitted to the
shareholders for approval at the Company's 1996 annual shareholders meeting. A
total of 120,000 shares of Common Stock has been reserved for issuance under the
1996 Purchase Plan. The 1996 Purchase Plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, has two six-month offering periods
each year beginning on the first trading day on or after May 1 and November 1,
except for the first offering period, which begins on the effective date of the
Company's initial public offering and ends on the last trading day on or before
October 31, 1996. The 1996 Purchase Plan is administered by the Board of
Directors or by a committee appointed by the Board. Employees are eligible to
participate if they are customarily employed by the Company or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year. The 1996 Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions of up to 10% of an employee's
"compensation," which includes base earnings and commissions but excludes
overtime and other bonuses and incentive compensation, up to a maximum of
$21,250 for all offering periods ending within the same calendar year. The price
of stock purchased under the 1996 Purchase Plan will be 85% of the lower of the
fair market value of the Common Stock at the beginning and at the end of each
offering period. Employees may end their participation in the offering at any
time during an offering period, and upon withdrawal are paid their payroll
deductions to date not yet used to purchase Common Stock. Participation ends
automatically on termination of employment with the Company.
Rights granted under the 1996 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1996 Purchase Plan. The 1996 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, the offering period then
underway is shortened (so that employees' rights to purchase stock under the
1996 Purchase Plan are exercised prior to the merger or sale of assets. The 1996
Purchase Plan terminates in March 2006. The Board of Directors has the authority
to amend or terminate the 1996 Purchase Plan, except that no such action may
adversely affect any outstanding rights to purchase stock under the 1996
Purchase Plan.
401(K) PLAN
The Company adopted a 401(k) savings plan (the "401(k) Plan") effective in
June 1994. Eligible employees who have attained age 18 may participate in the
401(k) Plan. Participants in the 401(k) Plan may defer compensation in an amount
not in excess of 15% of the employee's total annual compensation from the
Company, up to the annual statutory limit ($9,500 in 1996). The Company may make
matching contributions in an amount determined annually by the Board of
Directors. All contributions are credited to separate accounts maintained in
trust for each participant and are invested, at the participant's direction, in
one or more of the investment funds made available under the 401(k) Plan.
Matching contributions are subject to 25% annual vesting over a four-year
period. The 401(k) Plan is intended to qualify under Sections 401 and 501 of the
Internal Revenue Code so that contributions to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn, and
so that the contributions will be deductible by the Company when made.
EMPLOYMENT AGREEMENTS
In February 1994, the Company entered into an employment agreement with
James E. Rurka, President and Chief Executive Officer of the Company, for a
three-year term. Pursuant to such agreement, Mr. Rurka receives an annual base
salary of $260,000. Also pursuant to such agreement, Mr. Rurka received the
right to purchase 140,000 shares of Common Stock at $0.25 per share, on which
shares the Company has a right of repurchase which lapses over a four-year
period subject to Mr. Rurka's continued employment with the
45
<PAGE> 48
Company, and an option to purchase an additional 60,000 shares of Common Stock
based on Mr. Rurka's having met certain bonus objectives. In addition, the
Company provided Mr. Rurka, pursuant to the agreement, a forgivable loan to
cover certain relocation expenses. See "Certain Transactions -- Transactions
with Directors and Executive Officers."
In December 1992, the Company entered into an employment agreement with
Keith A. Bostian, Ph.D., Chief Operating Officer and a Director, for a
three-year term which provides for a minimum annual salary of $150,000 subject
to annual review and increase by mutual agreement, in addition to a guaranteed
annual bonus of $79,000, and the right to purchase 256,000 shares of Common
Stock at a purchase price of $0.005 per share subject to vesting over a
four-year period at the rate of 1/48th of such shares each month based upon
continued employment. The Company subsequently agreed with Dr. Bostian to modify
his compensation to an annual salary of $250,000, with no guaranteed bonus. The
Company's employment agreement with Dr. Bostian was automatically renewed for an
additional term of one year on January 11, 1996 and provides for further
automatic renewal for successive terms of one year each unless either party
gives notice of cancellation 90 days prior to such renewal.
The Company currently has no other compensatory plan or arrangement with
any of the Named Executive Officers where the amounts to be paid exceed $100,000
and which are activated upon resignation, termination or retirement of any such
executive officer upon a change in control of the Company.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Restated Certificate limits the liability of directors to the maximum
extent permitted by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages for breach of
their fiduciary duties as directors, except liability for (i) any breach of
their duty of loyalty to the corporation or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) any transaction from which the director
derived an improper personal benefit. Such limitation of liability does not
apply to liabilities arising under the federal securities laws and does not
affect the availability of equitable remedies such as injunctive relief or
rescission.
The Bylaws provide that the Company will indemnify its directors and
executive officers and may indemnify its other officers and employees and other
agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross negligence
on the part of indemnified parties. The Company's Bylaws also permit it to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the Bylaws permit such indemnification.
The Company has entered into indemnification agreements with its officers
and directors containing provisions which may require the Company, among other
things, to indemnify the officers and directors against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. The Company believes that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
46
<PAGE> 49
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT OF SECURITIES
The price per share and number of shares presented herein give effect to
the 1-for-5 reverse stock split which will be completed prior to the
consummation of the Offering and assume conversion of all outstanding
Convertible Preferred Stock of the Company into Common Stock, which will occur
automatically upon the completion of the Offering.
In connection with the incorporation of the Company in December 1992,
240,000 shares of Common Stock were sold to Avalon Medical Partners, L.P. for an
aggregate price of $1,200 and 256,000 shares of Common Stock were sold to Dr.
Keith A. Bostian for an aggregate price of $1,280.
Since the Company's inception in December 1992, the Company issued, in
private placement transactions (collectively, the "Private Placement
Transactions"), the following shares of Common Stock and Convertible Preferred
Stock: 496,000 shares of Common Stock at a price of $0.005 per share; 170,200
shares of Common Stock at a price of $0.025 per share; 17,771 shares of Common
Stock at $0.20 per share; 164,470 shares of Common Stock at a price of $0.25 per
share; 27,748 shares of Common Stock at a price of $.375 per share; 1,078,267
shares of Series A Preferred Stock at a price of $1.875 per share; 1,591,000
shares of Series B Preferred Stock at a price of $2.50 per share; 3,066,666
shares of Series C Preferred Stock at a price of $3.75 per share; 573,429 shares
of Series D Preferred Stock at a price of $8.75 per share, and 571,429 shares of
Series E Preferred Stock at a purchase price of $8.75 per share. In connection
with certain equipment leasing agreements, the Company issued warrants to
purchase the following shares of Preferred Stock: 19,467 shares of Series A
Preferred Stock at an exercise price of $1.875 per share; 86,320 shares of
Series B Preferred Stock at an exercise price of $2.50 per share; and 54,400
shares of Series C Preferred Stock at an exercise price of $3.75 per share. See
"Description of Capital Stock -- Warrants."
All of the Convertible Preferred Stock issued in the Private Placement
Transactions will convert into Common Stock on a 1-for-1 basis upon the closing
of the sale of the shares of the Common Stock offered hereby. All of the
outstanding warrants terminate, if not previously exercised, three years after
this offering. The Company can, under certain conditions, cause all of the
outstanding warrants issued to Dominion Ventures to be exercised in connection
with the Offering.
The purchasers of the Convertible Preferred Stock and Common Stock
described above included, among others, the following officers and directors and
holders of more than five percent of the Company's voting securities:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK ISSUABLE UPON
CONVERSION OF CONVERTIBLE PREFERRED STOCK(1)(2)
-----------------------------------------------
COMMON SERIES SERIES SERIES SERIES SERIES
PURCHASER STOCK A B C D E
- ----------------------------------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Kleiner Perkins Caufield & Byers
Entities(3)............................ -- 506,667 760,000 533,334 -- --
Institutional Venture
Partners/Institutional Venture
Management Entities(4)................. -- 374,400 561,200 533,334 -- --
Avalon Entities.......................... 240,000 177,600 266,800 -- -- --
Johnson & Johnson Development
Corporation............................ -- -- -- -- 571,429 --
Pfizer Inc .............................. -- -- -- -- -- 571,429
Atlas Venture Europe Fund Entities....... -- -- -- 533,334 -- --
New Enterprise Associates VI(5).......... -- -- -- 533,333 -- --
Abingworth Bioventures................... -- -- -- 400,000 -- --
Keith A. Bostian, Ph.D................... 256,000 8,000 -- -- -- --
James E. Rurka........................... 140,000 -- -- -- -- --
David Schnell, M.D....................... 20,000 3,600
John P. Walker........................... 20,000 -- -- -- -- --
L. James Strand, M.D..................... 8,000
Jon S. Saxe.............................. 6,040 -- -- -- -- --
</TABLE>
47
<PAGE> 50
- ---------------
(1) The purchasers of these securities are entitled to registration rights. See
"Description of Capital Stock -- Registration Rights."
(2) Except as otherwise indicated, shares held by affiliated persons and
entities have been aggregated. See "Principal Stockholders."
(3) Does not include 20,000 shares of Common Stock and 3,600 shares of Series A
Preferred Stock held by David Schnell, M.D., a Director of the Company. Dr.
Schnell is a Venture Limited Partner of Kleiner Perkins Caufield & Byers VI
Associates, which is the General Partner of Kleiner Perkins Caufield & Byers
VI and Kleiner Perkins Caufield & Byers VI Founders Fund. Joseph A. Lacob,
the Chairman of the Board of Directors of the Company, is a General Partner
of Kleiner Perkins Caufield & Byers.
(4) Does not include 8,000 shares of Series A Preferred Stock held by L. James
Strand, M.D., a Director of the Company. Does not include 12,000 shares of
Common Stock issuable upon exercise of stock options held by Dr. Strand. Dr.
Strand is a General Partner of Institutional Venture Management VI.
(5) Hugh Y. Rienhoff, Jr., M.D., a Director of the Company, is a Partner of New
Enterprise Associates.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
In February 1994, under the terms of his acceptance of employment with the
Company and in order to defray the costs of relocating to the Company's
geographic area, James E. Rurka, President, Chief Executive Officer and Director
of the Company, borrowed $53,861 from the Company pursuant to an Employment
Agreement between the Company and Mr. Rurka dated effective February 1994. The
loan to Mr. Rurka did not bear interest, and was forgiven over a two-year period
at the rate of one-quarter of the loan amount for each six-month period of his
employment with the Company. See "Management -- Employment Agreements."
In 1993, under the terms of his acceptance of employment with the Company
and in order to defray the costs of relocating to the Company's geographic area,
the Company reimbursed Keith A. Bostian, Ph.D. $100,908 for expenses incurred by
Dr. Bostian with respect to his relocation. In 1995, pursuant to the terms of
his employment agreement, Dr. Bostian received $70,433 to cover the income tax
impact of the reimbursement by the Company of his moving expenses.
In January 1993 Institutional Venture Partners transferred to L. James
Strand, M.D., a Director of the Company, and a General Partner of Institutional
Venture Partners, 8,000 shares of Series A Preferred Stock of the Company in
consideration of Dr. Strand's assistance on behalf of the Company.
Prior to his appointment as a Director of the Company, pursuant to a letter
agreement dated August 2, 1993, as revised and superseded by letter agreements
dated August 30, 1993 and September 20, 1993, which terminated in July 1995, Jon
S. Saxe agreed to provide consulting services to the Company on business
development issues in exchange for $1,333 per consulting day in cash and 267
shares of Common Stock of the Company per consulting day. Mr. Saxe received
$3,048 and 1,000 shares of Common Stock in 1993, $12,609 in 1994 and $15,422 and
5,040 shares of Common Stock in 1995 for consulting services rendered to the
Company.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors and will
continue to be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
48
<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1996, assuming
conversion of all shares of the Company's outstanding Preferred Stock into
shares of the Company's Common Stock, and as adjusted to reflect the sale by the
Company of the shares offered hereby, (i) by each person (or group of affiliated
persons) who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) by each of the Company's directors,
(iii) by the Named Executive Officers, and (iv) by all directors and executive
officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED(1)
SHARES ---------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL HOLDER OWNED(1) OFFERING OFFERING
- ------------------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Entities Affiliated with Kleiner Perkins Caufield & Byers (2)(3)......... 1,823,600 23.5 17.8
2750 Sand Hill Road
Menlo Park, CA 94025
Entities Affiliated with Institutional Venture Partners(4)............... 1,488,934 19.2 14.5
3000 Sand Hill Road, Bldg. 2, Ste. 290
Menlo Park, CA 94025
Entities Affiliated with Avalon Ventures(5).............................. 684,400 8.8 6.7
1020 Prospect Street, #405
La Jolla, CA 92037
Johnson & Johnson Development Corporation................................ 571,429 7.4 5.6
1 Johnson & Johnson Plaza
New Brunswick, NJ 08933
Pfizer Inc............................................................... 571,429 7.4 5.6
Eastern Point Road
Groton, CT 06340
Entities Affiliated with Atlas Venture(6)................................ 533,333 6.9 5.2
222 Berkeley Street
Boston, MA 02116
New Enterprise Associates VI (7)......................................... 533,333 6.9 5.2
1119 St. Paul Street
Baltimore, MD 21202
Abingworth Bioventures................................................... 400,000 5.2 3.9
231 Valdes Bon Malades
Kirchberg 2121
Luxembourg
David Schnell, M.D. (2).................................................. 1,823,600 23.5 17.8
Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
Joseph S. Lacob (3)...................................................... 1,800,000 23.2 17.5
Kleiner Perkins Caufield & Byers
2750 Sand Hill Road
Menlo Park, CA 94025
L. James Strand, M.D. (4)................................................ 1,488,934 19.2 14.5
Institutional Venture Partners
3000 Sand Hill Road, Bldg. 2, Ste. 290
Menlo Park, CA 94025
Hugh Y. Rienhoff, Jr., M.D. (7).......................................... 533,333 6.9 5.2
New Enterprise Associates
1119 St. Paul Street
Baltimore, MD 21202
Keith A. Bostian, Ph.D. (8).............................................. 271,084 3.5 2.6
James E. Rurka (9)....................................................... 176,875 2.3 1.6
John P. Walker........................................................... 20,000 * *
Jon S. Saxe(10).......................................................... 19,374 * *
Matthew J. Hogan (11).................................................... 0 * *
All directors and executive officers as a group (9 persons)(12).......... 4,333,200 55.4 42.0
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
49
<PAGE> 52
(1) Applicable percentage ownership is based on 7,756,981 shares of Common
Stock outstanding as of March 31, 1996, together with applicable options
for such stockholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities, subject to the
community property laws, where applicable. Shares of Common Stock subject
to options that are currently exercisable or exercisable within 60 days of
March 31, 1996 are deemed to be beneficially owned by the person holding
such options for the purpose of computing the percentage of ownership of
such person but are not treated as outstanding for the purpose of computing
the purchase of any other person.
(2) David Schnell, M.D., a Director of the Company, is a Venture Limited
Partner of Kleiner Perkins Caufield & Byers VI Associates, which is the
General Partner of Kleiner Perkins Caufield & Byers VI and Kleiner Perkins
Caufield & Byers VI Founders Fund. Includes 1,560,600 shares held by
Kleiner Perkins Caufield & Byers VI, L.P., 239,400 shares held by Kleiner
Perkins Caufield & Byers Founders Fund VI, L.P., and 23,600 shares held by
Dr. Schnell.
(3) Joseph S. Lacob, Chairman of the Board of the Company, is a General Partner
of Kleiner Perkins Caufield & Byers. Includes 1,560,600 shares held by
Kleiner Perkins Caufield & Byers VI, L.P. and 239,400 shares held by
Kleiner Perkins Caufield & Byers Founders Fund VI, L.P.
(4) L. James Strand, M.D., a Director of the Company, is a General Partner of
Institutional Venture Management VI. Includes 1,444,233 shares held by
Institutional Venture Partners V, L.P., 24,701 shares held by Institutional
Venture Management V, L.P. 8,000 shares held by Dr. Strand, and 12,000
shares issuable to Dr. Strand pursuant to options exercisable within 60
days of March 31, 1996.
(5) Includes 222,200 shares held by Avalon BioVentures II, L.P. and 462,200
shares held by Avalon Medical Partners, L.P.
(6) Includes 200,000 shares held by Atlas Venture Europe Fund BV and 333,333
shares held by Atlas Venture Fund II.
(7) Hugh Y. Rienhoff, Jr., M.D., a Director of the Company, is a Partner of New
Enterprise Associates.
(8) Includes 240,000 shares held by Dr. Bostian, 16,000 shares held by Arthur
Weil as trustee for Dr. Bostian's children with respect to which Dr.
Bostian disclaims beneficial ownership, and 7,084 shares issuable pursuant
to options exercisable within 60 days of March 31, 1996.
(9) Includes 140,000 shares held by Mr. Rurka and 36,875 shares issuable
pursuant to options exercisable within 60 days of March 31, 1996.
(10) Includes 6,040 shares held by Mr. Saxe and 13,334 shares issuable pursuant
to options exercisable within 60 days of March 31, 1996.
(11) Mr. Hogan joined the Company on May 6, 1996 as Chief Financial Officer and
will receive options to purchase 50,000 shares of Common Stock, none of
which were exercisable as of March 31, 1996.
(12) Includes 69,293 shares issuable pursuant to options exercisable within 60
days of March 31, 1996.
50
<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the Company will be authorized to issue
50,000,000 shares of Common Stock, $.001 par value per share, and 5,000,000
shares of undesignated Preferred Stock, $.001 par value per share. The price and
per share information presented herein give effect to the 1-for-5 reverse stock
split which will be completed prior to the consummation of the Offering, and the
assumed conversion of all outstanding Convertible Preferred Stock of the Company
into Common Stock, which will occur automatically upon the completion of the
Offering.
COMMON STOCK
As of March 31, 1996, there were 7,756,981 shares of Common Stock
outstanding held of record by approximately 40 stockholders, assuming no
exercise after March 31, 1996 of outstanding options to purchase Common Stock,
and after giving effect to the conversion of the Convertible Preferred Stock
into Common Stock at a 1-to-1 ratio and assuming no exercise of outstanding
warrants to purchase 160,187 shares of Common Stock (or securities convertible
into Common Stock). There will be 10,256,981 shares of Common Stock outstanding
(assuming no exercise of the Underwriters' over-allotment option) after giving
effect to the sale of the shares of Common Stock offered hereby. See
"Management -- Employee Benefit Plans."
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders. Subject to the prior rights of holders
of Preferred Stock, if any, the holders of Common Stock are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors in its discretion from funds legally available therefore. Upon
liquidation or dissolution of the Company, after payment of liabilities and the
liquidation preferences of any outstanding shares of Preferred Stock, the
remainder of the assets of the Company will be distributed ratably among the
holders of Common Stock. The Common Stock has no preemptive or other
subscription rights and there are no conversion rights or redemption rights or
sinking fund provisions with respect to such shares. All of the outstanding
shares of Common Stock are, and the shares to be sold in the Offering will be,
fully paid and nonassessable.
WARRANTS
As of March 31, 1996, there were outstanding warrants to purchase 19,467
shares of Series A Preferred Stock at an exercise price of $1.875 per share,
warrants to purchase an aggregate of 86,320 shares of Series B Preferred Stock
at an exercise price of $2.50 per share, and warrants to purchase an aggregate
of 54,400 shares of Series C Preferred Stock at an exercise price of $3.75 per
share. The warrants were issued in May 1993 and June 1994 in connection with
lease financing arrangements between the Company and Dominion Ventures, and in
September 1993 in connection with a lease financing arrangement between the
Company and Comdisco, Inc. All of the outstanding warrants terminate, if not
previously exercised, three years after the Offering. The Company can, under
certain conditions, cause all of the outstanding warrants issued to Dominion
Ventures to be exercised in connection with the Offering.
PREFERRED STOCK
Effective upon the closing of the Offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption rights, redemption prices, liquidation
preferences and the number of shares constituting a Series or the designation of
such Series, without further vote or action by the stockholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control in the Company without further action by the stockholders and
may adversely affect the market price of, and the voting and other rights of,
the holders of Common Stock. Upon the closing of the Offering, the Company will
have no shares of Preferred Stock outstanding. At present, the Company has no
plans to issue any of the Preferred Stock.
REGISTRATION RIGHTS
The holders of approximately 6,880,791 shares of Common Stock and their
permitted transferees (the "Holders") are entitled to certain rights with
respect to the registration of such shares under the Securities
51
<PAGE> 54
Act. Under the terms of the Information and Registration Rights Agreement dated
June 29, 1994, as amended to date, among the Company and certain holders of its
securities, if the Company proposes to register any of its securities under the
Securities Act, either for its own account or the account of other security
holders holding registration rights, the Holders are entitled to notice of such
registration and are entitled to include their registrable securities therein;
provided, among other conditions, that the underwriters have the right to limit
the number of such shares included in any such registration. The Holders also
have the right, beginning six months after the date of the Offering, to request
on two occasions that the Company file a registration statement under the
Securities Act at the Company's expense with respect to their shares of Common
Stock, and the Company, subject to certain limitations, is required to use its
best efforts to effect such registration. In addition, the Holders may require
the Company to register, at the expense of the Company, all or a portion of
their Registrable Securities on Form S-3 when such form becomes available to the
Company. All of the foregoing registration rights are subject to certain
conditions and limitations, including the right of the underwriters of an
offering to limit the number of shares to be included in such registration. In
addition, the Company need not effect a requested registration on a form other
than Form S-3 within three months of the effective date of any Company-initiated
registration. All of the foregoing registration rights terminate on the date
eight years after the closing of the Offering. See "Risk Factors -- Potential
Adverse Market Impact of Shares Eligible for Future Sale."
CERTAIN CHANGE OF CONTROL PROVISIONS
The Company anticipates it will reincorporate in Delaware prior to the
Offering and will be subject to Section 203 of the Delaware General Corporation
Law, an anti-takeover law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless (with certain exceptions) the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with affiliates
and associates, owns (or within three years prior to the determination of
interested stockholder status, did own) 15% or more of a corporation's voting
stock. The existence of this provision would be expected to have an
anti-takeover effect with respect to transactions not approved in advance by the
Board of Directors, including discouraging attempts that might result in a
premium over the market price for the shares of Common Stock held by
stockholders.
The Restated Certificate provides for a Board of Directors that is divided
into three classes. The directors in Class I hold office until the first annual
meeting of stockholders following this Offering, the directors in Class II hold
office until the second annual meeting of stockholders following this Offering,
and the directors in Class III hold office until the third annual meeting of
stockholders following this Offering, (or, in each case, until their successors
are duly elected and qualified or until their earlier resignation, removal from
office or death), and, after each such election, the directors in each such
class will then serve in succeeding terms of three years and until their
successors are duly elected and qualified. The classification system of electing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company and may maintain the
incumbency of the Board of Directors, as the classification of the Board of
Directors generally increases the difficulty of replacing a majority of the
directors.
The Restated Certificate and Bylaws do not provide for cumulative voting in
the election of directors. The authorization of undesignated Preferred Stock
makes it possible for the Board of Directors to issue Preferred Stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. These and other provisions may have
the effect of delaying or preventing hostile takeovers or delaying changes in
control or management of the Company. The amendment of any of these provisions
would require approval by holders of at least 66-2/3rd% of the outstanding
Common Stock. See "Risk Factors -- Effect of Certain Charter and Bylaw
Provisions; Certain Anti-Takeover Provisions."
TRANSFER AGENT
The transfer agent for the Company's Common Stock is Chemical Mellon
Shareholder Services L.L.C.
52
<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 10,256,981 shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options and warrants. Of
these shares, the 2,500,000 shares of Common Stock sold in this offering will be
freely transferable without restriction under the Securities Act unless they are
held by "affiliates" of the Company as that term is used under the Securities
Act and the regulations promulgated thereunder. The remaining approximately
7,756,981 shares of Common Stock (the "Restricted Shares") held by officers,
directors, employees, consultants and other stockholders of the Company were
sold by the Company in reliance on exemptions from the registration requirements
of the Securities Act and are "restricted" securities within the meaning of Rule
144 under the Securities Act and may not be sold publicly unless they are
registered under the Securities Act or are sold pursuant to Rule 144 or another
exemption from registration.
Beginning 180 days after commencement of the Offering, approximately
6,612,373 Restricted Shares that are subject to lock-up agreements (as described
below under "Underwriting") will become eligible for sale upon expiration of
such agreements, subject to compliance with Rule 144. The remaining
approximately 1,144,858 Restricted Shares, which are also subject to such
lock-up agreements, will have been held for less than two years upon the
expiration of such lock-up agreements and will become eligible for sale under
Rule 144 at various dates thereafter as the holding period provisions of Rule
144 are satisfied. In addition, 160,187 shares of Common Stock issuable upon
conversion of the Convertible Preferred Stock for which warrants are currently
outstanding will be subject to 180-day lock-up agreements and the two-year
holding period of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least two years is entitled to sell, within any three-month period
commencing 90 days after the Offering, a number of shares that does not exceed
the greater of (i) 1% of the then outstanding Common Stock (approximately
102,570 shares immediately after the Offering) or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale, subject to the filing of a Form 144 with respect to such sale and certain
other limitations and restrictions. In addition, a person who is not deemed to
have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least three years, would be entitled to sell such shares under Rule
144(k) without regard to the volume limitations described above or certain other
restrictions of Rule 144.
Under Rule 701 under the Securities Act, any employee, officer or director
of or consultant to the Company, who is not an affiliate of the Company, and who
purchased shares pursuant to a written compensatory plan or contract, including
the Option Plan, is entitled to sell such shares without having to comply with
the public information, holding period, volume limitation or notice provisions
of Rule 144, and affiliates of the Company are permitted to sell such shares
without having to comply with the Rule 144 holding period restrictions, in each
case commencing 90 days after the Offering.
The Company presently intends to file a registration statement under the
Securities Act to register Common Stock to be issued pursuant to the exercise of
options, including options granted or to be granted under the Option Plan and
the Director Plan, as well as Common Stock reserved for issuance under the 1996
Purchase Plan. Taking into account the effect of the lock-up agreements with the
holders of options, 325,002 shares issuable upon exercise of vested options will
be eligible for sale in the public market beginning 180 days after commencement
of this offering, subject, in the case of sales by affiliates, to the volume,
manner of sale, notice and public information requirements of Rule 144. See
"Management -- Employee Benefit Plans."
The holders of approximately 6,880,791 shares of Common Stock and their
permitted transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights."
Prior to the Offering, there has been no public market for the securities
of the Company. No predictions can be made of the effect, if any, that the sale
or availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of a substantial amount of
such shares by existing stockholders or by stockholders purchasing in the
Offering could have a negative impact on the market price of the Common Stock.
53
<PAGE> 56
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement") between the Company and each of the underwriters named
below (the "Underwriters"), the Company has agreed to sell to each of the
Underwriters, and each of the Underwriters, for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Alex. Brown & Sons Incorporated and Cowen & Company
are acting as the representatives (the "Representatives"), has severally agreed
to purchase from the Company, the number of shares of Common Stock set forth
opposite its name below. In the Purchase Agreement, the several Underwriters
have agreed, subject to the terms and conditions set forth therein, to purchase
all of the shares of Common Stock offered hereby, if any are purchased. In the
event of default by an Underwriter, the Purchase Agreement provides that, in
certain circumstances, purchase commitments of the non-defaulting Underwriters
may be increased or the Purchase Agreement may be terminated.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------- ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................
Alex. Brown & Sons Incorporated..............................
Cowen & Company..............................................
---------
Total........................................... 2,500,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share of Common Stock. The Underwriters may allow, and such dealers may reallow,
a discount not in excess of $ per share of Common Stock on sales to
certain other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
At the request of the Company, the Underwriters have reserved up to 150,000
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares offered
hereby.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus, to purchase up to an additional 375,000
shares of Common Stock to cover over-allotments, if any, at the initial public
offering price set forth on the cover page hereof, less the underwriting
discount. If the Underwriters exercise this option, each Underwriter will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the foregoing table is of the 2,500,000 shares of
Common Stock initially offered hereby.
54
<PAGE> 57
The Company, its officers, directors and certain stockholders of the
Company have agreed, subject to certain exceptions, not to, directly or
indirectly, (i) sell, grant any option to purchase or otherwise transfer or
dispose of any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock or file a registration statement
under the Securities Act with respect to the foregoing or (ii) enter into any
swap or other agreement or transaction that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock, without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated, for a period of
180 days after the date of this Prospectus. The foregoing does not prohibit the
Company's issuing shares pursuant to the exercise of the Underwriters'
overallotment option or under the Option Plan, the Director Plan or the 1996
Purchase Plan.
The Company has agreed to indemnify the Underwriters and others against
certain liabilities, including certain liabilities under the Securities Act and
other applicable securities laws, or to contribute to payments the Underwriters
may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of the Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
Prior to this Offering, there has been no market for the Common Stock of
the Company. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors to
be considered in determining the initial public offering price, in addition to
prevailing market conditions, are certain financial information of the Company,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management, the present state of the Company's
development and operations, and the above factors in relation to market values
and various valuation measures of other companies engaged in activities similar
to the Company. The initial public offering price set forth on the cover page of
this Prospectus should not, however, be considered an indication of the actual
value of the Common Stock. Such price is subject to change as a result of market
conditions and other factors. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to the Offering at or above the initial public
offering price.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Skadden, Arps, Slate, Meagher & Flom, Los Angeles,
California. As of the date of this Prospectus, Michael J. O'Donnell, Secretary
of the Company and a member of Wilson Sonsini Goodrich & Rosati, P.C.,
beneficially owns 3,000 shares of Common Stock.
EXPERTS
The financial statements of Microcide Pharmaceuticals, Inc. at December 31,
1994 and 1995, and for the period from inception (December 11, 1992) to December
31, 1993, the years ended December 31, 1994 and 1995 and for the period from
inception to December 31, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors -- Dependence on Proprietary Technology and Unpredictability of Patent
Protection" and "Business -- Patents, Proprietary Technology and Trade Secrets"
with respect to the intellectual property of the Company have been reviewed by
Lyon & Lyon, patent counsel for the Company.
55
<PAGE> 58
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete. In each instance, reference is made to
the copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. Copies of the Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the Commission's principal
office in Washington, D.C., or obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Company intends to distribute to its stockholders annual reports
containing audited financial statements and will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
56
<PAGE> 59
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Audited Financial Statements
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statement of Stockholders' Equity..................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 60
REPORT OF ERNST & YOUNG, LLP, INDEPENDENT AUDITORS
The Board of Directors
Microcide Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Microcide
Pharmaceuticals, Inc. (a development stage company) as of December 31, 1994 and
1995, and the related statements of operations, stockholders' equity, and cash
flows for the period from inception (December 11, 1992) to December 31, 1993,
for each of the two years in the period ended December 31, 1995 and for the
period from inception (December 11, 1992) to December 31, 1995 (not separately
presented herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Microcide Pharmaceuticals,
Inc. at December 31, 1994 and 1995 and the results of its operations and its
cash flows for the period from inception (December 11, 1992) to December 31,
1993, for each of the two years in the period ended December 31, 1995 and for
the period from inception (December 11, 1992) to December 31, 1995 (not
separately presented herein), in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
February 13, 1996, except for
the fourth paragraph of Note 8,
as to which the date is April 5, 1996
F-2
<PAGE> 61
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, MARCH PRO FORMA
------------------ 31, STOCKHOLDERS'
1994 1995 1996 EQUITY AT
------- -------- -------- MARCH 31,
1996
(UNAUDITED) ------------
(Note 8)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 5,810 $ 8,517 $ 15,093
Prepaid expenses and other current assets.......... 339 138 212
------- -------- --------
Total current assets................................. 6,149 8,655 15,305
Property and equipment, net.......................... 4,959 4,606 5,177
Other assets......................................... 232 232 209
------- -------- --------
$11,340 $ 13,493 $ 20,691
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 266 $ 463 $ 823
Accrued compensation and other accrued
liabilities..................................... 232 273 309
Current portion of capital lease obligations....... 806 1,118 1,116
Deferred revenue................................... -- 413 2,037
------- -------- --------
Total current liabilities............................ 1,304 2,267 4,285
Long-term portion of capital lease obligations....... 2,413 1,920 1,657
Accrued rent......................................... 117 155 153
Commitments
Stockholders' equity:
Preferred stock, no par value; 7,810,000 shares
authorized, issuable in series; 5,735,933
shares, 6,309,362 and 6,880,791 shares issued
and outstanding as of December 31, 1994 and 1995
and March 31, 1996, respectively -- aggregate
liquidation value of $27,517 at March 31, 1996;
pro forma -- no shares.......................... 17,443 22,435 27,425 $ --
Common stock, no par value; 10,000,000 shares
authorized, 836,533 shares, 855,440 and 876,190
shares issued and outstanding at December 31,
1994 and 1995 and March 31, 1996, respectively;
pro forma 7,756,981 shares...................... 49 632 2,266 29,691
Stockholder note receivable........................ (35) (35) (35) (35)
Deferred compensation.............................. -- (412) (1,974) (1,974)
Net unrealized loss on securities
available-for-sale.............................. -- (2) (2) (2)
Deficit accumulated during the development stage... (9,951) (13,467) (13,084) (13,084)
------- -------- --------
Total stockholders' equity........................... 7,506 9,151 14,596 $ 14,596
========
------- --------
$11,340 $ 13,493 $ 20,691
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 62
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(DECEMBER 11, YEARS ENDED THREE MONTHS ENDED (DECEMBER 11,
1992) TO DECEMBER 31, MARCH 31, 1996 1992) TO
DECEMBER 31, ------------------- ------------------- MARCH 31,
1993 1994 1995 1995 1996 1996
------------- ------- ------- ------- ------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
License fees................ $ -- $ -- $ 3,000 $ -- $ 1,000 $ 4,000
Research revenue............ -- -- 1,985 -- 1,625 3,610
--------
-
-------- -------- --------
Total revenues................ -- -- 4,985 -- 2,625 7,610
Operating expenses:
Research and development.... 1,685 5,180 6,400 1,324 1,780 15,045
General and
administrative............ 1,251 1,823 2,080 479 526 5,680
--------
-
-------- -------- --------
Total operating expenses...... 2,936 7,003 8,480 1,803 2,306 20,725
--------
-
-------- -------- --------
Income (loss) from
operations.................. (2,936) (7,003) (3,495) (1,803) 319 (13,115)
Interest income............... 32 218 257 85 137 644
Interest expense.............. (13) (249) (278) (70) (73) (613)
--------
-
-------- -------- --------
Net income (loss)............. $(2,917) $(7,034) $(3,516) $(1,788) $ 383 $ (13,084)
======== ======== ======== =========
Pro forma net income (loss)
per share................... $ (0.44) $ (0.22) $ 0.04
======== =========
Shares used in computing pro
forma net income (loss) per
share....................... 8,052 8,039 8,563
</TABLE>
See accompanying notes.
F-4
<PAGE> 63
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share and per share amounts)
PERIOD FROM INCEPTION (DECEMBER 11, 1992) TO MARCH 31, 1996
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK STOCKHOLDER NET UNREALIZED DURING THE TOTAL
------------------- --------------- NOTE DEFERRED LOSS ON DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT RECEIVABLE COMPENSATION SECURITIES STAGE EQUITY
--------- ------- ------- ------ ----------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock at
$0.005 per
share to
founders for
cash and
services in
December
1992........... -- $ -- 496,000 $ 2 $ -- $ -- $ -- $ -- $ 2
Issuance of
Series A
convertible
preferred stock
to investors at
$1.875 per
share for cash
in December
1992........... 62,160 117 -- -- -- -- -- -- 117
Issuance of
Series A
convertible
preferred stock
to investors at
$1.875 per
share for cash
in January
1993, less
issuance costs
of $18......... 1,016,107 1,887 -- -- -- -- -- -- 1,887
Issuance of
Series B
convertible
preferred stock
to investors at
$2.50 per share
for cash in
September and
December 1993,
less issuance
costs of $6.... 1,454,600 3,630 -- -- -- -- -- -- 3,630
Issuance of
common stock at
$0.025 to $0.25
share to
employees and
consultants for
cash in
January,
October and
December
1993........... -- -- 191,200 10 -- -- -- -- 10
Net loss......... -- -- -- -- -- -- (2,917) (2,917)
--------- ------- ------- ------ ----------- ------------ --- ----------- -------------
Balances at
December 31,
1993............. 2,532,867 5,634 687,200 12 -- -- -- (2,917) 2,729
Issuance of
Series B
convertible
preferred stock
to investors at
$2.50 per share
for cash in
January 1994... 136,400 341 -- -- -- -- -- -- 341
Issuance of
Series C
convertible
preferred stock
to investors at
$3.75 per share
for cash and
conversion of
subordinated
debt in July
1994, less
issuance costs
of $32......... 3,066,666 11,468 -- -- -- -- -- -- 11,468
Exercise of
common stock
options by
employees at
$0.20 and $0.25
per share for
cash and note
receivable in
March, July,
September and
October 1994... -- -- 149,333 37 (35) -- -- -- 2
Net loss......... -- -- -- -- -- -- -- (7,034) (7,034)
--------- ------- ------- ------ ----------- ------------ --- ----------- -------------
Balances at
December 31,
1994............. 5,735,933 17,443 836,533 49 (35) -- -- (9,951) 7,506
Issuance of
Series D
convertible
preferred stock
to investors at
$8.75 per share
for cash in
October and
November 1995,
less issuance
costs of $26... 573,429 4,992 -- -- -- -- -- -- 4,992
Exercise of
common stock
options by
employees and
issuance of
common stock
for services at
$0.25 to $0.38
per share for
cash in April,
May and July
1995........... -- -- 18,907 5 -- -- -- -- 5
Net unrealized
loss on
securities
available-for-
sale........... -- -- -- -- -- -- (2) -- (2)
Deferred
compensation... -- -- -- 578 -- (578) -- -- --
Amortization of
deferred
compensation... -- -- -- -- -- 166 -- -- 166
Net loss......... -- -- -- -- -- -- -- (3,516) (3,516)
--------- ------- ------- ------ ----------- ------------ --- ----------- -------------
Balances at
December 31,
1995............. 6,309,362 $22,435 855,440 $ 632 $ (35) $ (412) $ (2) $ (13,467) $ 9,151
Issuance of Series
E convertible
preferred stock
to investors at
$8.75 per share
for cash in March
1996, less
issuance costs of
$10
(unaudited)...... 571,429 4,990 -- -- -- -- -- -- 4,990
Exercise of common
stock options by
employees and
issuance of
common stock for
services at $0.25
to $0.375 per
share for cash in
January
(unaudited)...... -- 20,750 8 -- -- -- -- --
Deferred
compensation
(unaudited)...... -- -- -- 1,626 (1,626) -- -- --
Amortization of
deferred
compensation
(unaudited)...... -- -- -- -- -- 64 -- -- 64
Net income
(unaudited)...... -- -- -- -- -- -- -- 383 383
--------- ------- ------- ------ ----------- ------------ --- ----------- -------------
Balances at March
31, 1996
(unaudited)...... 6,880,791 $27,425 876,190 $2,266 $ (35) $ (1,974) $ (2) $ (13,084) $14,596
======== ======= ======= ====== ========= =========== ============ ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 64
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(In thousands)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION THREE MONTHS ENDED INCEPTION
(DECEMBER 11, YEARS ENDED (DECEMBER 11,
1992) TO DECEMBER 31, MARCH 31, 1992) TO
DECEMBER 31, ------------------- ------------------- MARCH 31,
1993 1994 1995 1995 1996 1996
-------------- ------- ------- ------- ------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net income (loss)............................. $ (2,917) $(7,034) $(3,516) $(1,787) $ 383 $(13,084)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization............... 63 859 1,247 297 351 2,520
Amortization of deferred compensation....... -- -- 166 -- 64 230
Accrued rent................................ 54 63 38 4 (2) 153
Net unrealized loss on securities........... -- -- (2) -- -- (2)
Changes in assets and liabilities:
Prepaid expenses and other current
assets.................................. (137) (202) 201 210 (74) (212)
Other assets.............................. (209) (23) -- (79) 23 (209)
Accounts payable.......................... 229 37 197 (106) 360 823
Accrued compensation and other accrued
liabilities............................. 181 51 41 37 36 309
Deferred revenue.......................... -- -- 413 -- 1,624 2,037
------- ------- ------- --------
Net cash provided by (used in) operating
activities.................................. (2,736) (6,249) (1,215) (1,424) 2,765 (7,435)
------- ------- ------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures.......................... (1,372) (692) (148) -- (922) (3,134)
------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible
promissory notes............................ -- 2,000 -- 2,000
Principal payments on capital lease
obligations................................. (29) (569) (927) (177) (265) (1,790)
Proceeds from issuances of common stock....... 12 2 5 -- 8 27
Net proceeds from issuance of convertible
preferred stock............................. 5,634 9,809 4,992 -- 4,990 25,425
------- ------- ------- --------
Net cash provided by financing activities..... 5,617 11,242 4,070 (177) 4,733 25,662
------- ------- ------- --------
Net increase in cash and cash equivalents..... 1,509 4,301 2,707 (1,601) 6,576 15,093
Cash and cash equivalents at beginning of
period...................................... -- 1,509 5,810 5,810 8,517 --
------- ------- ------- --------
Cash and cash equivalents at end of period.... $ 1,509 $ 5,810 $ 8,517 $ 4,209 $15,093 $ 15,093
======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid................................. $ 12 $ 246 $ 274 $ 73 $ 70 $ 602
======= ======= ======= ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Equipment purchased under capital leases...... $ 1,817 $ 2,000 $ 746 $ -- $ -- $ 4,563
======= ======= ======= ========
Stockholder note receivable................... $ -- $ 35 $ -- $ -- $ -- $ 35
======= ======= ======= ========
Conversion of convertible promissory notes to
convertible preferred stock................. $ -- $ 2,000 $ -- $ -- $ -- $ 2,000
======= ======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 65
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Microcide Pharmaceuticals, Inc. (the "Company") is a biopharmaceutical
company founded to discover, develop and commercialize novel antibiotics for the
treatment of serious bacterial infections. The Company's discovery and
development programs address the growing problem of antibiotic resistance in
certain bacteria through two principal themes: (i) Targeted Antibiotics, which
focuses on developing novel antibiotics and antibiotic potentiators, and (ii)
Targeted Genomics, which utilizes bacterial genetics to discover new classes of
antibiotics and other novel treatments for bacterial disease. The Company's
results of operations for the period from inception (December 11, 1992) to
December 31, 1992 were immaterial.
The Company's activities to date have consisted principally of raising
capital, arranging for facilities, acquiring equipment and intellectual
property, recruiting managerial and technical personnel and conducting research
and development. Accordingly, the Company is classified as a development stage
enterprise at December 31, 1995.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Interim Financial Information
The financial information at March 31, 1996 and for the three month periods
ended March 31, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Results of the March 31,
1996 period are not necessarily indicative of the results for the entire year.
Stock-Based Compensation
In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," the Company records and amortizes over the related vesting periods
deferred compensation representing the difference between the price per share of
stock issued or the exercise price of stock options granted and the deemed fair
value (for accounting purposes) of the Company's common stock at the time of
issuance or grant.
Revenue Recognition
Revenues related to research contracts are recognized ratably over the
related funding periods for each contract. The Company is required to perform
research activities as specified in each respective agreement on a best efforts
basis and the Company is reimbursed based on the costs associated with the
number of full time equivalent employees working on each specific contract,
which is generally on a ratable basis over the term of the agreement. Deferred
revenue may result when the Company does not incur the required level of effort
during a specific period in comparison to funds received under the respective
contracts. Revenues related to license agreements with noncancelable,
nonrefundable terms and no significant future obligations are recognized upon
execution of the agreements. Milestone payments will be recognized pursuant to
collaborative agreements upon the achievement of specified milestones, such as
selection of candidates for drug
F-7
<PAGE> 66
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
development, the commencement of clinical trials or receipt of regulatory
approvals. For collaborative arrangements which include both revenue received on
a cost reimbursement basis and funds received associated with the purchase of
the Company's equity, the Company accounts for the equity component based on the
estimated fair value of the Company's securities issued at the date that the
terms of the respective agreements were agreed upon.
Net Income (Loss) Per Share
Except as noted below, historical net income (loss) per share is computed
using the weighted average number of common shares outstanding. Common
equivalent shares from stock options and warrants are excluded from the
computation if their effect is antidilutive, except that, pursuant to the
Securities and Exchange Commission ("SEC") Staff Accounting Bulletins, common
and common equivalent shares (stock options and preferred stock) issued during
the 12 month period prior to the initial filing of the proposed public offering
at prices below the assumed public offering price have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method for stock options).
Historical net income (loss) per share information is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
(DECEMBER 11, YEAR ENDED ENDED
1992) TO DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- -----------------
1993 1994 1995 1995 1996
------------- ------ ------ ------ ------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net income (loss) per share....... $ (1.37) $(3.11) $(1.52) $(0.78) $ 0.14
====== ====== ======
Shares used in computing net
income
(loss) per share................ 2,126 2,263 2,316 2,303 2,827
</TABLE>
Pro forma net income (loss) per share has been computed as described above
and also gives effect, pursuant to SEC staff policy, to common equivalent shares
from convertible preferred shares issued more than 12 months from the initial
filing of the proposed initial public offering that will be automatically
converted upon completion of the offering.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid investments with a maturity from
date of purchase of three months or less to be cash equivalents. The Company
maintains deposits with financial institutions in the United States and invests
its excess cash in commercial paper which bears minimal risk.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("Statement 115"). The Company adopted the
provisions of Statement 115 as of January 1, 1994, the cumulative effect of
which was immaterial.
Management determines the appropriate classification of debt securities in
accordance with Statement 115 at the time of purchase and reevaluates such
designation as of each balance sheet date. At December 31, 1994, 1995 and March
31, 1996, all debt securities are designated as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in stockholders' equity. The amortized cost of debt
securities in this category is adjusted for amortization of
F-8
<PAGE> 67
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary for available-for-sale securities are included in interest
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in interest income.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets, which
are five to seven years. Equipment under capital lease and leasehold
improvements are amortized using the straight-line method over the estimated
useful lives of the assets or the term of the lease, whichever is shorter.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------ ---------
1994 1995 1996
------ ------- ---------
(In thousands)
<S> <C> <C> <C>
Laboratory and office equipment........................ $3,137 $ 3,949 $ 4,015
Leasehold improvements................................. 2,744 2,826 3,682
------ -------
5,881 6,775 7,697
Less accumulated depreciation and amortization......... (922) (2,169) (2,520)
------ -------
Property and equipment, net............................ $4,959 $ 4,606 $ 5,177
====== =======
</TABLE>
Properties leased under capital leases are included above with a cost of
approximately $3,817,000 and $4,559,000 at December 31, 1994 and 1995,
respectively, with accumulated amortization of approximately $682,000 and
$1,589,000 at December 31, 1994 and 1995, respectively.
3. INVESTMENTS
The following is a summary of available-for-sale securities (estimated fair
value) as of:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------- ---------
1994 1995 1996
------ ------ ---------
(In thousands)
<S> <C> <C> <C>
Cash equivalents:
Money market funds.................................... $ 290 $1,039 $ 7,181
Commercial paper...................................... 5,520 7,478 7,912
------ ------
$5,810 $8,517 $15,093
====== ======
</TABLE>
F-9
<PAGE> 68
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
4. LEASES
The Company is making payments under capital lease lines of credit with
leasing companies which financed certain equipment purchases.
The Company also leases its office and research facilities under operating
leases. Future minimum lease payments under all noncancelable leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
(In thousands)
<S> <C> <C>
Year ended December 31,
1996.......................................................... $ 1,360 $ 386
1997.......................................................... 1,247 393
1998.......................................................... 764 412
1999.......................................................... 197 418
2000.......................................................... -- 329
------- ------
Total minimum payment required.................................. 3,568 $ 1,938
======
Less amount representing interest............................... (530)
-------
Present value of future lease payments.......................... 3,038
Less current portion............................................ (1,118)
-------
$ 1,920
=======
</TABLE>
Rent expense for operating leases was approximately $161,000 for the period
from inception (December 11, 1992) to December 31, 1993, $377,000 in 1994 and
1995, $94,000 for the three months ended March 31, 1996 and $1,009,000 for the
period from inception (December 11, 1992) to March 31, 1996.
The Company has a commitment with a general contractor to install leasehold
improvements and certain equipment at a total cost of $1,217,000, subject to
modifications which may be requested by the Company. At March 31, 1996 the
Company estimates that its remaining obligation is approximately $350,000.
5. STOCKHOLDERS' EQUITY
Stock Purchase Agreements
Through December 31, 1995, the Company has issued 422,600 shares of its
common stock to officers, employees and consultants subject to stock purchase
agreements that allow the Company to repurchase, at the original issuance price,
unvested shares upon termination of employment. Under the agreements, shares
purchased vest at a rate of 25% at the end of the first year with the remaining
balance vesting in equal amounts monthly over the next three years. As of
December 31, 1995, 93,988 shares were subject to this repurchase provision (at
the original purchase prices ranging from $0.005 to $0.375 per share).
Preferred Stock
All series of preferred stock are convertible at the stockholders' option
at any time into common stock at a conversion rate of one share of common stock
for each share of preferred stock, subject to adjustment for antidilution.
Conversion is automatic upon the closing of an underwritten public offering with
aggregate offering proceeds exceeding $10,500,000 and an offering price of at
least $10.00 (adjusted for any
F-10
<PAGE> 69
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
recapitalizations) per share or written election of holders of record more than
2/3 of the outstanding shares. The Company has reserved 6,469,549 shares of
common stock to be issued to stockholders upon conversion of the outstanding
preferred stock and exercise of warrants.
Holders of Series A, B, C, D and E convertible preferred stock are entitled
to noncumulative dividends of $0.15, $0.20, $0.30, $0.875 and $0.875 per share,
respectively, if and when declared by the board of directors. These dividends
are to be paid in advance of any distributions to common stockholders. No
dividends have been declared through March 31, 1996.
In the event of a liquidation or winding up of the Company, holders of
Series A, B, C, D and E convertible preferred stock shall have a liquidation
preference of $1.875, $2.50, $3.75, $8.75 and $8.75 per share, respectively,
together with any declared but unpaid dividends, over holders of common shares.
Preferred stockholders are entitled to the number of votes they would have
upon conversion of their preferred shares into common stock.
The authorized and outstanding Series A, B, C, D and E shares of
convertible preferred stock were as follows at March 31, 1996:
<TABLE>
<CAPTION>
AGGREGATE
LIQUIDATION
SHARES ISSUANCE VALUE
AUTHORIZED ISSUED AND PRICE PER --------------
DESIGNATION (ALL CONVERTIBLE) SHARES OUTSTANDING SHARE
----------------------------------- ---------- ----------- --------- (In thousands)
<S> <C> <C> <C> <C>
Series A........................... 1,100,000 1,078,267 $ 1.875 $ 2,022
Series B........................... 1,700,000 1,591,000 $ 2.50 3,977
Series C........................... 3,210,000 3,066,666 $ 3.75 11,500
Series D........................... 1,200,000 573,429 $ 8.75 5,018
Series E........................... 600,000 571,429 $ 8.75 5,000
---------- ---------- -------
7,810,000 6,880,791 $ 27,517
========== ========== =======
</TABLE>
Warrants
In connection with various capital lease arrangements, the Company issued
warrants to purchase 19,467 shares of Series A preferred stock at $1.875 per
share, 86,320 shares of Series B preferred stock at $2.50 per share and 54,400
shares of Series C preferred stock at $3.75 per share. As of December 31, 1995,
no warrants had been exercised. The warrants expire the earlier of seven years
after their issuance or three years after an underwritten initial public
offering.
1993 Stock Plan
During 1993, the board of directors adopted the 1993 Stock Plan (the
"Plan"). The Company has reserved a total of 880,000 common shares for issuance
under the Plan.
Under the Plan, options and stock purchase rights may be granted by the
board of directors to employees and consultants. Options granted may be either
incentive stock options or nonstatutory stock options. Incentive stock options
may be granted to employees with exercise prices of no less than the fair value
and nonstatutory options may be granted to employees or consultants at exercise
prices of no less than 85% of the fair value of the common stock on the grant
date as determined by the board of directors. Options vest as determined by the
board of directors, generally at the rate of 25% at the end of the first year
with the
F-11
<PAGE> 70
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
remaining balance vesting ratably over the next three years. Common stock issued
pursuant to exercise of stock purchase rights are subject to repurchase by the
Company upon termination of employment. The Company's repurchase right generally
lapses over four years.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
SHARES OPTIONS OUTSTANDING
AVAILABLE -------------------------
FOR GRANT NUMBER OF PRICE PER
OF OPTIONS SHARES SHARE
---------- --------- -----------
<S> <C> <C> <C>
Shares reserved.......................................... 680,000 -- --
Options granted........................................ (188,200) 188,200 $0.20-$0.25
Options exercised...................................... -- (20,000) $ 0.25
-------- -------- -----------
Balance at December 31, 1993............................. 491,800 168,200 $0.20-$0.25
Additional shares reserved............................. 200,000 -- --
Options granted........................................ (402,700) 402,700 $0.25-$0.38
Options exercised...................................... -- (149,333) $0.20-$0.25
Options canceled....................................... 37,167 (37,167) $0.20-$0.25
-------- -------- -----------
Balance at December 31, 1994............................. 326,267 384,400 $0.20-$0.38
Options granted........................................ (144,800) 144,800 $ 0.38
Options exercised...................................... -- (13,867) $0.25-$0.38
Options canceled....................................... 18,833 (18,833) $0.20-$0.38
-------- -------- -----------
Balance at December 31, 1995............................. 200,300 496,500 $0.20-$0.38
Additional shares reserved............................. 500,000 -- --
Options granted........................................ (215,600) 215,600 $0.38-$2.50
Options exercised...................................... (20,750) $0.25-$0.38
Options canceled....................................... 750 (750) $ 0.25
-------- -------- -----------
Balance at March 31, 1996................................ 485,450 690,600 $0.20-$2.50
======== ======== ===========
</TABLE>
As of March 31, 1996 and December 31, 1995, options to purchase 236,696 and
212,967 shares of common stock, respectively, were exercisable under the Plan.
Through March 31, 1996, 180,000 shares of common stock have been issued pursuant
to stock purchase rights granted under the Plan, of which 80,625 shares were
subject to the Company's repurchase right at original purchase prices, ranging
from $0.25 to $0.38 per share (69,375 shares subject to repurchase at March 31,
1996).
At December 31, 1995, the Company has recorded deferred compensation of
$578,000 representing the difference between the exercise price and the deemed
fair value for financial reporting purposes of the Company's common stock
ranging from $1.25 to $6.25 per share for 144,500 shares subject to common stock
options and stock purchase rights granted. The deferred stock compensation is
amortized to expense over the period during which the options become
exercisable, generally four years. During the first quarter of 1996 options to
purchase a total of 215,600 shares were granted at a weighted average exercise
price of $2.44 per share, and for which deemed fair values of $9.25 to $10.00
per share were recorded, resulting in additional deferred compensation of
$1,626,000.
F-12
<PAGE> 71
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
6. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
Ortho Pharmaceutical Corporation
In October 1995, the Company entered into a research and development
agreement with Ortho Pharmaceutical Corporation ("Ortho"), a Johnson & Johnson
company, to discover and develop novel beta-lactam antibiotics, antibiotic
potentiators and inhibitors of bacterial signal transduction targeted at
problematic Gram-positive bacteria, including staphylococci and enterococci. The
agreement provides for certain revenue payments, including payments for research
and development costs for three years and for reaching certain research and
development goals. Ortho received exclusive worldwide rights to products
developed during the collaboration in the field of use as defined in the
agreement. The development, manufacturing, marketing and sales of drugs
resulting from the collaboration will be conducted by Ortho, provided that the
Company has the right to undertake certain co-promotion activities in North
America, subject to Ortho's approval. Should the development efforts result in a
marketable product, the Company will receive royalty payments based on Ortho's
sales. In connection with the agreement, Ortho made a nonrefundable $3,000,000
up-front license payment to the Company, and an affiliate of Ortho made an
equity investment of $5,000,000 in return for 571,429 shares of Series D
preferred stock (see Note 5). Total revenue recognized under the agreement for
the year ended December 31, 1995 and the three months ended March 31, 1996 was
$3,647,000 and $875,000, respectively.
Daiichi Pharmaceuticals Co. Ltd.
In November 1995, the Company entered into a research and development
agreement with Daiichi Pharmaceuticals Co. Ltd. ("Daiichi") to discover and
develop bacterial efflux pump inhibitors to be used in combination with
Daiichi's quinolone antibiotics to target Gram-negative bacteria, including
pseudomonas. The agreement provides for certain revenue payments, including
payments for research and development costs for three years commencing March 31,
1995 and for reaching certain research and development goals. Daiichi has the
right to enter into a license agreement for exclusive worldwide rights to
products developed during the collaboration in the field of use as defined in
the agreement. The development, manufacturing and sale of drugs resulting from
the collaboration will be conducted by Daiichi, subject to the Company's right
to co-promote such drugs in North America. Should the development efforts result
in a marketable product, the Company will receive royalty payments based on
Daiichi's sales. Total research revenue recognized under the agreement for the
year ended December 31, 1995 and the three months ended March 31, 1996 was
$1,338,000 and $652,000, respectively.
Costs related to research revenues under the above agreements for the year
ended December 31, 1995 and the three months ended March 31, 1996 approximated
the related revenue recognized.
7. INCOME TAXES
As of December 31, 1995, the Company had federal and state net operating
loss carryforwards of approximately $13,000,000 and $4,000,000, respectively.
The Company also had federal research and development tax credit carryforwards
of approximately $300,000. The federal net operating loss and credit
carryforwards will expire at various dates beginning in 2008 through 2010, if
not utilized. The state net operating loss carryforward will expire at various
dates beginning in 1998 through 2000, if not utilized.
Utilization of the net operating losses and credits may be subject to an
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986.
F-13
<PAGE> 72
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................... $ 3,400 $ 4,700
Research credit carryforwards.................................. 300 500
Other.......................................................... 300 400
------- -------
Total deferred tax assets........................................ 4,000 5,600
Valuation allowance.............................................. (4,000) (5,600)
------- -------
Net deferred tax assets.......................................... $ -- $ --
======= =======
</TABLE>
The valuation allowance increased by $1,600,000 during the year ended
December 31, 1995 ($2,900,000 in 1994).
8. SUBSEQUENT EVENTS
In February 1996, the Company entered into a research and development
agreement with Pfizer Inc ("Pfizer") to implement its essential gene and
multi-channel screening system to discover novel classes of antibiotics. The
agreement provides for certain revenue payments, including payments for research
and development costs for five years and for reaching certain research and
development goals. Pfizer received exclusive worldwide rights to products
developed during the collaboration. The development, manufacturing, and sale of
drugs resulting from the collaboration will be conducted by Pfizer, subject to
the Company's right to co-promote such products in North America. Should the
development efforts result in a marketable product, the Company will receive
royalty payments based on Pfizer's sales. In connection with the agreement,
Pfizer made a $1,000,000 up-front license payment and a $5,000,000 equity
investment in return for 571,429 shares of Series E preferred stock. Revenue
recognized under the agreement for the three months ended March 31, 1996 was
$1,098,000.
On February 23, 1996, the board of directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its common stock to the public. If the offering is
consummated under terms presently anticipated, all of the currently outstanding
preferred stock will automatically convert to 6,880,791 shares of common stock.
Unaudited pro forma stockholders' equity as adjusted for the matters described
above is set forth in the accompanying balance sheet.
On February 23, 1996, the Company's Board of Directors, subject to
stockholder approval, (1) authorized the reincorporation of the Company in the
State of Delaware, and (2) approved a one-for-five reverse stock split of its
common stock and preferred stock through an amendment to the Articles of
Incorporation. All share and per share amounts in the accompanying financial
statements have been retroactively adjusted to reflect the reverse stock split.
The Board has also approved an amendment to the Articles of Incorporation to
change the number of authorized shares of common stock to 50,000,000 shares and
preferred stock to 5,000,000 shares upon the closing of the offering, both of
which will have a par value of $0.001 per share. On March 7, 1996, the Board
approved the adoption of the 1996 Employee Stock Purchase Plan and the 1996
Directors' Stock Option Plan, which authorizes the issuance of 120,000 and
80,000 shares, respectively, under
F-14
<PAGE> 73
MICROCIDE PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 1995 AND 1996 IS UNAUDITED)
the plans. The Board also approved an amendment to the Company's 1993 stock
option plan to increase the number of common shares authorized for issuance by
500,000 shares for a total of 1,380,000 common shares reserved for issuance
under the plan. In April 1996, the above actions were approved by the
stockholders.
On April 5, 1996 the Company effected the one-for-five reverse stock split
described in the previous paragraph.
F-15
<PAGE> 74
[GRAPHIC APPEARS HERE]
[Narrative Description: Graphic depiction of the molecular
aspects of bacteria and antibiotic action.]
<PAGE> 75
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
The Company........................... 12
Use of Proceeds....................... 12
Dividend Policy....................... 12
Capitalization........................ 13
Dilution.............................. 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 20
Management............................ 39
Certain Transactions.................. 47
Principal Stockholders................ 49
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 53
Underwriting.......................... 54
Legal Matters......................... 55
Experts............................... 55
Additional Information................ 56
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE
OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,500,000 SHARES
LOGO
MICROCIDE PHARMACEUTICALS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of the Common Stock being registered hereunder. All of the amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
ITEM
------------------------------------------------------------------
<S> <C>
SEC registration fee.............................................. $ 13,879
NASD filing fee................................................... 4,525
Nasdaq National Market listing fees............................... 43,142
Accounting fees and expenses...................................... 135,000
Blue Sky fees and expenses........................................ 20,000
Legal fees and expenses........................................... 225,000
Printing and engraving fees and expenses.......................... 150,000
Transfer Agent and Registrar fees................................. 10,000
Directors and officers insurance.................................. 185,000
Miscellaneous..................................................... 13,454
------
TOTAL................................................... $800,000
======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify its directors, officers, employees and other agents in terms
sufficiently broad to permit indemnification (including reimbursement for
expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Certificate of Incorporation and Bylaws contain provisions covering
indemnification of corporate directors, officers and other agents against
certain liabilities and expenses incurred as a result of proceedings involving
such persons in their capacities as directors, officers, employees or agents,
including proceedings under the Securities Act or the Securities Exchange Act of
1934, as amended.
The Registrant's Restated Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
The Registrant's Bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of the corporation if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to the best interest of the corporation, and, with respect to any criminal
action or proceeding, the indemnified party had no reason to believe his conduct
was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
II-1
<PAGE> 77
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception in December 1992, the Registrant has sold and issued the
following securities which were not registered under the Securities Act:
(1) From December 31, 1992 to March 13, 1996, the Registrant sold and
issued an aggregate of 427,200 shares of Common Stock to employees and
consultants for cash in the aggregate amount of $5,785. An additional
203,950 shares were issued pursuant to the exercise of options and stock
purchase rights granted under the Registrant's Amended 1993 Incentive Stock
Plan. 240,000 shares were issued to Avalon Medical Partners, L.P. for cash
in the aggregate amount of $1,200. 5,040 shares were issued to Jon S. Saxe
valued at $0.375 per share for services rendered to the Registrant pursuant
to the terms of a consulting agreement.
(2) In January 1993, the Registrant sold and issued an aggregate of
1,078,267 shares of Series A Preferred Stock, at a purchase price of $1.875
per share, for cash in the aggregate amount of $2,000,000 to a group of
investors pursuant to a Preferred Stock Purchase Agreement.
(3) In September and December 1993, the Registrant sold and issued an
aggregate of 1,591,000 shares of Series B Preferred Stock, at a purchase
price of $2.50 per share, for cash in the aggregate amount of $3,977,500 to
a group of investors pursuant to a Preferred Stock Purchase Agreement.
(4) In July 1994, the Registrant sold and issued an aggregate of
3,066,666 shares of Series C Preferred Stock, at a purchase price of $3.75
per share, for cash in the aggregate amount of $11,500,000 to certain
investors pursuant to a Series C Preferred Stock Purchase Agreement.
(5) In October and November 1995, the Registrant sold and issued an
aggregate of 573,429 shares of Series D Preferred Stock, at a purchase
price of $8.75 per share, for cash in the aggregate amount of $5,000,000 to
investors pursuant to a Series D Preferred Stock Purchase Agreements.
(6) In March 1996, the Registrant sold and issued an aggregate of
571,429 shares of Series E Preferred Stock, at a purchase price of $8.75
per share, for cash in the aggregate amount of $5,000,000 to Pfizer Inc,
pursuant to a Series E Preferred Stock Purchase Agreement.
The sales and issuances of securities in the above transactions were deemed
to be exempt from registration under the Securities Act, principally by virtue
of Section 4(2) thereof as transactions by an issuer not involving a public
offering. The purchasers of such securities represented their intention to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the securities issued in such transactions. In addition, certain issuances
described in Item 15(1) were exempt from registration under the Securities Act
in reliance upon Rule 701 promulgated under the Securities Act.
II-2
<PAGE> 78
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C> <C>
1.1+ Form of Underwriting Agreement.
3.1+ Restated Articles of Incorporation of Microcide Pharmaceuticals, Inc., a
California corporation, as in effect prior to the Registrant's
reincorporation in Delaware.
3.2+ Restated Certificate of Incorporation of Microcide Pharmaceuticals, Inc.,
a Delaware corporation, as in effect immediately following the
Registrant's reincorporation in Delaware.
3.3+ Form of Restated Certificate of Incorporation of the Registrant to be
filed upon the closing of the offering under the Registration Statement.
3.4+ Bylaws of the Registrant, as in effect prior to the Registrant's
reincorporation in Delaware.
3.5+ Bylaws of the Registrant, as in effect immediately following the
Registrant's reincorporation in Delaware.
4.1+ Form of Lock-Up Agreement (included as Exhibit B to Exhibit 1.1).
4.2+ Form of Common Stock Certificate.
4.3+ Series A Preferred Warrant Purchase Agreement and Warrant between Dominion
Ventures, Inc. and the Registrant dated May 10, 1993.
4.4+ Series B Preferred Warrant Purchase Agreement and Warrant between Dominion
Ventures, Inc. and the Registrant dated May 10, 1993.
4.5+ Series C Preferred Warrant Purchase Agreement and Warrant between Dominion
Ventures, Inc. and the Registrant dated June 10, 1994.
4.6+ Series B Preferred Warrant Agreement between Comdisco, Inc. and the
Registrant dated September 1, 1993.
4.7+ Series C Preferred Warrant Agreement between Comdisco, Inc. and the
Registrant dated September 1, 1993.
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
5.2+ Opinion of Lyon & Lyon, patent counsel for the Company (included as
Exhibit C to Exhibit 1.1).
10.1+ Information and Registration Rights Agreement, dated June 29, 1994 as
amended.
10.2+ 1993 Amended Incentive Stock Plan.
10.3+ 1996 Employee Stock Purchase Plan.
10.4+ 1996 Director Option Plan.
10.5+ 401(k) Plan.
10.6 Research and License Agreement between the Registrant and Ortho
Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical Research
Institute dated October 24, 1995.
10.7+ Research and License Agreement between the Registrant and Ortho
Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical Research
Institute dated October 24, 1995.
10.8+ Joint Research Agreement between the Registrant and Daiichi Pharmaceutical
Co., Ltd. dated November 6, 1995.
10.9 Collaborative Research Agreement between the Registrant and Pfizer Inc
dated March 1, 1996.
</TABLE>
II-3
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<S> <C> <C>
10.10 License and Royalty Agreement between the Registrant and Pfizer Inc dated
March 1, 1996.
10.11+ Master Lease Agreement between Dominion Ventures, Inc. and the Registrant,
dated May 10, 1993, as amended on June 10, 1994 and November 22, 1994.
10.12+ Master Lease Agreement between the Registrant and Comdisco, Inc. dated
September 1, 1993.
10.13+ Lease Agreement between the Registrant and Portola Land Company dated
April 1993.
10.14+ Form of Indemnification Agreement between the Registrant and its Officers
and Directors.
10.15+ Employment Agreement dated January 31, 1994 between the Registrant and
James E. Rurka.
10.16+ Employment Agreement dated December 23, 1992 between the Registrant and
Keith A. Bostian, Ph.D.
11.1+ Calculation of net income (loss) per share.
23.1 Consent of Ernst & Young L.L.P., independent auditors (see page II-7).
23.2+ Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1).
23.3+ Consent of Lyon & Lyon, patent counsel for the Company (see page II-8).
24.1+ Power of Attorney (see page II-6).
</TABLE>
- ---------------
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES:
All Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
they are not required under the related instructions, are inapplicable or
because the information required thereby has been included in the financial
statements of the Registrant.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE> 80
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such new securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 to Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mountain View, State of California, on the 13th day
of May, 1996.
MICROCIDE PHARMACEUTICALS, INC.
By: /s/ JAMES E. RURKA
------------------------------------
President, Chief Executive Officer,
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS AMENDMENT NO. 3 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ---------------------------------- -------------
<S> <C> <C>
/s/ JAMES E. RURKA President, Chief Executive Officer May 13, 1996
- ---------------------------------------- and Director (Principal Executive
James E. Rurka Officer)
/s/ MATTHEW J. HOGAN Chief Financial Officer (Principal May 13, 1996
- ---------------------------------------- Financial and Accounting Officer)
Matthew J. Hogan
KEITH A. BOSTIAN* Chief Operating Officer and May 13, 1996
- ---------------------------------------- Director
Keith A. Bostian, Ph.D.
JOSEPH S. LACOB* Chairman of the Board of Directors May 13, 1996
- ----------------------------------------
Joseph Lacob
HUGH Y. RIENHOFF, JR.* Director May 13, 1996
- ----------------------------------------
Hugh Y. Rienhoff, Jr., M.D.
JON S. SAXE* Director May 13, 1996
- ----------------------------------------
Jon S. Saxe
DAVID SCHNELL* Director May 13, 1996
- ----------------------------------------
David Schnell, M.D.
L. JAMES STRAND* Director May 13, 1996
- ----------------------------------------
L. James Strand, M.D.
JOHN P. WALKER* Director May 13, 1996
- ----------------------------------------
John P. Walker
*By: /s/ JAMES E. RURKA
James E. Rurka,
Attorney-in-fact
</TABLE>
II-6
<PAGE> 82
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our report dated February 13, 1996
(except for the fourth paragraph of Note 8, as to which the date is April 5,
1996), in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-02400)
and related Prospectus of Microcide Pharmaceuticals, Inc. for the registration
of 2,875,000 shares of its common stock.
ERNST & YOUNG LLP
Palo Alto, California
May 13, 1996
II-7
<PAGE> 83
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------- ----------------------------------------------------------------------------
<C> <S> <C>
1.1+ Form of Underwriting Agreement..............................................
3.1+ Restated Articles of Incorporation of Microcide Pharmaceuticals, Inc., a
California corporation, as in effect prior to the Registrant's
reincorporation in Delaware.................................................
3.2+ Restated Certificate of Incorporation of Microcide Pharmaceuticals, Inc., a
Delaware corporation, as in effect immediately following the Registrant's
reincorporation in Delaware.................................................
3.3+ Form of Restated Certificate of Incorporation of the Registrant to be filed
upon the closing of the offering under the Registration Statement...........
3.4+ Bylaws of the Registrant, as in effect prior to the Registrant's
reincorporation in Delaware.
3.5+ Bylaws of the Registrant, as in effect immediately following the
Registrant's reincorporation in Delaware....................................
4.1+ Form of Lock-Up Agreement (included as Exhibit B to Exhibit 1.1)............
4.2+ Form of Common Stock Certificate............................................
4.3+ Series A Preferred Warrant Purchase Agreement and Warrant between Dominion
Ventures, Inc. and the Registrant dated May 10, 1993........................
4.4+ Series B Preferred Warrant Purchase Agreement and Warrant between Dominion
Ventures, Inc. and the Registrant dated May 10, 1993........................
4.5+ Series C Preferred Warrant Purchase Agreement and Warrant between Dominion
Ventures, Inc. and the Registrant dated June 10, 1994.......................
4.6+ Series B Preferred Warrant Agreement between Comdisco, Inc. and the
Registrant dated September 1, 1993..........................................
4.7+ Series C Preferred Warrant Agreement between Comdisco, Inc. and the
Registrant dated September 1, 1993..........................................
5.1+ Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.......
5.2+ Opinion of Lyon & Lyon, patent counsel for the Company (included as Exhibit
C to Exhibit 1.1)...........................................................
10.1+ Information and Registration Rights Agreement, dated June 29, 1994 as
amended.....................................................................
10.2+ 1993 Amended Incentive Stock Plan...........................................
10.3+ 1996 Employee Stock Purchase Plan...........................................
10.4+ 1996 Director Option Plan...................................................
10.5+ 401(k) Plan.................................................................
10.6 Research and License Agreement between the Registrant and Ortho
Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical Research
Institute dated October 24, 1995............................................
10.7+ Research and License Agreement between the Registrant and Ortho
Pharmaceutical Corporation and the R.W. Johnson Pharmaceutical Research
Institute dated October 24, 1995............................................
10.8+ Joint Research Agreement between the Registrant and Daiichi Pharmaceutical
Co., Ltd. dated November 6, 1995............................................
10.9 Collaborative Research Agreement between the Registrant and Pfizer Inc dated
March 1, 1996...............................................................
10.10 License and Royalty Agreement between the Registrant and Pfizer Inc dated
March 1, 1996...............................................................
10.11+ Master Lease Agreement between Dominion Ventures, Inc. and the Registrant,
dated May 10, 1993, as amended on June 10, 1994 and November 22, 1994.......
10.12+ Master Lease Agreement between the Registrant and Comdisco, Inc. dated
September 1, 1993...........................................................
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ------- ----------------------------------------------------------------------------
<C> <S> <C>
10.13+ Lease Agreement between the Registrant and Portola Land Company dated April
1993........................................................................
10.14+ Form of Indemnification Agreement between the Registrant and its Officers
and Directors...............................................................
10.15+ Employment Agreement dated January 31, 1994 between the Registrant and James
E. Rurka....................................................................
10.16+ Employment Agreement dated December 23, 1992 between the Registrant and
Keith A. Bostian, Ph.D. ....................................................
11.1+ Calculation of net income (loss) per share..................................
23.1 Consent of Ernst & Young L.L.P., independent auditors (see page II-7).......
23.2+ Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1)...................................................
23.3+ Consent of Lyon & Lyon, patent counsel for the Company (see page II-8)7
24.1+ Power of Attorney (see page II-6)...........................................
</TABLE>
- ---------------
+ Previously filed.
<PAGE> 1
EXHIBIT 10.6
MICROCIDE - ORTHO
RESEARCH AND LICENSE AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 1. DEFINITIONS........................................................................................ 3
ARTICLE 2. RESEARCH........................................................................................... 12
2.1 Research Program................................................................................... 12
2.2 Management......................................................................................... 12
2.2.1 Research Program................................................................. 12
2.2.2 Functions of the RAC............................................................. 13
2.2.3 Information and Access........................................................... 14
2.3 The Research Program............................................................................... 14
2.3.1 Microcide Research Efforts....................................................... 14
2.3.2 Information and Reports.......................................................... 14
2.3.3 Research Term.................................................................... 16
2.4 Research Funding................................................................................... 16
2.5 Research Audit..................................................................................... 17
ARTICLE 3. LICENSE............................................................................................ 18
ARTICLE 4. DEVELOPMENT AND COMMERCIALIZATION.................................................................. 20
4.1 Development........................................................................................ 20
4.1.1 Management....................................................................... 20
4.1.1.1 The PMT....................................................... 20
4.1.1.2 Functions of the PMT.......................................... 20
4.1.2 Development Program.............................................................. 22
4.2 Commercialization.................................................................................. 24
4.3 Performance Obligations............................................................................ 24
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
4.4 Selection of Collaboration Compounds and Rights to Related Compounds............................... 25
ARTICLE 5. LICENSE FEES....................................................................................... 27
ARTICLE 6. ROYALTIES, RECORDS AND REPORTS..................................................................... 29
ARTICLE 7. CONFIDENTIALITY.................................................................................... 32
ARTICLE 8. ADVERSE EVENT REPORTING............................................................................ 34
ARTICLE 9. INFRINGEMENT....................................................................................... 35
ARTICLE 10. STATUS OF THE PATENT RIGHTS........................................................................ 37
ARTICLE 11. PUBLICITY.......................................................................................... 39
ARTICLE 12. WARRANTIES AND REPRESENTATIONS; EXCLUSIVITY........................................................ 40
ARTICLE 13. TRADEMARKS......................................................................................... 41
ARTICLE 14. INDEMNIFICATION.................................................................................... 42
ARTICLE 15. MICROCIDE BANKRUPTCY............................................................................... 43
ARTICLE 16. DURATION........................................................................................... 44
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE 17. TERMINATION........................................................................................ 44
ARTICLE 18. RIGHTS AND OBLIGATIONS UPON TERMINATION............................................................ 45
ARTICLE 19. ASSIGNMENT......................................................................................... 47
ARTICLE 20. DISPUTE RESOLUTION................................................................................. 48
ARTICLE 21. GENERAL............................................................................................ 49
</TABLE>
-iii-
<PAGE> 5
RESEARCH AND LICENSE AGREEMENT
AGREEMENT, made this 24th day of October, 1995 by and between MICROCIDE
PHARMACEUTICALS, INCORPORATED, a corporation organized under California law
having its principal office at 850 Maude Avenue, Mountain View, California 94043
(hereinafter called "MICROCIDE");
ON THE ONE HAND,
AND:
ORTHO PHARMACEUTICAL CORPORATION, a company organized under Delaware law, having
its principal office at U.S. Route 202, Raritan, New Jersey 08869 (hereinafter
called "ORTHO") and
THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE, a division of Ortho
Pharmaceutical Corporation, having its principal office at U.S. Route 202,
Raritan, New Jersey 08869 (hereinafter called "RWJPRI"),
(ORTHO and RWJPRI are collectively referred to herein as "LICENSEE")
ON THE OTHER HAND,
WITNESSETH:
A. WHEREAS, MICROCIDE has an on-going research program in the FIELD as
defined below and has developed certain technology in this FIELD to
which it has the right to grant licenses;
-2-
<PAGE> 6
B. WHEREAS, patent applications have been filed in the name of MICROCIDE
in the United States and other territories for the granting of letters
patent relating to certain antibacterials and antibacterial
potentiators within the FIELD;
C. WHEREAS, LICENSEE has been engaged in research efforts focused on the
development of new antibacterials and has certain research, development
and commercialization capabilities in the field as defined herein;
D. WHEREAS, MICROCIDE and RWJPRI desire to engage in collaborative
research to conduct a drug discovery program as generally described in
the Research Plan attached hereto as Appendix A;
E. WHEREAS, LICENSEE is prepared to undertake a program for the
development, manufacture and sale of products developed from the
collaborative research, as hereinafter defined, provided that LICENSEE
is able to obtain a license under the PATENT RIGHTS and KNOW-HOW-HOW
(as hereinafter defined) with exclusivity to protect its investment in
such program;
F. WHEREAS, MICROCIDE recognizes that LICENSEE requires such license in
order to justify the investment in funding and personnel needed to
develop and market products developed from the collaborative research
and is willing to grant such rights.
NOW, THEREFORE, in consideration of the premises and the performance of the
covenants herein contained, IT IS AGREED AS FOLLOWS:
ARTICLE 1. DEFINITIONS
For the purposes of this agreement (hereinafter called the "LICENSE AGREEMENT"),
and solely for such purposes, the terms hereinafter set forth shall have the
following respective meanings:
-3-
<PAGE> 7
(a) "AFFILIATE" or "AFFILIATES" shall mean any corporation(s) or
organization(s) which is(are) directly or indirectly
CONTROLLED, CONTROLLED by, or under common CONTROL with
LICENSEE.
(b) "COLLABORATION COMPOUND" shall mean any composition of matter
in the FIELD (or in the case of pro-drugs, an active
metabolite of which), other than a natural product or
synthetic or semi-synthetic derivative thereof, that (i) was
discovered, identified, synthesized or acquired by or on
behalf of MICROCIDE as of the EFFECTIVE DATE, (ii) is
discovered, identified, synthesized or acquired by or on
behalf of MICROCIDE during the RESEARCH TERM and for six (6)
months thereafter, or (iii) is contained within a chemical
genus as defined in any issued claim of any unexpired patent
in the PATENT RIGHTS, or in a claim of a pending application
for such a patent which is being prosecuted in good faith, and
as to which one member of such chemical genus is defined in
(i) or (ii) above. For purposes of determining whether a given
composition is a COLLABORATION COMPOUND, it is understood that
a composition which is discovered, identified, synthesized or
acquired during the RESEARCH TERM or within six (6) months
thereafter ("the Applicable Date") shall be included as a
COLLABORATION COMPOUND notwithstanding whether the composition
was identified as being active in the FIELD after the
Applicable Date.
(c) "CONTROL", "CONTROL(S)" or "CONTROLLED" shall refer to direct
or indirect beneficial ownership of at least fifty percent
(50%) of the voting stock of a corporation or other business
entity, or a fifty percent (50%) or greater interest in the
income of such corporation or other business entity, or the
power to direct or cause the direction of the management or
policies of such corporation or other business entity whether
by ownership of voting securities, by contract or otherwise,
or such other relationship as, in fact, constitutes actual
control.
-4-
<PAGE> 8
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
(d) "DEVELOPMENT" shall mean all work involved in PHASES O, I, II,
and III for a LICENSED PRODUCT in any country or territory.
(e) "DEVELOPMENT PLAN" shall mean the plan for DEVELOPMENT of a
LICENSED PRODUCT pursuant to Article 4.1.1.2.
(f) "EFFECTIVE DATE" shall mean the date at the head of this
LICENSE AGREEMENT.
(g) "FDA" shall mean the United States Food and Drug
Administration.
(h) "FIELD" shall mean the field of:
[REDACTED]
(iv) [REDACTED]
(v) [REDACTED]
all for use in treating bacterial infections for all human and
animal pharmaceutical applications.
(i) "FTE" shall mean a full-time scientific person with
appropriate academic credentials and training dedicated to the
RESEARCH PROGRAM or in the case of less than a full-time
dedicated scientific person, a full-time, equivalent
scientific person year,
-5-
<PAGE> 9
based upon a total of forty-six and 1/4 (46.25) weeks or one
thousand eight hundred fifty (1,850) hours per year of
scientific work, on or directly related to the RESEARCH,
carried out by such a person. Included are Senior Research
Scientists and their associates (MS or BS). Excluded are
technical and non-technical project management personnel,
administrative facilities support, laboratory technical
support, information and computer support, and other internal
or external support personnel involved in the RESEARCH
PROGRAM.
(j) "IND" shall mean an Investigational New Drug Application filed
pursuant to the requirements of the FDA as more fully defined
in 21 C.F.R. section 312.3 or its equivalent in any MAJOR
MARKET COUNTRY or in the European Economic Community.
(k) "KNOW-HOW" shall mean all information, not generally known to
the public, including (i) techniques and data, including but
not limited to, screens, models, methods, assays, inventions,
discoveries, trade secrets, improvements, and technical
information, together with all experience, data, formulas,
procedures and results, and including all chemical,
pharmacological, toxicological, clinical, analytical and
quality control data, and (ii) any TANGIBLE RESEARCH PRODUCT.
Notwithstanding the foregoing, KNOW-HOW-HOW shall not include
the subject matter covered by any published patent or patent
application.
(l) "LICENSED PRODUCT" shall mean any COLLABORATION COMPOUND
selected for DEVELOPMENT and marketing by LICENSEE pursuant to
Article 4.
(m) "MAJOR MARKET COUNTRY" shall mean any one of the United
States, United Kingdom, Germany, France, Italy, or Japan.
(n) "MARKETING AUTHORIZATION" shall mean all allowances and
approvals (including pricing and reimbursement approvals)
granted by the appropriate federal,
-6-
<PAGE> 10
state and local regulatory agencies, departments, bureaus or
other governmental entities within a country necessary to
market and SELL LICENSED PRODUCT.
(o) "MICROCIDE KNOW-HOW" shall mean all KNOW-HOW which (i) is now
in possession by MICROCIDE, or to which MICROCIDE has the
rights to grant licenses to, which relate to the FIELD, or
(ii) is developed in performance of the RESEARCH PROGRAM
during the TERM OF THE RESEARCH or (iii) is hereafter
developed by MICROCIDE within the five year period following
the end of the RESEARCH TERM and is necessary or materially
useful in the development, manufacture or use of LICENSED
PRODUCT, and which MICROCIDE has rights to grant licenses to
(e.g., have not been developed in the course of an exclusive
collaboration with a third party or exclusively licensed to a
third party).
(p) "NDA" shall mean a New Drug Application and any supplements
filed pursuant to the requirements of the FDA, including all
documents, data and other information concerning the LICENSED
PRODUCT which are necessary for or included in, FDA approval
to market LICENSED PRODUCT as more fully defined in 21 CFR
Section 314.50 et seq. as well as equivalent submissions to
the appropriate health authorities in other countries.
(q) "NET SALES" shall mean the revenue billed by ORTHO or an
AFFILIATE or SUBLICENSEE from the sale of LICENSED PRODUCTS to
independent third parties less the following amounts: (i)
discounts, including cash discounts, or rebates, including
rebates to governmental agencies such as Medicaid rebates and
the like, actually allowed or granted, (ii) credits or
allowances actually granted upon claims or returns regardless
of the party requesting the return, (iii) freight charges paid
for delivery, (iv) taxes or other governmental charges levied
on or measured by the billed amount, when included in billing,
as adjusted for rebates and refunds and (v) provisions for
uncollectible amounts determined in accordance with United
States
-7-
<PAGE> 11
generally accepted accounting practices consistently applied
to all Products of the Selling Party.
If on a country-by-country basis the LICENSED PRODUCT, other
than an antibiotic potentiator as defined in Article 1(h)(iii)
hereof, is sold as a combination product containing one or
more active ingredients, NET SALES for purposes of determining
royalties on the combination products shall be reasonably
allocated between the LICENSED PRODUCT, the other active
components, and the combination product based upon their
relative value.
(r) "NON-COLLABORATION COMPOUND" shall mean any composition of
matter in the FIELD (or in the case of pro-drugs, an active
metabolite of which), other than a natural product or
synthetic or semi-synthetic derivative thereof, that (i) is
discovered, identified, synthesized or acquired by MICROCIDE
six (6) months or longer after the end of the RESEARCH TERM,
or (ii) is contained within a chemical genus as defined in any
issued claim of any unexpired patent in the PATENT RIGHTS, or
in a claim of a pending application for such a patent which is
being prosecuted in good faith, as to which one member of such
chemical genus is defined in (i) above, except to the extent
such composition falls within the definition of a
COLLABORATION COMPOUND pursuant to Article 1(b) above.
(s) "PATENT RIGHTS" shall mean (i) the patents and patent
applications identified in Appendix B hereof, and in respect
of such letters patent, and patent applications, all
corresponding Patent Co-operation Treaty applications,
European Patent Convention applications or applications under
similar administrative international conventions, and
corresponding national patents and patent applications,
together with any divisional, continuation, (but not a
continuation-in-part except to the extent described in (ii) or
(iii) below), substitution, reissue, extension, supplementary
protection certificate or other application based thereon; and
(ii) any other patents or patent applications to
-8-
<PAGE> 12
the extent they disclose and claim inventions made by
MICROCIDE in performance of the RESEARCH PROGRAM, and (iii)
any other patents or patent applications containing one or
more claims covering the manufacture, use or sale of a
LICENSED PRODUCT to the extent such patents or patent
applications disclose and claim inventions made by MICROCIDE
during the five year period following the end of the RESEARCH
PROGRAM, which are owned or controlled by MICROCIDE, or under
which MICROCIDE has the right to grant licenses to (e.g. are
not invented in the course of an exclusive collaboration with
a third party or exclusively licensed to a third party).
(t) "PHASE O" shall mean that portion of the DEVELOPMENT program
which starts with the selection of a COLLABORATION COMPOUND
for development into a LICENSED PRODUCT under Article 4
hereunder and which generally provides for toxicological and
pharmacological studies as well as drug substance and drug
product formulation and manufacturing development necessary to
obtain the permission of regulatory authorities to begin and
continue human clinical testing.
(u) "PHASE I" shall mean that portion of the DEVELOPMENT program
which provides for the first introduction into humans of a
LICENSED PRODUCT with the purpose of determining safety,
metabolism, absorption, elimination and other pharmacological
action in humans as well as additional development work on
animal toxicity, metabolism, drug substance and drug product
formulation and manufacturing development to ensure
continuation of human clinical testing.
(v) "PHASE II" shall mean that portion of the DEVELOPMENT PROGRAM
which provides for the initial trials of LICENSED PRODUCT on a
limited number of patients for the purposes of determining
dose and evaluating safety and preliminary efficacy data in
the proposed therapeutic indication as well as additional
development
-9-
<PAGE> 13
work on animal toxicity, metabolism, drug substance and drug
product formulation and manufacturing development to ensure
continuation of human clinical testing.
(w) "PHASE III" shall mean that portion of the DEVELOPMENT PROGRAM
which provides for continued trials of LICENSED PRODUCT on
sufficient numbers of patients to establish the safety and
efficacy of a LICENSED PRODUCT to support MARKETING
AUTHORIZATION in the proposed indication. In addition, all
other development work on animal toxicity, metabolism, drug
substance and drug product formulation and manufacturing
development will be finalized.
(x) "PMT" shall mean the Project Management Team.
(y) "RAC" shall mean the Research Advisory Committee.
(z) "RESEARCH PROGRAM" shall mean all research and development
performed, directed or acquired by MICROCIDE in the course of
performing the RESEARCH PLAN during the RESEARCH TERM.
(aa) "RESEARCH PLAN" shall have the meaning described in Article
2.1 hereof and shall be attached as Appendix A.
(ab) "RESEARCH TERM" shall mean the period set forth in Article
2.3.3 hereunder unless this Agreement is earlier terminated
under Article 17 below.
(ac) "RWJPRI KNOW-HOW" shall mean such KNOW-HOW which RWJPRI or
ORTHO has rights to grant licenses to, and which RWJPRI or
ORTHO discloses to MICROCIDE under this LICENSE AGREEMENT or
which is necessary or materially useful in the development,
manufacturing or use of COLLABORATION COMPOUNDS or LICENSED
PRODUCTS.
-10-
<PAGE> 14
(ad) "RWJPRI PATENTS" shall mean any patents and patent
applications in the FIELD, including all corresponding Patent
Co-operation Treaty applications, European Patent Convention
applications or applications under similar administrative
international conventions, and corresponding national patents
and patent applications, together with any divisional,
continuation, continuation-in-part, substitution, reissue,
extension, supplementary protection certificate or other
application based thereon, owned or controlled by RWJPRI or
ORTHO, and to which RWJPRI or ORTHO has the ability to grant a
license or sublicense to without violating the terms of any
agreement with any Third Party.
(ae) "SELLER" shall mean one who SELLS.
(af) "SOLD", "SALE", "SALES", "SELL", "SELLING" and "SELLS" shall
refer to the act of selling or disposing of for value.
(ag) "SUB-FIELD" shall mean a part of the FIELD as defined in
clauses (i)-(v) of Article 1(h) above.
(ah) "SUBLICENSEE" shall mean, with respect to a particular
Licensed Product, a third party to whom LICENSEE has granted a
licensee or sublicensee to make and sell such Licensed
Product. As used in this Agreement, "SUBLICENSEE" shall also
include a third party to whom LICENSEE has granted the right
to distribute such Licensed Product, provided that such third
party is responsible for marketing or promoting such Licensed
Products within the applicable territory.
(ai) "TANGIBLE RESEARCH PRODUCT" shall mean any composition of
matter, including, but not limited to, organic or inorganic
compounds, cells and cell lines, DNA and RNA molecules,
plasmids, receptors, proteins or peptides.
-11-
<PAGE> 15
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
(aj) "USE", "USES" and "USED" shall refer to the act of using for
any commercial purposes whatsoever.
(ak) "VALID CLAIM" shall mean a claim of an issued, unexpired
patent within the PATENT RIGHTS or a claim being prosecuted in
a pending application within the PATENT RIGHTS. A claim of an
issued, unexpired patent shall be presumed to be valid unless
and until it has been held to be invalid by a final judgement
of a court of competent jurisdiction from which no appeal can
be or is taken. For the purposes of royalty determination and
payment under Article 6 hereof, any claim being prosecuted in
a pending patent application shall be deemed to be the
equivalent of a valid claim of an issued, unexpired patent.
ARTICLE 2. RESEARCH
2.1 Research Program
MICROCIDE hereby agrees to conduct the RESEARCH PROGRAM in consultation
with RWJPRI with a goal of discovering, identifying and synthesizing
COLLABORATION COMPOUNDS for DEVELOPMENT by RWJPRI into one or more
LICENSED PRODUCTS for commercialization by ORTHO. The RESEARCH PROGRAM
shall be conducted in accordance with the overall RESEARCH PLAN
attached hereto as Appendix A.
2.2 Management
2.2.1
[REDACTED]
-12-
<PAGE> 16
2.2.2 Functions of the RAC
The RAC shall be responsible for managing the RESEARCH
PROGRAM. In carrying out this function, the RAC will:
(a) oversee directed research activities to be
undertaken under the RESEARCH PROGRAM in
accordance with the RESEARCH PLAN which will
specify the details by which MICROCIDE will
conduct the Research;
(b) review progress of the RESEARCH PROGRAM, set
priorities for Research activities, review
results achieved, direct changes or
modifications to the RESEARCH PLAN as
necessary and provide general guidance to
assist the overall program in meeting its
objective of fostering successful
identification of COLLABORATION COMPOUNDS
for DEVELOPMENT by RWJPRI;
(c) advise RWJPRI regarding the selection of
COLLABORATION COMPOUNDS for full DEVELOPMENT
by RWJPRI, under Article 4;
(d) attempt to settle disputes or disagreements
between the parties regarding the
performance of the RESEARCH PROGRAM
hereunder,
(e) approve any material agreements with third
parties to be made by MICROCIDE related to
performance of the RESEARCH PROGRAM under
this Agreement;
(f) perform such other functions as are
appropriate to further the purposes of this
Agreement as determined by the parties.
-13-
<PAGE> 17
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
2.2.3 Information and Access
MICROCIDE and RWJPRI shall provide the RAC, its members and authorized
representatives with reasonable access during regular business hours to
all records and documents relating to the performance of this Agreement
which it reasonably may request in order to perform its obligations
hereunder; provided that if such documents are under a bona fide
obligation of confidentiality to a third party, MICROCIDE or RWJPRI, as
the case may be, may withhold access thereto to the extent necessary to
satisfy such obligation.
2.3 The Research Program
2.3.1 Microcide Research Efforts
[REDACTED]
2.3.2 Information and Reports
(a) MICROCIDE will make available and use all reasonable
efforts to disclose to RWJPRI all MICROCIDE KNOW-HOW
including information regarding
-14-
<PAGE> 18
compounds synthesized or discovered, initial leads,
activities of leads, derivatives, results of in vitro
and in vivo studies, assay techniques and new assays.
RWJPRI will make available and use all reasonable
efforts to disclose to MICROCIDE such RWJPRI KNOW-HOW
necessary or materially useful in evaluating
COLLABORATION COMPOUNDS and/or in selecting LICENSED
PRODUCTS for DEVELOPMENT. Significant discoveries or
advances shall be communicated as soon as practical
after such KNOW-HOW is obtained or its significance
is appreciated. MICROCIDE shall provide RWJPRI with,
at a minimum, monthly oral or written reports and a
quarterly written report, including but not limited
to reports routinely prepared in the course of the
RESEARCH PROGRAM presenting a meaningful summary of
the Research performed under this Agreement.
Following the end of the RESEARCH TERM, a final
written report shall be provided by MICROCIDE within
six (6) months of termination of the RESEARCH
PROGRAM.
(b) Each party shall designate a single project
coordinator whose duties shall be to oversee matters
arising under the provisions of this Agreement and to
facilitate the communication of research results.
Such project coordinator shall be responsible for
day-to-day worldwide coordination of the RESEARCH
PROGRAM and will serve to facilitate communication
between the parties relating to the RESEARCH PROGRAM.
(c) MICROCIDE personnel working on the RESEARCH PROGRAM
shall use all reasonable efforts to make accurate
laboratory notebook records of the RESEARCH PROGRAM
in a manner suitable for use in United States patent
prosecution and litigation. RWJPRI and/or its
designee shall be permitted to review such laboratory
notebooks and records at any reasonable time and to
obtain copies thereof for further review by RWJPRI,
its AFFILIATES and
-15-
<PAGE> 19
consultants. MICROCIDE shall make reasonable efforts
to safeguard such notes and records against theft and
loss by fire, flood and other damages.
(d) To the extent permitted by applicable law, MICROCIDE
shall require all persons, agents, contractors, and
consultants employed or retained by MICROCIDE to work
on the RESEARCH PROGRAM, prior to beginning such
employment, to be bound in writing to (i) assign to
MICROCIDE all rights, title and interest in and to
any ideas, discoveries, improvements, inventions,
Know-How, patents, patent applications, and the like
which were made or conceived in performing the
RESEARCH PROGRAM, and to sign all documents and give
lawful assistance necessary for filing, and defending
patents, and patent applications in all countries,
whether such filing is by MICROCIDE, or designees or
assignees thereof, and (ii) to be bound in writing to
provisions of confidentiality substantially similar
to those of Article 7 hereof.
2.3.3 Research Term
The RESEARCH PROGRAM shall commence on the EFFECTIVE DATE and
continue for three (3) years. RWJPRI shall have the option,
exercisable not later than one hundred eighty (180) days prior
to the expiration of the RESEARCH TERM then in effect, to
extend the RESEARCH TERM for an additional one (1) year
period.
2.4 Research Funding
(a) Toward the performance of the RESEARCH PROGRAM by
MICROCIDE hereunder, RWJPRI shall pay MICROCIDE Three
Million Five Hundred Thousand Dollars ($3,500,000)
per year through the end of the RESEARCH TERM. Such
funding shall be provided in four (4) equal quarterly
installments
-16-
<PAGE> 20
during each calendar year payable in advance on or
about January 1, April 1, July 1, and October 1;
provided that the first payment for Contract Year One
shall be due ten (10) days after the EFFECTIVE DATE.
Any payment for a portion of a quarter shall be made
on a pro rata basis. During any extension of the
RESEARCH TERM pursuant to Article 2.3.3 above,
funding by RWJPRI shall continue at the same rate.
(b) All funds provided by RWJPRI under this Article 2.4
shall be used by MICROCIDE in the conduct of the
RESEARCH PROGRAM.
(c) The purchase of any item including, but not limited
to, equipment, materials and cell lines reasonably
required by MICROCIDE to carry out the RESEARCH
PROGRAM shall be paid for by MICROCIDE out of the
Research Funding and shall be owned by MICROCIDE.
2.5 Research Audit
MICROCIDE will maintain complete and accurate records which are
relevant to its expenditure of Research funding provided to it by
RWJPRI pursuant to Article 2.4 hereof. Such records shall be open
during regular business hours for a period of three (3) years from
creation of individual records for examination at RWJPRI's expense for
the sole purpose of verifying that MICROCIDE has devoted to the
RESEARCH PROGRAM the FTE's required by Article 2.3.1 above; provided
however, that such right may not be exercised more than once in any
calendar year. RWJPRI shall be entitled to a credit against future
Research payments or a refund in the event such audit reveals that the
proper FTE's were not allocated in accordance with Article 2.3.1 above.
-17-
<PAGE> 21
ARTICLE 3. LICENSE
3.1 MICROCIDE hereby grants to LICENSEE and LICENSEE hereby accepts from
MICROCIDE, upon the terms and conditions herein specified, a worldwide
exclusive license, with the right to grant sublicenses, under the
PATENT RIGHTS and MICROCIDE KNOW-HOW, to make, use and develop
COLLABORATION COMPOUNDS, subject to Article 4.4.1 herein, and to make,
to have made, to USE, to SELL and to have SOLD, LICENSED PRODUCTS.
3.2 ORTHO may sell LICENSED PRODUCTS through its AFFILIATES or agents in
any country.
3.3 ORTHO agrees to be responsible for the performance hereunder by its
AFFILIATES, agents and SUBLICENSEES to which the license and rights
hereunder shall have been extended.
3.4 For the purposes of reporting and making payments of earned royalties
under this LICENSE AGREEMENT, the manufacture, SALE or USE of LICENSED
PRODUCTS by any AFFILIATE, or SUBLICENSEE to which the license and
rights shall have been extended shall be considered the manufacture,
SALE or USE of such LICENSED PRODUCT by ORTHO and any such AFFILIATE or
SUBLICENSEE may make the pertinent reports and royalty payments
specified in Article 6 hereof directly to MICROCIDE on behalf of ORTHO;
otherwise, such reports and payments on account of SALES of LICENSED
PRODUCTS by each AFFILIATE and SUBLICENSEE shall be made by ORTHO; and,
in any event, the SALES of LICENSED PRODUCT by each such AFFILIATE and
SUBLICENSEE shall be separately shown in the reports to MICROCIDE if
such information is readily available to ORTHO.
3.5 In the event LICENSEE wishes to manufacture LICENSED PRODUCT in a
country other than a MAJOR MARKET COUNTRY where its AFFILIATE is unable
to pay royalties to
-18-
<PAGE> 22
ORTHO or where payment of royalties to ORTHO are limited as to their
tax deductibility, MICROCIDE, hereby agrees, at the request of ORTHO,
to grant direct licenses containing the same terms, conditions and
provisions as this Agreement to any AFFILIATE under PATENT RIGHTS and
MICROCIDE KNOW-HOW to make, have made, use and sell LICENSED PRODUCTS.
Any such licensed AFFILIATE shall thereafter report NET SALES directly
to MICROCIDE and the activities of any such AFFILIATE shall not be
includable in any reports made by ORTHO to MICROCIDE.
3.6 In addition to the rights concerning COLLABORATION COMPOUNDS and
LICENSED PRODUCTS granted pursuant to Article 3.1 hereof, MICROCIDE
hereby grants LICENSEE a nonexclusive, paid-up, worldwide license,
without the right to grant sublicenses, to make and use for LICENSEE's
internal research purposes all inventions covered by the PATENT RIGHTS
and all MICROCIDE KNOW-HOW disclosed to LICENSEE by MICROCIDE, provided
however that during the period after the end of the RESEARCH TERM,
MICROCIDE screens, assays and TANGIBLE RESEARCH PRODUCTS, other than
COLLABORATION COMPOUNDS, shall specifically be excluded from such
license and LICENSEE shall have no right to make or use such MICROCIDE
screens, assays or TANGIBLE RESEARCH PRODUCTS for any purpose.
3.7 LICENSEE hereby grants MICROCIDE a non-exclusive paid-up license, with
no right to grant sublicenses, under RWJPRI PATENTS and RWJPRI KNOW-HOW
to make and use methods and materials to carry out the RESEARCH PROGRAM
during the RESEARCH TERM and for six (6) months thereafter.
3.8 No other, further or different license or right, except as expressly
provided in Article 3 hereof, is hereby granted or implied.
-19-
<PAGE> 23
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
ARTICLE 4. DEVELOPMENT AND COMMERCIALIZATION
4.1 Development
4.1.1 Management
4.1.1.1 The PMT
[REDACTED]
4.1.1.2 Functions of the PMT
The PMT shall be responsible for managing
the DEVELOPMENT of LICENSED PRODUCTS as well
as related pre-market activities
-20-
<PAGE> 24
performed under the provisions of this
LICENSE AGREEMENT. In carrying out this
function, the PMT will:
(a) Promptly upon selection of
a LICENSED PRODUCT for
DEVELOPMENT, provide the
parties with a written
DEVELOPMENT PLAN,
including appropriate time
lines for DEVELOPMENT, for
such LICENSED PRODUCT;
(b) review progress of the
DEVELOPMENT work at least
quarterly, and direct
changes or modifications
to the DEVELOPMENT PLAN as
well as budgets therefor;
(c) establish, according to
the practices of RWJPRI
but in accordance with
this Agreement, a budget
for each DEVELOPMENT PLAN
and determine projected
additional costs or
savings associated with
any changes or
modifications thereto;
(d) submit progress reports as
to the performance of the
DEVELOPMENT PLAN, the
first such report to be
submitted six (6) months
following selection of
such COLLABORATION
COMPOUND for DEVELOPMENT
at six (6) month intervals
thereafter until the SALE
of LICENSED PRODUCT is
approved and LICENSED
PRODUCT is being marketed
on a regular commercial
basis in the United States
and each MAJOR MARKET
COUNTRY and such approval
and marketing is reported
in writing to MICROCIDE.
Minutes of meetings of the
PMT may serve as such
progress reports. The
parties agree to maintain
-21-
<PAGE> 25
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
information in such
reports in confidence in
accordance with the
confidentiality provisions
of Article 7 hereof.
4.1.2 Development Program
RWJPRI shall be solely responsible for and have the exclusive
right, at its discretion but in consultation with the RAC, to
select COLLABORATION COMPOUNDS which shall then be designated
LICENSED PRODUCTS for further DEVELOPMENT by RWJPRI and
marketing by ORTHO and its AFFILIATES. RWJPRI shall provide
MICROCIDE with written notice of its decision to select a
COLLABORATION COMPOUND for DEVELOPMENT. Once a LICENSED
PRODUCT has been selected for further development, RWJPRI,
with the guidance of the PMT, shall have the exclusive right
to develop the LICENSED PRODUCT through PHASES O, I, II and
III and shall have the exclusive right to prepare and file,
and shall be the owner of, all applications for MARKETING
AUTHORIZATION throughout the world. During such DEVELOPMENT
efforts, MICROCIDE will assist RWJPRI as may be mutually
agreed in chemical development, formulation development,
production of labeled material and production of sufficient
quantities of material for PHASE O and initial PHASE I
studies. Promptly following establishment of the PMT, the PMT
shall determine whether, and to what extent, MICROCIDE shall
have responsibility For PHASE O DEVELOPMENT. Unless the PMT
objects thereto, MICROCIDE will assume responsibility for
managing PHASE O DEVELOPMENT [REDACTED] ,
as defined in Article 1(h)(i) above, in conjunction with
RWJPRI, and on terms to be agreed by the parties. RWJPRI
shall exercise diligent efforts, commensurate with the
efforts it would normally exercise for products with similar
potential sales volume and consistent with its overall
business strategy, in developing such LICENSED PRODUCT in
accordance with the DEVELOPMENT PLAN established by the PMT.
In the course of such efforts RWJPRI shall, either directly
or through an AFFILIATE
-22-
<PAGE> 26
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
or SUBLICENSEE to which the license shall have been extended,
take appropriate steps including the following:
(a) in consultation with the RAC, select certain
COLLABORATION COMPOUNDS for PHASE O
DEVELOPMENT; and
(b) establish and maintain a program reasonably
designed, funded and resourced to obtain
information adequate to enable the
preparation and filing with an appropriate
and properly empowered national regulatory
authority all necessary documentation, data
and other evidence required for IND approval
to commence and conduct human clinical
trials of such LICENSED PRODUCT.
[REDACTED] , as defined in
Article 1(h)(i) above, MICROCIDE, or if the
PMT deems appropriate, RWJPRI, shall have
responsibility for IND preparation and
filing;
(c) proceed following IND approval to commence
PHASE I, II, and III trials, associated
studies and all other work which RWJPRI
reasonably deems to be required for
subsequent inclusion in filings for
MARKETING AUTHORIZATION;
(d) after such submissions are filed prosecute
such submissions and file all necessary
reports and respond to all reasonable
requests from the pertinent regulatory
authorities for information, data, samples,
tests and the like.
MARKETING AUTHORIZATION applications shall be
compiled by RWJPRI based on information generated
during the DEVELOPMENT program. RWJPRI shall own such
MARKETING AUTHORIZATIONS. MICROCIDE shall prepare
supporting documentation requested by RWJPRI.
MICROCIDE shall further assist ORTHO with the
preparation of supporting data to apply for and
pursue MARKETING AUTHORIZATIONS.
-23-
<PAGE> 27
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
4.2 Commercialization
4.2.1 Once a LICENSED PRODUCT has been approved for marketing, ORTHO
shall exercise reasonable efforts, commensurate with the
efforts it would normally exercise for products with similar
potential sales volume and consistent with its overall
business strategy, in promoting, advertising and SELLING
LICENSED PRODUCT under this LICENSE AGREEMENT.
4.2.2 MICROCIDE shall have the right, subject to ORTHO's approval,
to undertake certain co-promotion activities with respect to
LICENSED PRODUCTS in North America. Prior to commercialization
of LICENSED PRODUCTS, MICROCIDE intends to have established
non-direct demand generating Professional Services and
Technical Support activities within North America, in order
to: (a) promote rational antibiotic usage, (b) enhance
MICROCIDE's reputation for technical expertise in the
antibiotic field, and (c) support market adoption of LICENSED
PRODUCTS.
[REDACTED]
4.3 Performance Obligations
4.3.1 Non-performance of this Article 4, or any subparagraph thereof
by LICENSEE, shall be a breach of or default under this
LICENSE AGREEMENT, subject to MICROCIDE's right to terminate
this LICENSE AGREEMENT pursuant to Article 17.3 and 18.1
hereof as its sole and complete remedies.
-24-
<PAGE> 28
4.3.2 Notwithstanding any other provision hereunder, LICENSEE makes
no representation or warranty that development and marketing
of LICENSED PRODUCT shall be the exclusive means by which
LICENSEE will participate in the FIELD. Furthermore, all
business decisions concerning marketing and sales of LICENSED
PRODUCT including, without limitation, the design, sale, price
and promotion of LICENSED PRODUCTS covered under this
Agreement shall be within the sole discretion of LICENSEE.
MICROCIDE realizes that LICENSEE already sells products for
the treatment of bacterial infections, and acknowledges that
LICENSEE may now or in the future develop or acquire products
for the treatment and prevention of such conditions.
4.4 Selection of Collaboration Compounds and Rights to Related Compounds
4.4.1 During the RESEARCH TERM and for one (1) year thereafter,
LICENSEE shall have the exclusive right to select
COLLABORATION COMPOUNDS for DEVELOPMENT and commercialization
as LICENSED PRODUCTS. Thereafter, so long as LICENSEE has one
or more COLLABORATION COMPOUNDS within a SUB-FIELD in active
DEVELOPMENT or commercialization as set forth in Articles
4.1.2 and 4.2.1 respectively, LICENSEE shall have the
exclusive right, but not the obligation, to select other
COLLABORATION COMPOUNDS within such SUB-FIELD for DEVELOPMENT
by RWJPRI and marketing by ORTHO and its AFFILIATES in
accordance with Articles 4.1 and 4.2. Following termination of
the one (1) year period, all rights to COLLABORATION COMPOUNDS
in any SUB-FIELD in which LICENSEE does not have a
COLLABORATION COMPOUND in DEVELOPMENT or commercialization
shall lapse and MICROCIDE shall have the right to develop,
market and commercialize such COLLABORATION COMPOUND
independently and all rights and licenses thereto shall revert
to MICROCIDE at the conclusion of such period or any time
thereafter.
-25-
<PAGE> 29
4.4.2 In addition to the rights concerning COLLABORATION COMPOUNDS
set forth in Article 4.4.1 above, so long as LICENSEE has one
or more COLLABORATION COMPOUNDS within a SUB-FIELD in active
DEVELOPMENT, LICENSEE shall have a right of first negotiation
to obtain an exclusive worldwide license on terms to be
negotiated in good faith by the parties herein, to any
NON-COLLABORATION COMPOUNDS within such SUB-FIELD. This right
of first negotiation shall extend for the period of time that
LICENSEE has a COLLABORATION COMPOUND in DEVELOPMENT and shall
terminate upon NDA filing in the United States on a
COLLABORATION COMPOUND. No sooner than (a) one (1) year
following commencement of PHASE O with respect to SUB-FIELD
(i), or (b) the commencement of PHASE O with respect to
SUB-FIELDS (ii)-(v), or at any time thereafter during such
DEVELOPMENT period, MICROCIDE may offer such license to
LICENSEE in writing and shall provide such information as
LICENSEE shall reasonably request for LICENSEE to evaluate
whether it wishes to accept such license. LICENSEE shall have
sixty (60) days from the date of receipt of such offer to
inform MICROCIDE whether it wishes to negotiate the terms of
such license. If LICENSEE so informs MICROCIDE that it wishes
to negotiate such a license, the parties shall have ninety
(90) days to enter into a definitive license agreement with
MICROCIDE with respect thereto. If LICENSEE has not advised
MICROCIDE within such sixty (60) day period, or such extended
period as the parties may mutually agree to, that LICENSEE
wishes to negotiate such a license, or the parties have not
executed such a definitive license agreement within said
ninety (90) day period, or such extended period as the parties
may mutually agree to, MICROCIDE shall be free to enter into
an agreement with a third party to license such NON-
COLLABORATION COMPOUND, or to develop and market such NON-
COLLABORATION COMPOUND itself, provided that MICROCIDE shall
not enter into an agreement with a third party for licensing
of such NON-COLLABORATION COMPOUND on terms substantially less
favorable to MICROCIDE taken as a whole than those last
offered in writing to MICROCIDE by LICENSEE pursuant hereto.
-26-
<PAGE> 30
4.4.3 In addition, LICENSEE shall have a right to first negotiation
to obtain an exclusive worldwide license, on terms to be
negotiated in good faith by the parties, to any natural
product, (or synthetic or semi-synthetic derivative thereof),
in the FIELD, discovered, synthesized or acquired by MICROCIDE
during the RESEARCH TERM. Two (2) years following commencement
of the RESEARCH PROGRAM, or any time thereafter, MICROCIDE may
offer to license any such natural products by giving notice in
writing to LICENSEE and by providing LICENSEE with such
information as LICENSEE shall reasonably request for LICENSEE
to evaluate whether it wishes to accept such license. LICENSEE
shall have ninety (90) days from receipt of such offer to
inform MICROCIDE whether it wishes to negotiate such a
license. If LICENSEE so informs MICROCIDE that it wishes to
negotiate such a license, the parties shall have one hundred
twenty (120) days to enter into a definitive license agreement
with respect thereto. If LICENSEE has not advised MICROCIDE
within such ninety (90) day period, or such extended period as
the parties may mutually agree to, that LICENSEE wishes to
negotiate such a license, or the parties have not entered into
a definitive agreement within such 120-day period, MICROCIDE
shall be free to grant a license to any third party with
respect to such natural product or may develop and market such
natural product itself.
ARTICLE 5. LICENSE FEES
5.1 In consideration of the rights and licenses granted to LICENSEE under
this Agreement, ORTHO shall pay MICROCIDE an initial license fee of
Three Million Dollars ($3,000,000) within ten (10) Days of the
EFFECTIVE DATE and a one-time license fee of One Million Dollars
($1,000,000) within thirty (30) days of receipt of written notice by
MICROCIDE of RWJPRI's decision to select the first COLLABORATION
COMPOUND for DEVELOPMENT pursuant to Article 4.1 hereunder. RWJPRI
shall be deemed to have selected a COLLABORATION COMPOUND for
DEVELOPMENT no later than the commencement of PHASE O for such
COLLABORATION COMPOUND.
-27-
<PAGE> 31
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
5.2 In addition, for each LICENSED PRODUCT hereunder, ORTHO shall pay to
MICROCIDE, subject to Article 17, Milestone License Fees in amounts and
times as follows:
(i) [REDACTED]
(ii) [REDACTED]
(iii) [REDACTED]
(iv)
[REDACTED]
-28-
<PAGE> 32
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
ARTICLE 6. ROYALTIES, RECORDS AND REPORTS
6.1 For the rights and privileges granted under this LICENSE AGREEMENT,
ORTHO shall pay to MICROCIDE, on a country-by-country basis in the
manner provided and subject to Article 17, the following earned
royalties:
(a) [REDACTED]
(b)
[REDACTED]
6.2 Earned royalty shall be paid pursuant to Article 6.1 hereof on all
LICENSED PRODUCTS SOLD under this LICENSE AGREEMENT; and the earned
royalty payable on a given LICENSED PRODUCT made hereunder shall not
become due and owing until such LICENSED PRODUCT is SOLD.
The earned royalty for any particular LICENSED PRODUCT shall be due
upon the first bona fide arm's length SALE to a third party other than
an AFFILIATE or SUBLICENSEE thereof
-29-
<PAGE> 33
and any subsequent SALE of such LICENSED PRODUCT by a third party that
is not an AFFILIATE or SUBLICENSEE shall be royalty free.
6.3 Notwithstanding the provisions of Article 6.2 hereof, in the case of
transfers or SALES of any LICENSED PRODUCT among ORTHO, AFFILIATES and
SUBLICENSEE or between AFFILIATES, one and only one royalty shall be
payable thereon and such royalty shall become payable upon the final
SALE thereof to a third party.
6.4 ORTHO shall keep, and shall cause its AFFILIATES and SUBLICENSEES to
keep, full, true and accurate books of account containing all
particulars in accordance with ORTHO'S normal accounting procedures
then in effect for the purpose of showing the amount payable to
MICROCIDE by way of royalty as aforesaid or by way of any other
provision hereunder. Said books of account shall be kept at ORTHO's (or
if sales by a SUBLICENSEE, at the SUBLICENSEE's) principal place of
business. Said books and the supporting data shall be maintained and
kept open during reasonable business hours, for three (3) years
following the end of the calendar year to which they pertain (and
access shall not be denied thereafter, if reasonably available), to the
inspection of an independent certified public accountant retained by
MICROCIDE and reasonably acceptable to ORTHO or such SUBLICENSEE for
the purpose of verifying ORTHO's royalty statements, or ORTHO's
compliance in other respects with this LICENSE AGREEMENT, but this
right to inspect may not be exercised more than once in any year and
once a calendar period is audited, it may not be re-audited. Said
accountant shall disclose to MICROCIDE only information relating solely
to the accuracy of the royalty reports and the royalties paid under
this Agreement. Names of customers and other confidential information
shall not be disclosed to MICROCIDE by such independent accountant.
Such accountant shall be retained at MICROCIDE's sole expense.
Notwithstanding the foregoing, inspections of the records of
SUBLICENSEES shall be limited to the extent that ORTHO has the right to
authorize MICROCIDE to make such inspection; provided that if ORTHO
does not have the right to authorize MICROCIDE to make such an
inspection, upon MICROCIDE's request, ORTHO shall inspect the
-30-
<PAGE> 34
SUBLICENSEE's records and shall provide to MICROCIDE the results of
such inspection. In any case, if an underpayment of more than five
percent (5%) is established for a period, LICENSEE shall pay the costs
of the audit of such period.
6.5 ORTHO within sixty (60) days after the first day of January, April,
July and October of each year (the "Reporting Date") shall deliver to
MICROCIDE a true and accurate report, giving such particulars of the
LICENSED PRODUCTS SOLD by ORTHO, AFFILIATES, and SUBLICENSEES and the
NET SALES due during the three (3) months preceding the Reporting Date
("Accounting Period") under this LICENSE AGREEMENT as are pertinent to
an accounting for royalty under this LICENSE AGREEMENT.
Simultaneously with the delivery of each such report, ORTHO shall pay
to MICROCIDE the royalty due under this LICENSE AGREEMENT for the
period covered by such report. If no royalties are due, it shall be so
reported. Royalties shall be paid to MICROCIDE in United States Dollars
at MICROCIDE's office specified for the purposes of giving notice in
Article 21 hereof.
6.6 The remittance of royalties payable on sales outside the United States
will be payable to MICROCIDE in United States Dollar equivalents at the
official rate of exchange of the currency of the country from which the
royalties are payable as quoted by The Wall Street Journal, New York
Edition, for the last business day prior to the Reporting Date for
which the royalty payment is made. If the transfer or the conversion
into United States Dollar equivalents in any such instance is not
lawful or possible, the payment of such part of the royalties as is
necessary shall be made by the deposit thereof, in the currency of the
country where the sales were made on which the royalty was based, to
the credit and account of MICROCIDE or its nominee in any commercial
bank or trust company of its choice located in that country, prompt
notice of which shall be given by ORTHO to MICROCIDE.
-31-
<PAGE> 35
6.7 In any country where the rate of royalty is limited by applicable law,
the royalty payment shall be made to MICROCIDE at the highest rate
permitted by law in that country for licenses of the type herein
granted provided that such rate is equal to or less than the rate
specified in this LICENSE AGREEMENT.
6.8 Any tax required to be withheld on royalties payable to MICROCIDE under
the laws of any foreign country shall be promptly paid by ORTHO for and
on behalf of MICROCIDE to the appropriate governmental authority, and
ORTHO shall furnish MICROCIDE with proof of payment of such tax
together with official or other appropriate evidence issued by the
appropriate governmental authority sufficient to enable MICROCIDE to
support a claim for income tax credit in respect of any sum so
withheld. Any such tax required to be withheld shall be an expense of
and borne by MICROCIDE.
6.9 ORTHO'S obligation to make payments of royalties under this Article
shall be waived and excused to the extent that the statutes, laws,
codes, or government regulations of the country from which such
payments are to be paid prohibit or prevent any such payments.
ARTICLE 7. CONFIDENTIALITY
7.1 Disclosures of confidential and proprietary information hereunder by
either party to the other shall be made in writing (or promptly
confirmed in writing if made in another form), and shall be clearly
marked "Confidential". Such confidential information shall be
safeguarded by the recipient, shall not be disclosed to third parties
and shall be made available only to recipient's employees or
independent contractors who agree in writing to equivalent conditions
and who have a need to know the information for the purposes specified
under this Agreement. All confidential information shall remain the
property of and be returned to the disclosing party within thirty (30)
days of receipt of a written request by the disclosing party, or within
thirty (30) days of termination of this Agreement except for one (1)
copy which may be retained by the receiving party for purposes of
determining its legal rights hereunder. These
-32-
<PAGE> 36
mutual obligations of confidentiality shall apply for a period of five
(5) years after the termination of this Agreement, but such obligations
shall not apply to any information that:
(i) is or hereafter becomes generally available to the
public other than by reason of any default with
respect to a confidentiality obligation under this
Agreement; or
(ii) was already known to the recipient as evidenced by
prior written documents in its possession; or
(iii) is disclosed to the recipient by a third party who is
not in default of any confidentiality obligation to
the disclosing party hereunder; or
(iv) is developed by or on behalf of the receiving party,
without reliance on confidential information received
hereunder; or
(v) is used with the consent of the disclosing party
(which consent shall not be unreasonably withheld) in
applications for patents or copyrights under the
terms of this Agreement; or
(vi) has been approved in writing for publication by the
disclosing party; or
(vii) is required to be disclosed in compliance with
applicable laws or regulations in connection with the
manufacture or sale of products covered by this
Agreement; or
(viii) is otherwise required to be disclosed in compliance
with applicable laws or regulations or order by a
court or other regulatory body having competent
jurisdiction; or
-33-
<PAGE> 37
(ix) is product-related information which is reasonably
required to be disclosed in connection with marketing
of products covered by this Agreement.
Notwithstanding the foregoing, confidential
information may be provided to third parties under
the appropriate terms and conditions including
confidentiality provisions equivalent to those in
this Agreement for consulting, manufacturing
development, manufacturing, external testing and
marketing trials with respect to the products covered
by this Agreement.
7.2 The parties recognize the importance of publishing the information
developed in the RESEARCH PROGRAM under the provisions of this
Agreement. Accordingly, each party shall submit any proposed
publication containing Confidential Information to the other party at
least thirty (30) days in advance to allow that party to review such
planned public disclosure. The reviewing party will promptly review
such proposed publication and make any objections that it may have to
the publication of the Confidential Information contained therein.
Should the reviewing party make an objection to the publication of the
Confidential Information, then the Parties shall discuss the advantages
and disadvantages of publishing the same, and the Chairman of RWJPRI
and the President of MICROCIDE shall reasonably agree on the extent to
which such publications shall be made.
ARTICLE 8. ADVERSE EVENT REPORTING
MICROCIDE shall promptly inform RWJPRI in writing within twenty-four
(24) hours of its receipt of any information which it receives
regarding or related to any serious, unexpected adverse reaction to
LICENSED PRODUCT. Each party shall comply with each Adverse Drug
Experience reporting requirement of it in the United States Federal
Food Drug and Cosmetic Act, as amended (21 USC Section 301 et seq.) and
the similar requirements of international regulatory authorities. In
addition, on an on-going basis, each party agrees to make a good faith
effort to promptly provide the other party with any additional
information
-34-
<PAGE> 38
in its possession which indicates adverse effects in humans associated
with LICENSED PRODUCT. The obligations of this Article shall survive
termination of this Agreement as to LICENSED PRODUCT continued to be
sold by ORTHO.
ARTICLE 9. INFRINGEMENT
9.1 (a) In the event that there is infringement on a commercial scale
by a third party of any patent licensed to LICENSEE hereunder,
LICENSEE shall notify MICROCIDE in writing to that effect,
including with said written notice evidence establishing a
prima facie case of infringement by such third party.
MICROCIDE shall then, at its option, take action to obtain a
discontinuance of such infringement or bring suit against the
third party infringer. MICROCIDE shall bear all the expenses
of any suit brought by it. In the event damages or other
monies are awarded or received in settlement of such suit,
MICROCIDE shall be entitled to deduct an amount to cover its
out-of-pocket expenses, including attorneys fees, incurred for
such suit. The balance of any recoveries shall then be shared
by the parties with MICROCIDE receiving seventy-five percent
(75%) and ORTHO receiving twenty-five percent (25%). ORTHO
will cooperate with MICROCIDE in any such suit and shall have
the right to consult with MICROCIDE and be represented by its
own counsel at its own expense.
9.1 (b) If, after the expiration of said one hundred and twenty (120)
days from the date of a request by ORTHO to do so, MICROCIDE
has not overcome the prima facie case of infringement,
obtained a discontinuance of such infringement, or brought
suit against the third party infringer, then ORTHO shall have
the right after such one hundred twenty (120) day notice
period, but not the obligation, to bring suit against such
infringer and join MICROCIDE as a party plaintiff, provided
that ORTHO shall bear all the expenses of such suit. In the
event damages or other monies are awarded or received in
settlement of such suit, ORTHO shall be entitled to deduct an
amount to cover its out-of-pocket expenses, including
attorneys fees and including a reasonable
-35-
<PAGE> 39
allocation for in-house attorney's time, incurred for such
suit. The balance of any recoveries shall be shared by the
parties with ORTHO receiving seventy-five percent (75%) and
MICROCIDE receiving twenty-five percent (25%). MICROCIDE will
cooperate with ORTHO in any suit for infringement of a
licensed patent brought by ORTHO against a third party, and
shall have the right to consult with ORTHO and to participate
in and be represented by independent counsel in such
litigation at its own expense. ORTHO shall incur no liability
to MICROCIDE as a consequence of such litigation or any
unfavorable decision resulting therefrom, including any
decision holding MICROCIDE'S patent invalid or unenforceable.
9.2 In the event either party hereto shall initiate or carry on legal
proceedings to enforce the PATENT RIGHTS against an alleged infringer,
as provided herein, the other party hereto shall fully cooperate with
the party initiating or carrying on such proceedings.
9.3 MICROCIDE warrants that it is presently aware of no patents or patent
applications owned by a third party which would be infringed by the
manufacture, use or sale of any LICENSED PRODUCT. In the event ORTHO is
charged with such infringement by a third party, ORTHO shall have the
right to defend against such charge of infringement and, during the
period in which such litigation is pending, ORTHO shall have the right
to apply up to twenty-five percent (25%) of the royalties due MICROCIDE
on sales of the allegedly infringing LICENSED PRODUCT against its
litigation expenses. If, as a result of judgment in the litigation or
settlement with the third party, ORTHO is required to pay royalties or
other monies to such third party, ORTHO may thereafter deduct from the
amount of royalties due MICROCIDE on NET SALES of the LICENSED PRODUCT
charged to infringe, an amount which is the lesser of twenty-five
percent (25%) of all sums actually paid by ORTHO to such third party or
twenty-five percent (25%) of all royalty payments otherwise payable to
MICROCIDE on the NET SALES of such LICENSED PRODUCT.
-36-
<PAGE> 40
ARTICLE 10. STATUS OF THE PATENT RIGHTS
10.1 MICROCIDE shall file, maintain and prosecute the patent applications
within the PATENT RIGHTS to obtain patents thereon at its own expense
as it considers appropriate. MICROCIDE does not represent or warrant
that any such patent will be obtained and MICROCIDE shall in its sole
discretion be responsible for determining whether to abandon any or all
of said patent applications or any portions thereof. Title to all
patents claiming inventions made solely by an employee of a Party in
the course of performing the RESEARCH PROGRAM shall be owned by such
Party, subject to the license provisions of Article 3 hereunder. Title
to all patents claiming inventions made jointly by employees of
MICROCIDE and LICENSEE shall be jointly owned by MICROCIDE and
LICENSEE, subject to the license provisions of Article 3 hereunder. The
laws of the United States with respect to joint ownership of inventions
shall apply in all jurisdictions, and each party hereby waives any
right (other than as set forth in this Agreement) to obtain an
accounting of profits or approve any license or exploitation thereof.
10.2 MICROCIDE agrees to promptly provide LICENSEE with copies of:
1. All patent applications included in PATENT RIGHTS;
2. All prior art searches conducted on behalf of MICROCIDE
related to said patent applications and the subject matter of
this License Agreement; and
3. All correspondence to and from the United States Patent and
Trademark Office related to said patent applications as well
as all requested correspondence relating to corresponding
national and international patent applications.
10.3 LICENSEE shall have the right to consult with MICROCIDE regarding the
content of said patent applications, prior art searches and
correspondence, and to comment thereon.
-37-
<PAGE> 41
MICROCIDE shall consider all such comments offered by LICENSEE, it
being agreed, however, that all final decisions respecting conduct of
the prosecution of said patent applications shall rest solely in the
discretion of MICROCIDE.
10.4 MICROCIDE shall file patent applications in those foreign countries
which may be designated in writing by LICENSEE and LICENSEE shall be
permitted to consult with MICROCIDE in the selection of foreign patent
counsel and in the preparation and prosecution of said foreign patent
applications.
10.5 MICROCIDE shall promptly notify LICENSEE in the event MICROCIDE decides
not to file, or decides to abandon or discontinue prosecution or
maintenance of any one or more patents or patent applications included
in PATENT RIGHTS. Such notification will be given as early as possible
which in no event will be less than sixty (60) days prior to the date
on which said application(s) will become abandoned. LICENSEE shall have
the option, exercisable upon written notification to MICROCIDE, to
assume full responsibility for the filing, prosecution or maintenance
of the affected patents or patent application(s), in LICENSEE's name at
its expense. Royalty obligations with respect to such affected patents
or patent applications shall be governed by, and at the royalty rate,
set forth in Article 6.1(b) hereinabove for the life of such patent.
10.6 LICENSEE shall cooperate with MICROCIDE, and MICROCIDE agrees to
diligently seek any extension under the U.S. Drug Price Competition and
Patent Term Restoration Act of 1984, the Supplementary Certificate of
Protection of the Member States of the European Community or other
similar measure in any other country that is available or that becomes
available in respect of the term of any patent within the PATENT RIGHTS
including any patent that may issue on a patent application within the
PATENT RIGHTS. LICENSEE shall diligently advise MICROCIDE in a timely
manner of approval by the Food and Drug Administration of the United
States of America to USE, SELL or market LICENSED PRODUCTS or any other
governmental approval obtained by or on behalf of LICENSEE or
-38-
<PAGE> 42
an AFFILIATE that is pertinent to any such extension and LICENSEE shall
supply MICROCIDE with any pertinent information and data in its
possession or control or that is in the possession or control of any
AFFILIATE or SUBLICENSEE and shall cooperate fully in assisting
MICROCIDE to obtain any such extension that it may seek and LICENSEE
shall supply MICROCIDE in a timely manner with any information and data
and any supporting affidavits or documents required to comply with 35
USC 156 Extension of Patent Term (and any successor legislation) and
any administrative rules or regulation thereunder or required to comply
with any corresponding laws and regulations that are or shall be in
effect in any country within the PATENT RIGHTS, all without further
consideration. ORTHO shall require its AFFILIATES to comply with this
Article 10.7.
ARTICLE 11. PUBLICITY
Neither party shall originate any publicity, news release or public
announcement, written or oral, whether to the public or press,
stockholders or otherwise, relating to this LICENSE AGREEMENT,
including its existence, the subject matter to which it relates,
performance under it or any of its terms, to any amendment hereto or
performances hereunder without the written consent of the other party
save only (i) such announcements as in the opinion of counsel for the
party making such announcement is required by applicable law to be made
or (ii) announcements to MICROCIDE's private advisors, present
investors, and bona fide prospective institutional investors so long as
such disclosure is made under a binder of confidentiality wherein such
advisor or investor agrees not to discloser the information contained
in the announcement to any third party tor to use the information for
any purpose other than to evaluate its investment or prospective
investment in MICROCIDE. Such announcements shall be factual and as
brief as reasonable. If a party decides to make an announcement
required by law or otherwise permitted under this Agreement, it will
give the other party ten (10) days' advance written notice of the text
of the announcement so that the other party will have an opportunity to
comment upon the announcement. Upon request by a party for approval of
any other disclosures, such approval or disapproval shall be given in
-39-
<PAGE> 43
writing within fifteen (15) days of its receipt. Upon request by either
Party, the Parties agree to prepare a mutually agreed press release and
related Question and Answer document with respect to this Agreement.
Once information has been approved for disclosure, no further consent
or approval shall be required under this Section with respect to such
information.
ARTICLE 12. WARRANTIES AND REPRESENTATIONS; EXCLUSIVITY
12.1 MICROCIDE warrants that it exclusively owns or controls by agreement,
assignment or license the entire right, title and interest in the
PATENT RIGHTS and MICROCIDE KNOW- HOW and that it has full power and
authority to execute, deliver and perform this LICENSE AGREEMENT and
the obligations hereunder.
12.2 MICROCIDE expressly warrants and represents that it has no outstanding
encumbrances or agreements, either written, oral or implied, in
connection herewith, and that it has not granted and will not grant
during the term of this Agreement or any renewal hereof, any rights,
license, consent or privilege that conflict with the rights granted
herein.
12.3 Each party expressly represents and warrants that it has the full power
and authority to enter into this Agreement and to carry out the
transactions contemplated hereby. MICROCIDE further represents and
warrants that as of the EFFECTIVE DATE no academic institution, member
of an academic institution, corporation or any local, state or federal
government holds any property rights in the PATENT RIGHTS, and that it
is able to consummate this Agreement in the capacity of a free agent.
12.4 Each party hereby warrants that the execution, delivery and performance
of this LICENSE AGREEMENT has been duly approved and authorized by all
necessary corporate or partnership actions of both parties; do not
require any shareholder or partnership approval which has been obtained
or the approval and consent of any trustee or the holders of any
indebtedness of either party; do not contravene any law, regulation,
rules or order binding on
-40-
<PAGE> 44
either Party, and do not contravene the provisions of or constitute a
default under any indenture, mortgage, contract or other agreement or
instrument to which either party is a signatory
12.5 During the RESEARCH TERM, MICROCIDE shall not conduct, have conducted
or fund any research, development, regulatory, manufacturing or
commercialization activity specifically directed at discovery or
developing products in the FIELD, except as permitted pursuant to this
LICENSE AGREEMENT including Articles 4.1.2 and 4.2.2. Following
expiration of the RESEARCH TERM and during the period under which
LICENSEE has one or more LICENSED PRODUCTS in active DEVELOPMENT and
for two (2) years thereafter, MICROCIDE shall not conduct, have
conducted or fund any research, development, regulatory, manufacturing
or commercialization activity directed at COLLABORATION COMPOUNDS
within the same SUB-FIELD as such LICENSED PRODUCT under DEVELOPMENT by
LICENSEE, except as permitted under this LICENSE AGREEMENT.
ARTICLE 13. TRADEMARKS
ORTHO, at its expense, shall be responsible for the selection,
registration and maintenance of all Trademarks which it employs in
connection with LICENSED PRODUCTS and shall own and control such
trademarks. MICROCIDE recognizes the exclusive ownership by ORTHO of
any proprietary ORTHO name, logotype or trademark furnished by ORTHO
(including ORTHO's AFFILIATES) for use in connection with the LICENSED
PRODUCT. MICROCIDE shall not, either while this LICENSE AGREEMENT is in
effect or at any time thereafter, register, use or attempt to obtain
any right in or to any such name, logotype or trademark or in and to
any name, logotype or trademark confusingly similar thereto.
-41-
<PAGE> 45
ARTICLE 14. INDEMNIFICATION
14.1 ORTHO agrees to indemnify and hold harmless, MICROCIDE, its AFFILIATES
and their respective officers, directors, employees and agents
("MICROCIDE Indemnitees") from and against any and all liability,
damages, losses, claims, suits, proceedings, demands, recoveries or
expenses, including reasonable attorney's fees and expenses, incurred
or rendered against such MICROCIDE Indemnitees which arise out of or
result from the use, testing, manufacture, processing, packaging,
labeling, sale or distribution of LICENSED PRODUCTS by ORTHO or its
AFFILIATES or SUBLICENSEE; except for any and all liability, damages,
losses, claims, suits, proceedings, demands, recoveries or expenses,
incurred by or rendered against MICROCIDE which are based upon the
gross negligence or wilful misconduct by MICROCIDE or its AFFILIATES.
14.2 MICROCIDE agrees to indemnify and hold harmless, LICENSEE , its
AFFILIATES, and SUBLICENSEES and their respective officers, directors,
employees and agents ("LICENSEE Indemnitees") from and against any and
all liability, damages, losses, claims, suits, proceedings, demands,
recoveries or expenses, including reasonable attorney's fees and
expenses, incurred or rendered against such LICENSEE Indemnitees which
arise out of or result from (i) the negligence or wilful misconduct by
MICROCIDE or its AFFILIATES in carrying out the RESEARCH PROGRAM under
this Agreement, or (ii) personal injury to MICROCIDE's employees or
agents or damage to MICROCIDE's property resulting from acts performed
by, under the direction of, or at the request of LICENSEE in carrying
out activities contemplated by this LICENSE AGREEMENT.
14.3 Each respective Indemnitee and Indemnitor hereunder shall cooperate in
the defense of any such claim, lawsuit or action. Indemnitee further
shall make available to Indemnitor its employees, documents and
expertise in the mutual defense of such action. Indemnitee hereby
agrees to notify Indemnitor promptly of Indemnitee's receipt thereof
any claim, lawsuit or action which is within the scope of Indemnitor's
undertaking. Failure to provide such
-42-
<PAGE> 46
notification shall terminate Indemnitor's obligation as to such
lawsuit, claim or action. Indemnitor shall bear no responsibility for
any expenses incurred by Indemnitee prior to such notice.
14.4 The respective Indemnitor hereunder shall control the management of any
such claim, lawsuit or action, including, without limitation, the
selection of counsel, trial strategy, and determination of the
appropriateness and reasonableness of any settlement.
ARTICLE 15. MICROCIDE BANKRUPTCY
All rights and licenses granted under or pursuant to this Agreement by
each Party are, and shall otherwise be deemed to be, for purposes of
Section 365(n) of Title 11, U.S. code (the "Bankruptcy Code"), licenses
of rights to "intellectual property" as defined under Section 101(60)
of the Bankruptcy Code. The Parties agree that LICENSEE, shall retain
and may fully exercise all of its rights and elections under the
Bankruptcy Code. MICROCIDE agrees, during the term of this Agreement,
to create and maintain current copies or, if not amendable to copying,
detailed descriptions or other appropriate embodiments, of all such
intellectual property. MICROCIDE further agrees that in the event of
the commencement of a bankruptcy proceeding by or against it under the
Bankruptcy Code, LICENSEE shall be entitled to a complete duplicate of
or complete access to, as appropriate) any such intellectual property
and all embodiments of such intellectual property, and same, if not
already in its possession shall be promptly delivered to LICENSEE (a)
upon such commencement of a bankruptcy proceeding upon written request
therefor by LICENSEE, unless MICROCIDE elects to continue to perform
all of its obligations under this Agreement or (b) if not delivered
under (a) above, upon the rejection of this Agreement by or on behalf
of MICROCIDE upon written request therefor by LICENSEE.
-43-
<PAGE> 47
ARTICLE 16. DURATION
16.1 This Agreement shall commence upon the EFFECTIVE DATE and shall, unless
sooner terminated pursuant to any other provisions of this Agreement,
continue in full force and effect until the latest of (i) one (1) year
after the end of the RESEARCH TERM, or (ii) after the end of such one
(1) year period, six (6) months following the date upon which LICENSEE
ceases to have one or more LICENSED PRODUCTS in active DEVELOPMENT or
commercialization or (iii) for as long as royalties are payable
according to the provisions of Article 6 herein. On a
country-by-country basis, once ORTHO has paid royalties for the full
period under which such royalty payments are due under Article 6.1
hereunder, ORTHO and its AFFILIATES shall have a fully paid-up,
irrevocable, exclusive license under the MICROCIDE KNOW-HOW to make,
have made, USE, SELL and HAVE SOLD LICENSED PRODUCTS.
ARTICLE 17. TERMINATION
17.1 During the RESEARCH TERM hereunder, LICENSEE may terminate this
AGREEMENT at any time on six (6) months' written notice to MICROCIDE.
During such six (6) month notice period, RWJPRI shall continue to make
quarterly installment payments for Research Funding pursuant to Article
2.4 hereunder, provided, however, that the payment for the fist and
second remaining quarters shall be one-half (1/2) and one-quarter
(1/4), respectively, of the amount otherwise due, for such six month
notice period. Upon conclusion of such six (6) month period, no further
payments shall be due MICROCIDE from LICENSEE hereunder.
17.2 Notwithstanding any other provision herein, at the end of the RESEARCH
TERM or at any time thereafter, LICENSEE may terminate this LICENSE
AGREEMENT in its entirety or, in countries other than MAJOR MARKET
COUNTRIES, on a country-by-country basis, upon three (3) months'
written to MICROCIDE. At its sole discretion, MICROCIDE may on
-44-
<PAGE> 48
receipt of such notice from LICENSEE immediately accelerate such
termination of this LICENSE AGREEMENT, in its entirety or on a
country-by-country basis, as applicable, at any time within such three
(3) month period.
17.3 Notwithstanding any other provisions of this Agreement, either party,
at its option, may terminate this Agreement on ninety (90) days prior
written notice served by one party should the other party fail to
comply with or perform its obligations hereunder, unless such failure
or non-performance is corrected within the ninety (90) day period
following notification, or such extended period as shall be agreed
between the parties.
17.4 Should the other party commit an act of bankruptcy, be declared
bankrupt, voluntarily file or have filed against it a petition for
bankruptcy or reorganization unless such petition is dismissed within
sixty (60) days of filing, enter into an arrangement for the benefit of
creditors, enter into a procedure of winding up to dissolution or
should a Trustee or Receiver be appointed for its business assets or
operations, the other party shall be entitled to terminate this LICENSE
AGREEMENT forthwith by giving written notice to the first party.
17.5 Failure to terminate this Agreement following breach or failure to
comply with this Agreement shall not constitute a waiver of a party's
defenses, rights or causes of action arising from such or any future
breach or noncompliance.
ARTICLE 18. RIGHTS AND OBLIGATIONS UPON TERMINATION
18.1 In the event this LICENSE AGREEMENT is terminated in its entirety by
LICENSEE in accordance with Articles 17.1 or 17.2 hereunder, or by
MICROCIDE under Article 4.3.1, 17.3 or 17.4 hereunder LICENSEE
undertakes:
(a) to deliver to MICROCIDE any MICROCIDE KNOW-HOW in its
possession;
(b) not to use the MICROCIDE KNOW-HOW as long as it has to be kept
confidential pursuant to Article 7 hereunder;
-45-
<PAGE> 49
(c) to terminate its rights under the PATENT RIGHTS;
(d) to transfer, at MICROCIDE's written request, all RWJPRI
KNOW-HOW, MARKETING AUTHORIZATIONS and regulatory filings to
MICROCIDE or its designee; and
(e) to the extent requested by MICROCIDE, to transfer to MICROCIDE
responsibility for and control of ongoing DEVELOPMENT work,
including contracts with Third Parties for such work, in an
expeditious and orderly manner with the costs for such work
assumed by MICROCIDE as of the date such contracts are
transferred;
(f) grant to MICROCIDE an irrevocable, exclusive, worldwide
paid-up license under RWJPRI patents and RWJPRI KNOW-HOW owned
or controlled by LICENSEE, with the right to grant and
authorize sublicenses, to make, have made, USE, SELL and HAVE
SOLD COLLABORATION COMPOUNDS and LICENSED PRODUCTS, and
provide MICROCIDE with all reasonable assistance to transfer
the RWJPRI KNOW-HOW and enable MICROCIDE to continue
DEVELOPMENT and to make, have made, USE, SELL and HAVE SOLD
COLLABORATION COMPOUNDS and LICENSED PRODUCTS.
18.2 In the event that this LICENSE AGREEMENT is terminated by LICENSEE (a)
pursuant to Article 17.3 hereof for a material default by MICROCIDE, or
(b) under Article 19.2 hereof, then from and after the date of such
termination, LICENSEE shall be entitled to use all MICROCIDE KNOW-HOW
and other information generated under this LICENSE AGREEMENT, and shall
have an exclusive, worldwide license under the PATENT RIGHTS and
KNOW-HOW, to make, have made, USE, SELL and HAVE SOLD LICENSED
PRODUCTS. In such event:
(i) all provisions of this LICENSE AGREEMENT shall survive except
Articles 2.1, 2.2, 2.3.1, 2.3.3., 2.4, 4.1, 4.2, 4.3.1, 4.4.2,
4.4.3; and
(ii) the RESEARCH TERM shall immediately terminate and the
definition of COLLABORATION COMPOUND under Article 1(b) shall
thereafter be revised by
-46-
<PAGE> 50
deleting section (b) (ii) therefrom. In the event of
termination under Article 19.2 hereof, Article 12.5 shall
terminate.
Further, MICROCIDE will provide LICENSEE with all reasonable assistance to
transfer the MICROCIDE KNOW-HOW and enable LICENSEE to continue DEVELOPMENT and
to make, have made, USE, SELL and HAVE SOLD LICENSED PRODUCT.
18.3 Termination of this Agreement for any reason shall be without prejudice
to:
i. MICROCIDE's right to receive all payments accrued and unpaid
on the effective date of such termination; and
ii Any other remedies which either party may then or thereafter
have hereunder or otherwise.
18.4 Except as set forth in Article 18.2 above, Articles 3.6, 7, 8, 14, 15,
19, 20 and 21, and the last sentence of Article 10.1 shall survive the
expiration and any termination of the LICENSE AGREEMENT for any reason.
ARTICLE 19. ASSIGNMENT
19.1 This Agreement or any interest herein shall not be assigned or
transferred, in whole or in part, by either party hereto without the
prior written consent of the other party hereto. However, without
securing such prior written consent, either party may assign this
Agreement to an AFFILIATE or a successor of all or substantially all of
its business to which this Agreement relates provided, that no such
assignment shall be binding and valid until and unless the assignee
shall have assumed in a writing, delivered to the non-assigning party,
all of the duties and obligations of the assignor, and, provided,
further, that the assignor shall remain liable and responsible to the
non-assigning party hereto for the performance and observance of all
such duties and obligations.
-47-
<PAGE> 51
19.2 This LICENSE AGREEMENT shall be binding upon, and inure to, the benefit
of the parties hereto, to the benefit of any permitted assignee or
successor to substantially the entire assets of LICENSEE to which this
LICENSE AGREEMENT relates, and to the benefit of any permitted assignee
or successor to substantially the entire assets of the assigning party
to which this LICENSE AGREEMENT relates. If, at any time during the
term of this LICENSE AGREEMENT, MICROCIDE is acquired by way of merger
or sale of all or substantially all of its assets or outstanding stock,
by a pharmaceutical or biotechnology Company with annual worldwide
sales of one billion United States dollars ($1,000,000,000) or more the
("Acquiror"), or MICROCIDE otherwise assigns this LICENSE AGREEMENT in
whole or in part to such a pharmaceutical or biotechnology Company with
annual worldwide sales of one billion United States dollars
($1,000,000,000) or more (the "Assignee"), LICENSEE shall have the
right, upon notice, to terminate this LICENSE AGREEMENT and the
provisions of Article 18.2 hereof shall apply. LICENSEE shall also have
the right, whether or not it elects to terminate this LICENSE
AGREEMENT, to require that all steps it may reasonably specify be taken
to prevent disclosure of its confidential information to such Acquiror
or Assignee in any way deemed adverse to its interests.
ARTICLE 20. DISPUTE RESOLUTION
Any and all disputes between the parties relating in any way to the
entering into of this LICENSE AGREEMENT and/or the validity,
construction, meaning, enforceability, or performance of this LICENSE
AGREEMENT or any of its provisions, or the intent of the parties in
entering into this LICENSE AGREEMENT, or any of its provisions, or any
dispute relating to patent validity or infringement arising under this
LICENSE AGREEMENT shall be settled by arbitration. Such arbitration
shall be conducted at New York, New York, if requested by MICROCIDE and
in San Francisco, California if requested LICENSEE, in accordance with
the Commercial Arbitration Rules then pertaining to the American
Arbitration Association with a panel of three (3) arbitrators. The
arbitrators shall be selected from the National Panel of Arbitrators of
the American Arbitration Association. The
-48-
<PAGE> 52
Arbitrators may, at their discretion, provide for discovery by the
parties not to exceed four (4) months from the date of filing of the
notice of arbitration and the arbitrators shall render a decision
within thirty(30) days of the completion of the hearing. The law of the
State of New Jersey shall apply to the arbitration proceedings. The
decision of the arbitrators shall be final and binding on the parties
and their legal successors. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof.
The successful party in such arbitration, in addition to all other
relief provided, shall be entitled to an award of all its reasonable
costs and expenses including attorney costs. The parties shall be
deemed to have waived any rights to punitive damages. Disputes arising
out of issues before the RAC or PMT shall not be subject to
arbitration.
ARTICLE 21. GENERAL
21.1 Before signing this LICENSE AGREEMENT the parties have had numerous
conversations, including preliminary discussions, formal negotiations
and informal conversations at meals and social occasions, and have
generated correspondence and other writings, in which the parties
discussed the transaction which is the subject of this LICENSE
AGREEMENT and their aspirations for its success. In such conversations
and writings, individuals representing the parties may have expressed
their judgments and beliefs concerning the intentions, capabilities,
and practices of the parties, and may have forecasted future events.
The parties recognize that such conversations and writings often
involve an effort by both sides to be positive and optimistic about the
prospects for the transaction. It is also recognized, however, that all
business transactions contain an element of risk, as does the
transaction contemplated by this LICENSE AGREEMENT and that it is
normal business practice to limit the legal obligations of contracting
parties to only those promises and representations which are essential
to their transaction so as to provide certainty as to their respective
future rights and remedies. Accordingly, it is agreed that this LICENSE
AGREEMENT, including the Appendices hereto attached,
-49-
<PAGE> 53
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
[REDACTED]
All prior negotiations, representations, agreements, contracts, offers
and earlier understandings of whatsoever kind, whether written or oral
between MICROCIDE and LICENSEE in respect of this LICENSE AGREEMENT,
are superseded by, merged into, extinguished by and completely
expressed by this LICENSE AGREEMENT.
No aspect, part or wording of this LICENSE AGREEMENT may be modified
except by mutual agreement between the MICROCIDE and LICENSEE taking
the form of an instrument in writing signed and dated by duly
authorized representatives of both MICROCIDE and LICENSEE .
21.2 All communications, reports, payments and notices required by this
LICENSE AGREEMENT by one party to the other shall be addressed to the
parties at their respective addresses set forth below or to such other
address as requested by either party by notice in writing to the other.
-50-
<PAGE> 54
If to MICROCIDE:
MICROCIDE PHARMACEUTICALS, INCORPORATED,
850 Maude Avenue,
Mountain View, California 94043
Telefax No.: (415) 428-3534
With a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Telefax No.: (415) 493-6511
Attn: Michael O'Donnell
If to ORTHO, RWJPRI or LICENSEE:
ORTHO PHARMACEUTICAL CORPORATION,
1000 U.S. Route 202,
Raritan, New Jersey 08869
Telefax No.: (908) 218-1416
With a copy to:
Chief Patent Counsel
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08903
Telefax No.: (908) 524-2808
-51-
<PAGE> 55
AND
R.W. JOHNSON PHARMACEUTICAL
RESEARCH INSTITUTE
920 U.S. Route 202
Raritan, New Jersey 08869
Telefax No.: (908) 704-9486
All such notices, reports, payments and communications shall be made in
writing by telefax to the numbers set forth above or by First Class
mail, postage prepaid, and shall be considered made as of the date of
deposit with the United States Post Office or when received by telefax.
21.3 All matters affecting the interpretation, validity, and performance of
this Agreement shall be governed by the internal laws of the State of
New Jersey without regard to its conflict of law principles, except as
to any issue which by New Jersey law depends upon the validity, scope
or enforceability of any patent within the PATENT RIGHTS, which issue
shall be determined in accordance with the applicable patent laws of
the country of such patent.
21.4 Should any part or provision of this Agreement be held unenforceable or
in conflict with the law of any jurisdiction, the validity of the
remaining part or provision shall not be affected by such holdings;
provided that the parties shall use their best efforts to negotiate an
enforceable provision that most nearly reflects the parties original
intentions.
21.5 Any provision hereof which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the
extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability
of such provision in any other jurisdiction.
-52-
<PAGE> 56
21.6 The waiver by either party, whether express or implied, of any
provisions of this Agreement, or of any breach or default of either
party, shall not be construed to be a continuing waiver of such
provision, or of any succeeding breach or default or of a waiver of any
other provisions of this Agreement.
21.7 Notwithstanding anything to the contrary in this LICENSE AGREEMENT,
nothing herein contained shall be construed as a representation by
MICROCIDE that the PATENT RIGHTS can be or will be used to prevent the
importation by a third party hereto of a product into or the SALE or
USE by a third party hereto of a product in any country within the
PATENT RIGHTS where such product shall have been placed in commerce
under circumstances which preclude the use of the PATENT RIGHTS to
prevent such importation or SALE or USE by reason of any applicable law
or treaty.
21.8 As used in this LICENSE AGREEMENT, singular includes the plural and
plural includes the singular, wherever so required by the context. The
headings appearing at the beginning of the numbered Articles hereof
have been inserted by convenience only and do not constitute a part of
this LICENSE AGREEMENT.
21.9 Nothing herein shall be deemed to create an agency, joint venture or
partnership between the parties hereto.
21.10 Notwithstanding any other provisions of this LICENSE AGREEMENT, neither
of the parties hereto shall be liable in damages or have the right to
terminate this LICENSE AGREEMENT for any delay or default in performing
hereunder if such delay or default is caused by conditions beyond its
control including, but not limited acts of GOD, governmental
restrictions, wars, or insurrections, strikes, floods, work stoppages
and/or lack of materials, and any time for performance hereunder shall
be extended for the actual time of delay caused by such occurrence;
provided, however, that the party suffering such delay or default shall
notify the other party in writing of the reasons for the delay or
default and shall diligently seek
-53-
<PAGE> 57
to correct such conditions. If such reasons for delay or default
continuously exist for twelve (12) months, this LICENSE AGREEMENT may
be terminated by either party.
-54-
<PAGE> 58
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and duly
executed this LICENSE AGREEMENT on the date(s) indicated below, to be effective
the day and year first above written.
For and on Behalf of MICROCIDE PHARMACEUTICALS, INCORPORATED
By:______________________________________
Name:____________________________________
Title: Chief Executive
Date:____________________________________
For and on Behalf of ORTHO PHARMACEUTICAL CORPORATION AND LICENSEE
By:______________________________________
Name: Eric Milledge
Title: President
Date:____________________________________
For and on Behalf of THE R.W. JOHNSON PHARMACEUTICAL RESEARCH INSTITUTE
By:______________________________________
Name: William A.M. Duncan
Title: Chairman
Date:____________________________________
-55-
<PAGE> 59
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
APPENDIX A
RESEARCH PLAN
CONFIDENTIAL TREATMENT
REQUESTED
-56-
<PAGE> 60
Appendix A-1
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 61
Appendix A-2
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 62
Appendix A-3
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 63
Appendix A-4
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 64
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
APPENDIX B
PATENT RIGHTS
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 65
APPENDIX B-1
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 66
APPENDIX B-2
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 67
APPENDIX B-3
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 68
APPENDIX B-4
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 69
APPENDIX B-5
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 70
APPENDIX B-6
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 71
APPENDIX B-7
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 1
EXHIBIT 10.9
COLLABORATIVE RESEARCH AGREEMENT
This COLLABORATIVE RESEARCH AGREEMENT (The "Agreement") is entered into
as of the Effective Date by and between PFIZER INC, a Delaware corporation,
having an office at 235 East 42nd Street, New York, NY 10017 and its Affiliates
("Pfizer"), and MICROCIDE PHARMACEUTICALS, INC. ("Microcide"), a California
corporation, having an office at 850 Maude Avenue, Mountain View, CA 94043.
WHEREAS, Microcide has expertise in genetic approaches to the problem of
antibacterial resistance; and
WHEREAS, Microcide has filed the parent applications described in Exhibit A
attached to and made part of this Agreement; and
WHEREAS, the parties plan to seek patent protection for all Products which make
up the subject matter of this Agreement and the License Agreement; and
WHEREAS, the parties will also execute a License and Royalty Agreement with
respect to the commercialization of the subject matter of this Agreement on the
same date that this Agreement is executed; and
<PAGE> 2
WHEREAS, Pfizer has the capability to undertake research for the discovery and
evaluation of agents for treatment of disease and also the capability for
clinical analysis, manufacturing and marketing with respect to such agents;
NOW, THEREFORE, the parties agree as follows:
1. DEFINITIONS.
Whenever used in this Agreement, the terms defined in this Section 1 shall have
the meanings specified. The capitalized terms used in this Agreement and not
defined elsewhere in it or in this Section 1 shall have the meanings specified
in this License Agreement.
1.1 "AFFILIATE" means any corporation or other legal entity owning,
directly or indirectly, fifty percent (50%) or more of the voting capital shares
or similar voting securities of Pfizer or Microcide; any corporation or other
legal entity fifty percent (50%) or more of the voting capital shares or similar
voting rights of which is owned, directly or indirectly, by Pfizer or Microcide
or any corporation or other legal entity fifty percent (50%) or more of the
voting capital shares or similar voting rights of which is owned, directly or
indirectly, by a corporation or other legal entity which owns, directly or
indirectly, fifty percent (50%) or more of the voting capital shares or similar
voting securities of Pfizer or Microcide.
1.2 "ANNUAL COMMITMENT" means the maximum amount to be paid to
Microcide by Pfizer to fund the Research Program for any Commitment Year.
1.3 "ANNUAL RESEARCH PLAN" means the written plan describing the
research and manning in the Area to be carried out during each Commitment Year
by Pfizer and Microcide pursuant to this
-2-
<PAGE> 3
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
Agreement. Each Annual Research Plan will be developed and agreed to by
Microcide and Pfizer and attached to and made a part of this Agreement as
Exhibit B.
1.4 "RESEARCH PROGRAM" is the collaborative research program in the
Area conducted by Pfizer and Microcide pursuant to the Annual Research Plans in
effect during the Contract Period attached to and made part of this Agreement as
Exhibit C.
1.5 "EFFECTIVE DATE" is March 1, 1996.
1.6 "CONTRACT PERIOD" means the period beginning on the Effective Date
and ending on the date on which the Research Program terminates.
1.7 "COMMITMENT YEAR" means a twelve-month period commencing on each
anniversary of the Effective Date.
1.8
[REDACTED]
1.9 "TECHNOLOGY" means and includes all materials, technology,
technical information, know-how, expertise and trade secrets within the Area.
1.10 "MICROCIDE TECHNOLOGY" means Technology:
(a) developed by employees of or consultants to Microcide
prior to the Effective Date; or
(b) acquired by purchase, license, assignment or other
means from third parties by Microcide prior to the
Effective Date.
-3-
<PAGE> 4
1.11 "JOINT TECHNOLOGY" means Technology:
(a) developed by employees of or consultants to Pfizer or
Microcide solely or jointly with each other during
the Contract Period in connection with the
performance of the Research Program; or
(b) acquired by purchase, license, assignment or other
means from third parties by Microcide or Pfizer
during the Contract Period for use in the performance
of the Research Program.
1.12 "PFIZER TECHNOLOGY" means Technology:
(a) developed by employees of or consultants to Pfizer
alone or jointly with third parties prior to the
Effective Date or during the Contract Period in the
course of activities not described in an Annual
Research Plan; or
(b) acquired by purchase, license, assignment or to other
means from third parties by Pfizer prior to the
Effective Date.
1.13 "MICROCIDE CONFIDENTIAL INFORMATION" means all information about
any element of the Microcide or Joint Technology which is disclosed by Microcide
to Pfizer and designated "Confidential" in writing by Microcide at the time of
disclosure to Pfizer to the extent that such information as of the date of
disclosure to Pfizer is not (i) known to Pfizer as of the date of disclosure to
Pfizer as shown by its prior written records, other than by virtue of a prior
confidential disclosure to Pfizer by Microcide; or (ii) then or thereafter
disclosed in published literature, or otherwise generally known to the public
through no fault or omission of Pfizer; or (iii) obtained from a third party
free from any obligation of confidentiality to Microcide.
-4-
<PAGE> 5
1.14 "PFIZER CONFIDENTIAL INFORMATION" means all information about any
element of Pfizer or Joint Technology which is disclosed by Pfizer to Microcide
and designated "Confidential" in writing by Pfizer at the time of disclosure to
Microcide to the extent that such information is not (i) known to Microcide as
of the date of disclosure to Microcide as shown by its prior written records,
other than by virtue of a prior confidential disclosure to Microcide by Pfizer;
or (ii) then or thereafter disclosed in published literature, or otherwise
generally known to the public through no fault or omission of Microcide; or
(iii) obtained from a third party free from any obligation of confidentiality to
Pfizer.
1.15 "PATENT RIGHTS" shall mean:
(a) The patents and patent applications listed in Exhibit A,
and patents issuing on them, including any division, continuation,
continuation-in-part, renewal, extension, reexamination, reissue or foreign
counterpart of such patents and patent applications; and
(b) all patents and patent applications claiming inventions
within the Pfizer Technology, Microcide Technology and Joint Technology, whether
domestic or foreign, including all continuations, continuations-in-part,
divisions, and renewals, all letters patent granted thereon, and all reissues,
reexaminations and extensions thereof.
1.16 "PRODUCT" means a drug useful in the treatment of bacterial
disease in human beings or animals.
2. COLLABORATIVE RESEARCH PROGRAM.
2.1 PURPOSE. Microcide and Pfizer shall conduct the Research Program
throughout the Contract Period. The objective of the Research Program is to
discover, develop and patent Products.
-5-
<PAGE> 6
2.2 ANNUAL RESEARCH PLAN. The Annual Research Plan for the first
Commitment Year is described in the attached Exhibit B. For each Commitment Year
after the first, the Annual Research Plan shall be prepared by the Research
Committee for submission to and approval by Pfizer and Microcide no later than
ninety (90) days before the end of the prior Commitment Year. Each new Annual
Research Plan for each succeeding Commitment Year shall be appended to Exhibit B
and made part of this Agreement.
2.3 EXCLUSIVITY. Microcide agrees that during the Contract Period
neither it nor any of its Affiliates shall conduct research or sponsor any other
research in the Area, or engage in any such research sponsored by any third
party, without the prior written consent of Pfizer.
2.4 RESEARCH COMMITTEE.
2.4.1 PURPOSE. Pfizer and Microcide shall establish a Research
Committee (the "Research Committee").
(a) to review and evaluate progress under each
Annual Research Plan;
(b) to prepare the Annual Research Plan
including Product candidate nomination
criteria for each Commitment Year; and
(c) to coordinate and monitor publication of
research results obtained from and the
exchange of information and materials that
relate to the Research Program. (This
function shall survive the termination of
this Agreement.)
2.4.2 MEMBERSHIP. Pfizer and Microcide each shall appoint, in
its sole discretion, three members of the Research Committee. Substitutes may be
appointed at any time.
-6-
<PAGE> 7
The members initially shall be:
Pfizer Appointees: Steven J. Brickner, Ph.D.
William E. Kohlbrenner, Ph.D.
Frank C. Sciavolino, Ph.D.
Microcide Appointees: Molly Schmid, Ph.D.
James G. Christenson, Ph.D.
Keith A. Bostian, Ph.D.
2.4.3 CHAIR. The Research Committee shall be chaired by two
co-chairpersons, one appointed by Pfizer and the other appointed by Microcide.
2.4.4 MEETINGS. The Research Committee shall meet at least
quarterly, at places and on dates selected by each party in turn.
Representatives of Pfizer or Microcide or both, in addition to members of the
Research Committee, may attend such meetings at the invitation of either party.
2.4.5 MINUTES. The Research Committee shall keep accurate
minutes of its deliberations which record all proposed decisions and all actions
recommended or taken. Drafts of the minutes shall be delivered to all Research
Committee members within five (5) business days after each meeting. The party
hosting the meeting shall be responsible for the preparation and circulation of
the draft minutes. Draft minutes shall be edited by the co-chairpersons and
shall be issued in final form only with their approval and agreement.
2.4.6 DECISIONS. All decisions of the Research Committee shall
be made by agreement of the members.
2.4.7 EXPENSES. Pfizer and Microcide shall each bear all
expenses of their respective members related to their participation on the
Research Committee.
-7-
<PAGE> 8
2.5 REPORTS AND MATERIALS.
2.5.1 REPORTS. During the Contract Period, Pfizer and
Microcide each shall furnish to the Research Committee:
(a) summary written reports within fifteen (15)
days after the end of each three-month
period commencing on the Effective Date,
describing its progress under the Annual
Research Plan; and
(b) comprehensive written reports within thirty
(30) days after the end of each Commitment
Year, describing in detail the work
accomplished by it under the Annual Research
Plan during the Commitment Year and
discussing and evaluating the results of
such work.
2.5.2 MATERIALS. Subject to any contractual obligations to
third parties, Microcide and Pfizer shall, during the Contract Period, as a
matter of course as described in the Annual Research Plan, or upon each other's
written or oral request, furnish to each other samples of biochemical,
biological or synthetic chemical materials which are part of Pfizer Technology,
Microcide Technology or Joint Technology and which are necessary for each party
to carry out its responsibilities under the Annual Research Plan, provided that
the Annual Research Plan provides funding therefor. To the extent that the
quantities of materials requested by either party exceed the quantities set
forth in the Annual Research Plan, the requesting party shall reimburse the
other party for the reasonable costs of such materials if they are furnished.
2.6 LABORATORY FACILITIES AND PERSONNEL. Microcide shall
provide suitable laboratory facilities, equipment and personnel for the work to
be done by Microcide in carrying out the Research Program. Subject to the
approval of the Research Committee and the prospective host laboratory,
-8-
<PAGE> 9
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
employees of both Pfizer and Microcide may be assigned to work in the other's
laboratory in numbers and at times deemed reasonable by the host laboratory.
2.7 DILIGENT EFFORTS. Pfizer and Microcide each shall use
reasonably diligent efforts to achieve the objectives of the Research Program.
3. FUNDING THE RESEARCH PROGRAM AND OTHER PAYMENTS.
3.1 Pfizer shall pay Microcide $1,000,000.00 upon the execution of this
Agreement, the License and Royalty ("License Agreement") and the Stock Purchase
Agreement between the parties of even date with this Agreement.
3.2 The Annual Commitment for each Commitment Year is as follows:
<TABLE>
<CAPTION>
COMMITMENT YEAR ANNUAL COMMITMENT
------------------------ ---------------------------
<S> <C>
1 $ 4.2 MM
2 $ 4.2 MM
3 $ 4.2 MM
4 $ 4.2 MM
5 $ 4.2 MM
</TABLE>
3.3
[REDACTED]
3.3.1
[REDACTED]
-9-
<PAGE> 10
3.3.2 Each payment shall be paid by Pfizer in U.S. currency by
wire transfer to an account designated by Microcide or by other mutually
acceptable means on the first day of the quarter.
3.3.3 Microcide shall keep for three (3) years from the
conclusion of each Commitment Year complete and accurate records of its
expenditures of payments received by it. The records shall conform to good
accounting principles as applied to a similar company similarly situated. Pfizer
shall have the right at its own expense during the term of this Agreement and
during the subsequent three-year period to appoint an independent certified
public accountant reasonably acceptable to Microcide to inspect said records for
the sole purpose of verifying that Microcide has devoted to the Research Program
the FTE's required to verify the accuracy of such expenditures, pursuant to each
Annual Research Plan. Upon reasonable notice by Pfizer, Microcide shall make its
records available for inspection by the independent certified public accountant
during regular business hours at the place or places where such records are
customarily kept, for the sole purpose of verifying that Microcide has devoted
to the Research Plan the FTE's required pursuant to each Annual Research Plan.
This right of inspection shall not be exercised more than once in any calendar
year and not more than once with respect to records covering any specific period
of time. All information concerning such expenditures, and all information
learned in the course of any audit or inspection, shall be deemed to be
Microcide Confidential Information. The failure of Pfizer to request
-10-
<PAGE> 11
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
verification of any expenditures before or during the three-year period shall be
considered acceptance by Pfizer of the accuracy of such expenditures, and
Microcide shall have no obligation to maintain any records pertaining to such
report or statement beyond such three-year period. The results of such
inspection, if any, shall be binding on the parties.
3.4
[REDACTED]
4. TREATMENT OF CONFIDENTIAL INFORMATION.
4.1 CONFIDENTIALITY.
4.1.1 Pfizer and Microcide each recognize that the other's
Confidential Information constitutes highly valuable, confidential information.
Subject to the terms and conditions of the License Agreement, the obligations
set forth in Section 4.3 and the publication rights set forth in Section 4.2,
Pfizer and Microcide each agree that during the term of this Agreement and for
five (5) years thereafter, it will keep confidential, and will cause its
Affiliates to keep confidential, all Microcide Confidential Information or
Pfizer Confidential Information, as the case may be, that is disclosed to it, or
to any of its Affiliates pursuant to this Agreement. Neither Pfizer nor
Microcide nor any of their respective Affiliates shall use such Confidential
Information of the other party except as expressly permitted in this Agreement.
4.1.2 Pfizer and Microcide each agree that any disclosure of
the other's Confidential Information to any officer, employee or agent of the
other party or of any of its Affiliates shall be made only if and to the extent
necessary to carry out its rights and obligations under this Agreement
-11-
<PAGE> 12
and shall be limited to the maximum extent possible consistent with such
responsibilities. Pfizer and Microcide each agree not to disclose the other's
Confidential Information to any third parties under any circumstance without
written permission from the other party except to the extent necessary to
exercise its rights pursuant to this Agreement or to comply with applicable law.
Each party shall take such action, and shall cause its Affiliates to take such
action, to preserve the confidentiality of each other's Confidential Information
as it would customarily take to preserve the confidentiality of its own
Confidential Information. Each party will return all the Confidential
Information disclosed to the other party pursuant to this Agreement, including
all copies and extracts of documents, within sixty (60) days of the request upon
the termination of this Agreement except for one (1) copy which may be kept for
archival purposes.
4.1.3 Microcide and Pfizer each represent that all of its
employees, and any consultants to such party, participating in the Research
Program who shall have access to Pfizer Technology, Microcide Technology or
Joint Technology and Pfizer Confidential Information and Microcide Confidential
Information are bound by agreement to maintain such Confidential Information in
confidence.
4.2 PUBLICATION. Notwithstanding any matter set forth with
particularity in this Agreement to the contrary, results obtained in the course
of the Research Program may be submitted for publication following scientific
review by the Research Committee and subsequent approval by Microcide's and
Pfizer's managements, which approval shall not be unreasonably withheld. After
receipt of the proposed publication by both Pfizer's and Microcide's managements
written approval or disapproval shall be provided within thirty (30) days for a
manuscript, within fourteen (14) days for
-12-
<PAGE> 13
an abstract for presentation at, or inclusion in the proceedings of a scientific
meeting, and within fourteen (14) days for a transcript for an oral presentation
to be given at a scientific meeting.
4.3 PUBLICITY. Except as required by law (including disclosure required
by applicable federal securities regulations), neither party may disclose the
terms of this Agreement without the written consent of the other party, which
consent shall not be unreasonably withheld; provided, however, that, upon
execution of this Agreement, the parties will issue a press release with respect
to its contents; and, provided further, that copies of this Agreement may be
disclosed in confidence by Microcide to prospective investors, banks and other
sources of financing.
4.4 DISCLOSURE OF INVENTIONS. Each party shall promptly inform the
other about all inventions in the Area that are conceived, made or developed in
the course of carrying out the Research Program by employees of, or consultants
to, either of them solely, or jointly with employees of, or consultants to the
other.
4.5 RESTRICTIONS ON TRANSFERRING MATERIALS.
(a) Pfizer and Microcide recognize that the biological,
synthetic chemical and biochemical materials which are part of Pfizer
Technology, Microcide Technology or Joint Technology, represent valuable
commercial assets. Therefore, throughout the Contract Period and for five (5)
years thereafter, Microcide and Pfizer agree not to transfer the materials
included in Joint Technology and, in the case of Pfizer, the materials included
in Microcide Technology and, in the case of Microcide, the materials included in
Pfizer Technology to any third party unless (i) prior written consent for any
such transfer is obtained from the other party to this Agreement, or (ii) such
transfer is pursuant to a subcontractor for work related to the Research Program
and such subcontractor is
-13-
<PAGE> 14
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
obligated to hold such materials in confidence, or (iii) with respect to Joint
Technology only, Section 4.5(b) or Section 5.2(c) below becomes effective.
(b)
[REDACTED]
5. INTELLECTUAL PROPERTY RIGHTS. The following provisions relate to rights in
the intellectual property developed by Microcide or Pfizer, or both, during the
course of carrying out the Research Program.
5.1 OWNERSHIP. All Microcide Confidential Information and Microcide
Technology shall be owned by Microcide. All Pfizer Confidential Information and
Pfizer Technology shall be owned by Pfizer. All Joint Technology shall be owned
jointly by Microcide and Pfizer. All Patent Rights claiming Microcide Technology
only shall be owned by Microcide. All Patent Rights claiming Pfizer Technology
only shall be owned by Pfizer. All Patent Rights claiming Joint Technology shall
be jointly owned by Microcide and Pfizer.
5.2 GRANTS OF RESEARCH AND POST-AGREEMENT LICENSES.
(a) Microcide and Pfizer each hereby grants to the other a
nonexclusive, worldwide, royalty-free license or sublicense, as the case may be,
including the right to grant sublicenses to Affiliates, to make and use
Confidential Information, the Technology and Patent Rights during the Contract
Period solely for the performance of the Research Program.
-14-
<PAGE> 15
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
(b)
[REDACTED]
(c)
[REDACTED]
6. PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF PATENT
RIGHTS. The following provisions relate to the filing, prosecution and
maintenance of Patent Rights during the term of this Agreement.
6.1 FILING, PROSECUTION AND MAINTENANCE BY MICROCIDE. With respect to
Microcide and Joint Patent Rights, Microcide shall have the exclusive right and
obligation:
(a) to file applications for letters patent on any invention
included in Patent Rights; provided, however, that Microcide shall consult with
Pfizer regarding countries in which such patent applications should be filed and
shall file patent applications in those countries where Pfizer requests that
Microcide file such applications; and, further provided, that Microcide, at its
option and expense, may file in countries where Pfizer does not request that
Microcide file such applications;
-15-
<PAGE> 16
(b) to take all reasonable steps to prosecute all pending and
new patent applications included within Patent Rights;
(c) to respond to oppositions, nullity actions,
re-examinations, revocation actions and similar proceedings filed by third
parties against the grant of letters patent for such applications;
(d) to maintain in force any letters patent included in Patent
Rights by duly filing all necessary papers and paying any fees required by the
patent laws of the particular country in which such letters patent were granted;
and
(e) to cooperate fully with, and take all necessary actions
requested by, Pfizer in connection with the preparation, prosecution and
maintenance of any letters patent included in Patent Rights.
Microcide shall notify Pfizer in a timely manner of any decision to
abandon a pending patent application or an issued patent included in Patent
Rights. Thereafter, Pfizer shall have the option, at its expense, of continuing
to prosecute any such pending patent application or of keeping the issued patent
in force.
6.1.1 COPIES OF DOCUMENTS. Microcide shall provide to Pfizer
copies of all patent applications that are part of Patent Rights prior to
filing, for the purpose of obtaining substantive comment of Pfizer patent
counsel and for the inclusion of all reasonable claims suggested by such
counsel. Microcide shall also provide to Pfizer copies of all documents relating
to prosecution of all such patent applications in a timely manner and shall
provide to Pfizer every six (6) months a report detailing their status. Pfizer
shall provide to Microcide every six (6) months a report detailing the status of
all patent applications that are a part of Pfizer Patent Rights.
-16-
<PAGE> 17
6.1.2 REIMBURSEMENT OF COSTS FOR FILING PROSECUTING AND
MAINTAINING PATENT RIGHTS. Within thirty (30) days of receipt of invoices from
Microcide, Pfizer shall reimburse Microcide for all the costs of filing,
prosecuting, responding to opposition and maintaining patent applications and
patents in countries where Pfizer requests that patent applications be filed,
prosecuted and maintained. Such reimbursement shall be in addition to Funding
Payments. However, Pfizer may, upon sixty (60) days notice, request that
Microcide discontinue filing or prosecution of patent applications in any
country and discontinue reimbursing Microcide for the costs of filing,
prosecuting, responding to opposition or maintaining such patent application or
patent in any country. Microcide shall pay all costs in those countries in which
Pfizer does not request that Microcide file, prosecute or maintain patent
applications and patents, but in which Microcide, at its option, elects to do
so.
6.1.3 Pfizer shall have the right to file on behalf of and as
an agent for Microcide all applications and take all actions necessary to obtain
patent extensions pursuant to 35 USC Section 156 and foreign counterparts for
Patent Rights described in this Section 6.1 licensed to Pfizer. Microcide agrees
to sign, at Pfizer's expense, such further documents and take such further
actions as may be requested by Pfizer in this regard.
6.2 FILING, PROSECUTION AND MAINTENANCE BY PFIZER. With respect to
Pfizer Patent Rights, Pfizer shall have those rights and duties ascribed to
Microcide in Section 6.1; provided, Microcide shall have no obligation to
reimburse Pfizer for the payment of any expenses incurred in connection with the
Pfizer Patent Rights.
6.3 DISCLAIMER. Neither party may disclaim a claim within Patent Rights
without the consent of the other.
-17-
<PAGE> 18
7. ACQUISITION OF RIGHTS FROM THIRD PARTIES. During the Contract Period,
Microcide and Pfizer shall each promptly notify each other of any and all
opportunities to acquire in any manner from third parties, technology or patents
or information which may be useful in or may relate to the Research Program. In
each case, Pfizer and Microcide shall decide if such rights should be acquired
in connection with the Research Program and, if so, whether by Microcide,
Pfizer, or both. If acquired, such rights shall become part of the Confidential
Information, Technology or Patent Rights, whichever is appropriate, of the
acquiring party or Joint Technology, as the case may be. Pfizer shall pay all
costs of acquiring and maintaining rights to such intellectual property, at
Pfizer's sole discretion; provided that Microcide shall have no obligation or
liability hereunder with respect to such rights in the event Pfizer shall elect
not to acquire such rights.
8. OTHER AGREEMENTS. Concurrently with the execution of this Agreement,
Microcide and Pfizer shall enter into the License and Stock Purchase Agreements
appended to and made part of this Agreement. This Agreement, the License
Agreement and the Stock Purchase Agreement and the Confidentiality Agreement
between the parties are the sole agreements with respect to the subject matter
and supersede all other agreements and understandings between the parties with
respect to same.
9. TERM, TERMINATION AND DISENGAGEMENT.
9.1 TERM. Unless sooner terminated or extended, the Contract Period and
this Agreement shall expire on February 28, 2001.
-18-
<PAGE> 19
9.2 EVENTS OF TERMINATION. The following events shall constitute events
of termination ("Events of Termination"):
(a) any written representation or warranty by Microcide or
Pfizer, or any of their respective officers, made under or in connection with
this Agreement shall prove to have been incorrect in any material respect when
made and concerning which the declaring party knew or should have known the
correct version.
(b) Microcide or Pfizer shall fail in any material respect to
perform or observe any term, covenant or understanding contained in this
Agreement or in any of the other documents or instruments delivered pursuant to,
or concurrently with, this Agreement, and any such failure shall remain
unremedied for sixty (60) days after written notice to the failing party.
9.3 TERMINATION.
9.3.1 Upon the occurrence of any Event of Termination, the
party not responsible may, by thirty (30) days notice to the other party,
terminate this Agreement.
9.3.2 If Pfizer terminates this Agreement pursuant to Section
9.3.1, the License Agreement shall continue according to its terms. If Microcide
terminates this Agreement pursuant to Section 9.3.1, the License Agreement shall
terminate immediately.
9.4 TERMINATION BY PFIZER.
9.4.1 After this Agreement has been in effect for a period of
thirty (30) months, Pfizer may terminate this Agreement with six (6) months
notice given on or after the last day of the thirtieth month, with or without
cause, to Microcide. If Pfizer terminates this Agreement pursuant to this
Section, it will make the payments which would otherwise have been due for such
six (6) month
-19-
<PAGE> 20
period; provided, however, that such termination shall not terminate Pfizer's
right and obligations pursuant to the License Agreement.
9.5 Termination of this Agreement by either party, with or without
cause, will not terminate such portions of the Research Licenses granted
pursuant to Section 5.2(b) which by their terms extend beyond termination of
this Agreement.
9.6 Termination of this Agreement for any reason shall be without
prejudice to:
(a) the rights and obligations of the parties provided in
Sections 2.2.1(c), 3.3.3, 4, 5.1, 5.2(b) and 6 with respect to Joint Patent
Rights and 9.3, 9.4, 9.5, 9.6 and 12; (b) Microcide's right to receive all
payments accrued under Section 3; or (c) any other remedies which either party
may otherwise have.
10. REPRESENTATIONS AND WARRANTIES. Microcide and Pfizer each represents and
warrants as follows:
10.1 It is a corporation duly organized, validly existing and is in
good standing under the laws of the States of California and Delaware,
respectively, is qualified to do business and is in good standing as a foreign
corporation in each jurisdiction in which the conduct of its business or the
ownership of its properties requires such qualification and has all requisite
power and authority, corporate or otherwise, to conduct its business as now
being conducted, to own, lease and operate its properties and to execute,
deliver and perform this Agreement.
10.2 The execution, delivery and performance by it of this Agreement
have been duly authorized by all necessary corporate action and do not (a)
require any consent or approval of its stockholders, (b) violate any provision
of any law, rule, regulation, order, writ, judgment, injunctions,
-20-
<PAGE> 21
decree, determination award presently in effect having applicable to it or any
provision of its certificate of incorporation or by-laws, or (c) as of the
Effective Date, result in a breach of or constitute a material default under any
material agreement, mortgage, lease, license, permit or other instrument or
obligation to which it is a party or by which it or its properties may be bound
or affected.
10.3 This Agreement is a legal, valid and binding obligation of it,
enforceable against it in accordance with its terms and conditions, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws, from time to time in effect,
affecting creditors' rights generally.
10.4 It is not under any obligation to any person, or entity,
contractual or otherwise, that is conflicting or inconsistent in any respect
with the terms of this Agreement or that would impede the diligent and complete
fulfillment of its obligations.
10.5 To the best of its knowledge and belief as of the Effective Date,
it has good and marketable title to or valid leases or licenses for, all of its
properties, rights and assets necessary for the fulfillment of its
responsibilities under the Research Program.
11. COVENANTS OF MICROCIDE AND PFIZER OTHER THAN REPORTING REQUIREMENTS.
Throughout the Contract Period, Microcide and Pfizer each shall:
11.1 maintain and preserve its corporate existence, rights, franchises
and privileges in the jurisdiction of its incorporation, and qualify and remain
qualified as a foreign corporation in good standing in each jurisdiction in
which such qualification is from time to time necessary or desirable in view of
their business and operations or the ownership of their properties.
-21-
<PAGE> 22
11.2 comply in all material respects with the requirements of all
applicable laws, rules, regulations and orders of any government authority to
the extent necessary to conduct the Research Program, except for those laws,
rules, regulations and orders it may be contesting in good faith.
12. INDEMNIFICATION. Pfizer will indemnify, defend and hold Microcide and its
Affiliates and their respective directors, officers, employees and agents (the
"Microcide Indemnitees") harmless from and against any damages, liabilities,
settlements, costs, legal fees and other expenses incurred in connection with a
claim against the Microcide Indemnitees based on any action or omission of
Pfizer, its agents or employees related to the obligations of Pfizer under this
Agreement; provided, however, that the foregoing shall not apply (i) if the
claim is found in a final judgment to be based upon the negligence, recklessness
or willful misconduct of Microcide, or (ii) if Microcide fails to give Pfizer
prompt notice of any claim it receives within fifteen (15) days of such receipt
and such failure materially prejudices Pfizer with respect to any claim or
action to which Pfizer's obligations pursuant to this Section applies. Pfizer,
in its sole discretion, shall choose legal counsel, shall control the defense of
such claim or action and shall have the right to settle same on such terms and
conditions it deems advisable; provided, however, that a Microcide Indemnitee
shall have the right to retain its own counsel, if representation of such
Microcide Indemnitee by the counsel retained by Pfizer would be inappropriate
due to actual or potential differing interests between Pfizer and any other
party represented by such counsel in such proceeding.
-22-
<PAGE> 23
13. NOTICES. All notices shall be in writing mailed via certified mail, return
receipt requested, courier, or facsimile transmission addressed as follows, or
to such other address as may be designated from time to time:
If to Pfizer: To Pfizer at its address as set forth in the
beginning of this Agreement.
Attention: President, Central Research
with copy to: Office of the General Counsel
If to Microcide: To Microcide at its address as set forth in
the beginning of this Agreement.
Attention: Chief Executive Officer
with copy to: Wilson Sonsini Goodrich &
Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Michael O'Donnell
Notices shall be deemed given as of the date received.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
15. MISCELLANEOUS.
15.1 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective legal representatives,
successors and permitted assigns.
15.2 HEADINGS. Paragraph headings are inserted for convenience of
reference only and do not form a part of this Agreement.
15.3 COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original.
-23-
<PAGE> 24
15.4 AMENDMENT; WAIVER. This Agreement may be amended, modified,
superseded or canceled, and any of the terms may be waived, only by a written
instrument executed by each party or, in the case of waiver, by the party or
parties waiving compliance. The delay or failure of any party at any time or
times to require performance of any provisions shall in no manner affect the
rights at a later time to enforce the same. No waiver by any party of any
condition or of the breach of any term contained in this Agreement, whether by
conduct, or otherwise, in any one or more instances, shall be deemed to be,
considered as, a further or continuing waiver of any such condition or of the
breach of such term or any other term of this Agreement.
15.5 NO THIRD PARTY BENEFICIARIES. No third party, including any
employee of any party to this Agreement, shall have or acquire any rights by
reason of this Agreement. Nothing contained in this Agreement shall be deemed to
constitute the parties partners with each other or any third party.
15.6 ASSIGNMENT AND SUCCESSORS. This Agreement may not be assigned by
either party, except that each party may assign this Agreement and the rights
and interests of such party, in whole or in part, to any of its Affiliates, any
purchaser of all or substantially all of its assets or to any successor
corporation resulting from any merger or consolidation of such party with or
into such corporations.
15.7 FORCE MAJEURE. Neither Pfizer nor Microcide shall be liable for
failure of or delay in performing obligations set forth in this Agreement, and
neither shall be deemed in breach of its obligations, if such failure or delay
is due to natural disasters or any causes reasonably beyond the control of
Pfizer or Microcide.
-24-
<PAGE> 25
15.8 SEVERABILITY. If any provision of this Agreement is or becomes
invalid or is ruled invalid by any court of competent jurisdiction or is deemed
unenforceable, it is the intention of the parties that the remainder of the
Agreement shall not be affected.
15.9 COMPLIANCE WITH LAW. In exercising their rights under this
Agreement, the parties shall fully comply with the requirements of any and all
applicable laws, regulations, rules and orders of any governmental body having
jurisdiction over the exercise of rights under this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives.
PFIZER INC
By__________________________________________
MICROCIDE PHARMACEUTICALS, INC.
By:_________________________________________
cc: Pfizer Inc, Legal Division, Groton, CT 06340
-25-
<PAGE> 26
EXHIBITS
<TABLE>
<CAPTION>
Section
- -------
<S> <C>
Exhibit A Microcide Patent Applications
Exhibit B Annual Research Plans - To be appended yearly.
Exhibit C Research Programs
</TABLE>
<PAGE> 27
EXHIBIT A
MICROCIDE PATENT APPLICATIONS
<PAGE> 28
Microcide Pharmaceuticals, Inc.
CONFIDENTIAL
EXHIBIT A
CONFIDENTIAL TREATMENT
REQUESTED
2 of 3
<PAGE> 29
Microcide Pharmaceuticals, Inc.
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
3 of 3
<PAGE> 30
EXHIBIT B
ANNUAL RESEARCH PLANS
(To be appended yearly)
<PAGE> 31
EXHIBIT C
RESEARCH PROGRAM
- ------------------------------------- ----------------------------------------
JOHN L. LAMATTINA, PH.D. KEITH A. BOSTIAN, PH.D.
Vice President, Chief Operating Officer
U.S. Discovery Operations
Pfizer Central Research Microcide Pharmaceuticals, Inc.
Eastern Point Road 850 Maude Avenue
Groton, Connecticut 06340 Mountain View, California 94043
1 of 33
<PAGE> 32
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
2 of 33
<PAGE> 33
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
3 of 33
<PAGE> 34
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
4 of 33
<PAGE> 35
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
5 of 33
<PAGE> 36
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
6 of 33
<PAGE> 37
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
7 of 33
<PAGE> 38
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
8 of 33
<PAGE> 39
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
9 of 33
<PAGE> 40
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
10 of 33
<PAGE> 41
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
11 of 33
<PAGE> 42
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
12 of 33
<PAGE> 43
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
13 of 33
<PAGE> 44
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
14 of 33
<PAGE> 45
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
15 of 33
<PAGE> 46
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
16 of 33
<PAGE> 47
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
17 of 33
<PAGE> 48
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
18 of 33
<PAGE> 49
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
19 of 33
<PAGE> 50
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
20 of 33
<PAGE> 51
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
21 of 33
<PAGE> 52
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
22 of 33
<PAGE> 53
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
23 of 33
<PAGE> 54
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
24 of 33
<PAGE> 55
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
25 of 33
<PAGE> 56
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
26 of 33
<PAGE> 57
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
27 of 33
<PAGE> 58
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
28 of 33
<PAGE> 59
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
29 of 33
<PAGE> 60
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
30 of 33
<PAGE> 61
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
31 of 33
<PAGE> 62
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
32 of 33
<PAGE> 63
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
33 of 33
<PAGE> 64
EXHIBIT 10.10
LICENSE AND ROYALTY AGREEMENT
This LICENSE AND ROYALTY AGREEMENT (the "Agreement") is entered into as
of March 1, 1996 (the "Effective Date") by and between PFIZER INC., a Delaware
corporation, having an office at 235 East 42nd Street, New York, NY 10017 and
its Affiliates ("Pfizer") and MICROCIDE PHARMACEUTICALS, INC. ("Microcide"), a
California corporation, having an office at 850 Maude Avenue, Mountain View, CA
94043.
WHEREAS, Pfizer desires to obtain an exclusive license and sublicense
to Microcide's right, title and interest in the Patent Rights so that Pfizer can
manufacture, use or sell the Licensed Products; and
WHEREAS, Microcide is willing to grant such license and sublicense;
Therefore, in consideration of the mutual covenants and promises set
forth in this Agreement, the parties agree as follows:
1. DEFINITIONS.
The capitalized terms used in this Agreement and not defined elsewhere
in it shall have the meanings specified for such terms in this Section 1 and in
the Research Agreement.
1.1 "RESEARCH AGREEMENT" means the Collaborative Research Agreement
between Pfizer and Microcide effective March 1, 1996.
1.2 "NET SALES" means the gross amount invoiced by Pfizer and any
sublicensee of Pfizer for sales to a third party or parties of Licensed
Products, less normal and customary trade discounts actually allowed, rebates,
returns, credits, taxes the legal incidence of which is on the purchaser and
separately shown on Pfizer's or any sublicensee of Pfizer's invoices and
transportation, insurance and
-1-
<PAGE> 65
postage charges, if prepaid by Pfizer or any sublicensee of Pfizer and billed on
Pfizer's or any sublicensee or Pfizer's invoices as a separate item.
1.3 "LICENSED PRODUCT" means any Product, the manufacture, use or sale
of which would infringe the Patent Rights in the absence of a license or
sublicense or which, if such Patent Rights are comprised of patent applications
alone, the manufacture, use or sale of such Product would infringe a claim
included in such applications as if such claim were issued in a patent.
1.4 "CLASS" means antibacterial agents having the same mechanism of
action or pharmacophores acting on a given target.
2. GRANT OF LICENSE, TERM, RIGHTS AND OBLIGATIONS.
2.1 LICENSE GRANTED TO PFIZER UNDER THE PATENT RIGHTS.
Subject to the terms and conditions of this Agreement, Microcide grants
to Pfizer the exclusive, worldwide license or sublicense, as the case may be,
including the right to grant sublicenses, to manufacture, use and sell Licensed
Products in the Area under all Microcide's right, title and interest in the
Patent Rights (the "License").
2.2 TERM OF LICENSE GRANT AND PAYMENT OF ROYALTIES.
Unless terminated earlier as provided below, the License shall commence
on the Effective Date and shall terminate on a country-by-country basis on the
expiration of the last to expire of the Patent Rights in each such country.
2.3 PFIZER OBLIGATIONS.
2.3.1 Pfizer shall use reasonably diligent efforts to exploit
Licensed Products commercially, including conducting clinical trials and
obtaining regulatory approvals.
-2-
<PAGE> 66
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
2.3.2 If Pfizer grants a sublicense pursuant to Section 2,
Pfizer shall guarantee that any sublicensee fulfills all of Pfizer's obligations
under this Agreement; provided, however, that Pfizer shall not be relieved of
its obligations pursuant to this Agreement. Pfizer shall provide Microcide a
copy of any such sublicense promptly following execution thereof.
2.4 TECHNICAL ASSISTANCE.
Microcide shall use reasonable efforts, consistent with its other
obligation and overall business strategy, to provide to Pfizer or any
sublicensee of Pfizer, at Pfizer's request and expense, any technical assistance
reasonably necessary to enable Pfizer or such sublicensee to manufacture, use or
sell each Licensed Product and to enjoy fully all the rights granted to Pfizer
pursuant to this Agreement at mutually convenient times and places.
2.5
[REDACTED]
-3-
<PAGE> 67
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
3. ROYALTIES, PAYMENTS OF ROYALTIES, ACCOUNTING FOR ROYALTIES, RECORDS,
MILESTONE PAYMENTS.
3.1 PATENT RIGHTS.
Pfizer shall pay Microcide a royalty based on the Net Sales of each
Licensed Product. Such royalty shall be paid with respect to each country of the
world from the date of the first commercial sale (the date of the invoice of
Pfizer or any sublicensee of Pfizer with respect to such sale) of such Licensed
Product in each such country until the expiration of the last Patent Right to
expire with respect to each such country and each such Licensed Product.
3.2
[REDACTED]
-4-
<PAGE> 68
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
3.3
[REDACTED]
3.4 PAYMENT DATES.
Royalties shall be paid by Pfizer on Net Sales within sixty (60) days
after the end of each calendar quarter in which such Net Sales are made. Such
payments shall be accompanied by a statement showing the Net Sales of each
Licensed Product by Pfizer and any sublicensee of Pfizer in each country, the
applicable royalty rate for such Licensed Product, and a calculation of the
amount of royalty due.
3.5 ACCOUNTING.
The Net Sales used for computing the royalties payable to Microcide by
Pfizer shall be computed and paid in U.S. dollars by wire transfer to an account
designated by Microcide or other mutually acceptable means. For purposes of
determining the amount of royalties due, the amount of Net Sales in any foreign
currency shall be computed by (a) converting such amount into dollars at the
prevailing commercial rate of exchange for purchasing dollars with such foreign
currency as quoted by Citibank in New York on the last business day of the
calendar quarter for which the relevant
-5-
<PAGE> 69
royalty payment is to be made by Pfizer and (b) deducting the amount of any
governmental tax, duty, charge, or other fee actually paid in respect of such
conversion into, and remittance of dollars.
3.6 RECORDS.
Pfizer shall keep for three (3) years from the date of each payment of
royalties complete and accurate records of sales by Pfizer of each Licensed
Product in sufficient detail to allow the accruing royalties to be determined
accurately. Microcide shall have the right for a period of three (3) years after
receiving any report or statement with respect to royalties due and payable to
appoint at its expense an independent certified public accountant reasonably
acceptable to Pfizer to inspect the relevant records of Pfizer to verify such
report or statement. Pfizer shall make its records available for inspection by
such independent certified public accountant during regular business hours at
such place or places where such records are customarily kept, upon reasonable
notice from Microcide, to verify the accuracy of the reports and payments. Such
inspection right shall not be exercised more than once in any calendar year nor
more than once with respect to sales in any given period. Microcide agrees to
hold in strict confidence all information concerning royalty payments and
reports, and all information learned in the course of any audit or inspection.
The failure of Microcide to request verification of any report or statement
during said three-year period shall be considered acceptance of the accuracy of
such report, and Pfizer shall have no obligation to maintain records pertaining
to such report or statement beyond said three-year period. The results of each
inspection, if any, shall be binding on both parties.
-6-
<PAGE> 70
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
3.7
[REDACTED]
-7-
<PAGE> 71
3.8 RENEGOTIATION OF ROYALTY RATES.
The parties acknowledge that the royalty rate set forth in Section 3.2
is based on the premise that Products will be administered to patients orally by
tablets or capsules which deliver the drug by dissolving passively in the
gastrointestinal tract, or parenterally by standard intramuscular or intravenous
formulations ("Existing Dosage Forms"). If Pfizer identifies or develops a
different method of administration ("New Dosage Form") with respect to a Product
or Products which represents a commercial opportunity for Pfizer or improves the
safety or efficacy of such Product, the parties shall negotiate a new royalty
rate for such Product in such New Dosage Form to account for development costs
and change sin the cost of goods, selling price and projected annual Net Sales.
3.9 ANIMAL HEALTH.
The royalty rates and milestone payments set forth above shall apply to
Products for the treatment of human bacterial disease only. If Pfizer chooses to
develop a Product for the treatment of such diseases in animals, the parties
agree to negotiate suitable royalty rates and milestone payments.
4. LEGAL ACTION.
4.1 ACTUAL OR THREATENED DISCLOSURE OR INFRINGEMENT.
When information comes to the attention of Pfizer to the effect that
any Patent Rights relating to a Licensed Product have been or are threatened to
be unlawfully infringed, Pfizer shall notify Microcide and Pfizer shall have the
right at Pfizer's expense, to take such action as it may deem necessary to
prosecute or prevent such unlawful infringement, including the right to bring or
defend any suit, action or proceeding involving any such infringement. Pfizer
shall notify Microcide promptly of the receipt of any such information and of
the commencement of any such suit, action or proceeding. If Pfizer determines
that it is necessary or desirable to Microcide to join any such suit,
-8-
<PAGE> 72
action or proceeding, Microcide shall, at Pfizer's expense, execute all papers
and perform such other acts as may be reasonably required to permit Pfizer to
act in Microcide's name and Pfizer shall hold Microcide free, clear harmless
from any and all costs and expenses of such litigation, including attorneys
fees. If Pfizer brings a suit, it shall have the right first to reimburse itself
out of any sums recovered in such suit or in its settlement for all costs and
expenses, including attorney's fees, related to such suit or settlement, and
twenty-five percent (25%) of any funds that shall remain from said recovery
shall be paid to Microcide and the balance of such funds shall be retained by
Pfizer. If Pfizer does not, within one hundred twenty (120) days after giving
notice to Microcide of the above-described information, notify Microcide of
Pfizer's intent to bring suit against any infringer. Microcide shall have the
right to bring suit for such alleged infringement, but it shall not be obligated
to do so, and many join Pfizer as party plaintiff, if appropriate, in which
event Microcide shall hold Pfizer free, clear and harmless from any and all
costs and expenses of such litigation, including attorneys' fees, and any sums
recovered in any such suit or its settlement shall belong to Microcide. However,
twenty-five percent (25%) of any such sums received by Microcide, after
deduction of all costs and expenses related to such suit or settlement,
including attorney's fees paid, shall be paid to Pfizer. Each party shall always
have the right to be represented by counsel of its own selection and at its own
expense in any suit instituted by the other for infringement under the terms of
this Section. If Pfizer lacks standing and Microcide has standing to bring any
such suit, action or proceeding, then Microcide shall do so at the request of
Pfizer and at Pfizer's expense.
4.2 DEFENSE OF INFRINGEMENT CLAIMS.
Microcide will cooperate with Pfizer at Pfizer's expense in the defense
of any suit, action or proceeding against Pfizer or any sublicensee of Pfizer
alleging the infringement of the intellectual
-9-
<PAGE> 73
property rights of a third party by reason of the manufacture, use or sale of
the Licensed Product. Pfizer shall give Microcide prompt written notice of the
commencement of any such suit, action or proceeding or claim of infringement and
will furnish Microcide a copy of each communication relating to the alleged
infringement. Microcide shall give to Pfizer all authority (including the right
to exclusive control of the defense of any such suit, action or proceeding and
the exclusive right after consultation with Microcide, to compromise, litigate,
settle or otherwise dispose of any such suit, action or proceeding), information
and assistance necessary to defend or settle any such suit, action or
proceeding; provided, Pfizer shall not make any admission regarding the
invalidity or unenforceability of any aspect of the Microcide Patent Rights or
Joint Patent Rights without the prior written consent of Microcide. If the
parties agree that Microcide should institute or join any suit, action or
proceeding pursuant to this Section, Pfizer may, at Pfizer's expense, join
Microcide as a defendant if necessary or desirable, and Microcide shall execute
all documents and take all other actions, including giving testimony, which may
reasonably be required in connection with the prosecution of such suit, action
or proceeding.
4.3 HOLD HARMLESS.
Microcide agrees to defend, protect, indemnify and hold harmless Pfizer
and any sublicensee of Pfizer, from and against any loss or expense arising from
any proved claim (i.e., established in a final judgment by a court of competent
jurisdiction, which judgment is unappealed or unappealable) of a third party
that it has been granted rights by Microcide that Pfizer or any sublicensee or
Pfizer in exercising their rights granted to Pfizer by Microcide pursuant to
this Agreement, has infringed upon such rights granted to such third party by
Microcide.
-10-
<PAGE> 74
4.4 THIRD PARTY LICENSES.
If the manufacture, use or sale by Pfizer of a Licensed Product in any
country would, in the opinion of both Pfizer and Microcide, infringe the patent
rights owned by a third party, Pfizer will attempt to obtain a license under
such patent rights or other intellectual property and shall pay all costs,
expenses and royalties due with respect to the acquisition and maintenance of
rights under any such third party license.
5. REPRESENTATION AND WARRANTY.
Microcide represents and warrants to Pfizer that it has the right to
grant the License granted pursuant to this Agreement, and that the License so
granted does not conflict with or violate the terms of any agreement between
Microcide and any third party.
6. TREATMENT OF CONFIDENTIAL INFORMATION.
6.1 CONFIDENTIALITY.
6.1.1 Pfizer and Microcide each recognize that the other's
Confidential Information constitutes highly valuable, confidential information.
Subject to Pfizer's rights and obligations pursuant to this Agreement, Pfizer
and Microcide each agree that during the term of the Research Agreement and for
five (5) years thereafter, it will keep confidential, and will cause its
Affiliates to keep confidential, all Microcide Confidential Information or
Pfizer Confidential Information, as the case may be, that is disclosed to it or
to any of its Affiliates pursuant to this Agreement.
6.1.2 Pfizer and Microcide each agree that any disclosure of
the other's Confidential Information to any officer, employee or agent of the
other party or of any of its Affiliates shall be made only if and to the extent
necessary to carry out its rights and obligations under this Agreement and shall
be limited to the maximum extent possible consistent with such responsibilities.
Subject to
-11-
<PAGE> 75
Pfizer's rights and obligations pursuant to this Agreement, Pfizer and Microcide
each agree not to disclose the other's Confidential Information to any third
parties under any circumstance without written permission from the other party
except to the extent necessary to exercise its right pursuant to this Agreement
or to comply with applicable law. Each party shall take such action, and shall
cause its Affiliates to take such action, to preserve the confidentiality of
each other's Confidential Information as it would customarily take to preserve
the confidentiality of its own Confidential Information. Each party will return
all the Confidential Information disclosed to the other party pursuant to this
Agreement, including all copies ands extracts of documents, within sixty (60)
days of the request upon the termination of this Agreement except for one (1)
copy which may be kept for archival purposes.
6.2 PUBLICITY.
Except as required by law, neither party may disclose the terms of this
Agreement nor the research described in it without the written consent of the
other party, which consent shall not be unreasonably withheld; provided,
however, that, upon execution of this Agreement, the parties will issue a press
release with respect to its contents; and, further provided, that copies of this
Agreement may be disclosed in confidence by Microcide to prospective investors,
banks and other sources of financing.
7. PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF PATENT
RIGHTS.
The following provisions relate to the filing, prosecution and
maintenance of Patent Rights during the term of this Agreement:
-12-
<PAGE> 76
7.1 FILING, PROSECUTION AND MAINTENANCE BY MICROCIDE.
With respect to Microcide and Joint Patent Rights, Microcide shall have
the exclusive right and obligation:
(a) to file applications for letters patent on any
patentable invention included in Patent Rights;
provided, however, that Microcide shall consult with
Pfizer regarding countries in which such patent
applications should be filed and shall file patent
applications in those countries where Pfizer requests
that Microcide file such applications; and, further
provided, that Microcide, at its option and expense,
may file in countries where Pfizer does not request
that Microcide file such applications;
(b) to prosecute all pending and new patent applications
included within Patent Rights;
(c) to respond to oppositions, nullity actions,
re-examinations, revocation actions and similar
proceedings filed by third parties against the grant
of letters patent for such applications; and
(d) to maintain in force any letters patent included in
Patent Rights by duly filing all necessary papers and
paying any fees required by the patent laws of the
particular country in which such letters patent were
granted.
Microcide shall notify Pfizer in a timely manner of any decision to
abandon a pending patent application or an issued patent included in Patent
Rights. Thereafter, Pfizer shall have the option, at its expense, of continuing
to prosecute any such pending patent application or of keeping the issued patent
in force.
-13-
<PAGE> 77
7.1.1 COPIES OF DOCUMENTS. Microcide shall provide the Pfizer
copies of all patent applications that are part of the Patent Rights prior to
filing, for the purpose of obtaining substantive comment of Pfizer patent
counsel and inclusion of reasonable claims suggested by such counsel. Microcide
shall also provide to Pfizer copies of all documents relating to prosecution of
all such patent applications in a timely manner and shall provide to Pfizer
every six (6) months a report detailing their status. Pfizer shall provide to
Microcide every six (6) months a report detailing the status of all patent
applications that are a part of Patent Rights in which Pfizer employees or
consultants alone are named as inventors.
7.1.2 REIMBURSEMENT OF COSTS FOR FILING, PROSECUTING AND
MAINTAINING PATENT RIGHTS. Within thirty (30) days of receipt of invoices from
Microcide, Pfizer shall reimburse Microcide for all the costs of filings,
prosecuting, responding to opposition and maintaining patent applications and
patents in countries where Pfizer requests that patent applications be filed,
prosecuted and maintained. Such reimbursement shall be in addition to payments
made pursuant to the Research Agreement. However, Pfizer may, upon sixty (60)
days notice, request that Microcide discontinue filing or prosecution of patent
applications in any country and discontinue reimbursing Microcide for the costs
of filing, prosecuting, responding to opposition or maintaining such patent
application or patent in any country. Microcide shall pay all costs in those
countries in which Pfizer does not request that Microcide file, prosecute or
maintain patent applications and patents, but in which Microcide, at its option,
elects to do so.
7.1.3 PFIZER RIGHT TO PROSECUTE. Pfizer shall have the right
to file on behalf of and as an agent for Microcide all applications and take all
actions necessary to obtain patent extensions pursuant to 35 USC Section 156 and
foreign counterparts for Patent Rights described in this
-14-
<PAGE> 78
Section 6.1 licensed to Pfizer. Microcide agrees to sign, at Pfizer's expense,
such further documents and take such further actions as may be requested by
Pfizer in this regard.
7.2 FILING, PROSECUTION AND MAINTENANCE BY PFIZER. With respect to
Pfizer Patent Rights, Pfizer shall have those rights and duties ascribed to
Microcide in Section 7.1; provided, Microcide shall have no obligation to
reimburse Pfizer for the payment of any expenses incurred in connection with the
Pfizer Patent Rights.
7.3 DISCLAIMER. Neither party may disclaim a claim within Patent Right
without the consent of the other.
8. OTHER AGREEMENTS.
Concurrently with the execution of this Agreement, Microcide and Pfizer
shall enter into the Research Agreement. This Agreement, the Research Agreement,
the Stock Purchase Agreement and the Confidentiality Agreement of are the sole
agreements with respect to the subject matter and supersede all other agreements
and understanding between the parties with respect to same.
9. TERMINATION AND DISENGAGEMENT.
9.1 EVENTS OF TERMINATION. The following events shall constitute events
of termination ("Events of Termination").
(a) Any written representation or warranty by Microcide
or Pfizer, or any of its officers, made under or in
connection with this Agreement shall prove to have
been incorrect in any material respect when made and
concerning which the declaring party knew or should
have known the correct version.
(b) Microcide or Pfizer shall fail in any material
respect to perform or observe any term, covenant or
understanding contained in this Agreement or in any
of the
-15-
<PAGE> 79
other documents or instruments delivered pursuant to,
or concurrently with, this Agreement, and any such
failure shall remain unremedied for sixty (60) days
after written notice to the failing party; provided,
in the case of a failure to pay any amount due
hereunder, any failure to pay such amount within ten
(10) business days after written notice to the
failing party shall be an event of termination.
9.2 TERMINATION. Upon the occurrence of any Event of Termination, the
party not responsible may, by thirty (30) days notice to the other party,
terminate this Agreement.
9.3 Termination of this Agreement by either party, with or without
cause, will not terminate the licenses granted pursuant to Section 5.2(b) of the
Research Agreement.
9.4 Pfizer shall have the right at any time to terminate this Agreement
in whole or as to any portion of Microcide Patent Rights or Joint Patent Rights
upon ninety (90) days notice.
9.5 Termination of this Agreement for any reason shall be without
prejudice to:
(a) the rights and obligations of the parties provided in
Sections 3, 6, 7 with respect to Joint Patent Rights,
10, 12, and 13;
(b) Microcide's right to receive all royalty payments and
other payments accrued hereunder; or
(c) any other remedies which either party may otherwise
have..
10. INDEMNIFICATION.
Pfizer will indemnify, defend and hold Microcide and its Affiliates and
their respective directors, officers, employees and agents (the "Microcide
Indemnitees") harmless from and against any damages, liabilities, settlements,
costs, legal fees, and other expenses incurred in connection with
-16-
<PAGE> 80
any claim against the Microcide Indemnitees based on any action or omission of
Pfizer or its sublicensee and their respective agents or employees related to
manufacture, use, sale or other distribution of Licensed Products or other
exercise of the rights granted Pfizer under this Agreement including, without
limitation, any product liability claims; provided, however, that the foregoing
shall not apply (i) if the claim is found in a final judgment to be based upon
the negligence, recklessness or willful misconduct of Microcide, or (ii) if
Microcide fails to give Pfizer prompt notice of any claim it receives within
fifteen (15) days of such receipt and such failure materially prejudices Pfizer
with respect to any claim or action to which Pfizer's obligation pursuant to
this Section applies. Pfizer, in its sole discretion, shall choose legal
counsel, shall control the defense of such claim or action, and shall have the
right to settle same on such terms and conditions it deems advisable; provided,
however, than an Microcide Indemnitee shall have the right to retain its own
counsel, if representation of such Microcide Indemnitee by the counsel retained
by Pfizer would be inappropriate due to actual or potential differing interests
between Pfizer and any other party represented by such counsel in such
proceeding.
11. NOTICES.
All notices shall be in writing mailed via certified mail, return
receipt requested, courier, or facsimile transmission addressed as follows, or
to such other address as may be designated from time to time:
If to Pfizer: To Pfizer at its address as set forth at the
beginning of this Agreement
Attention: President, Central Research, with a
copy to: Office of the General Counsel
If to Microcide: Microcide at its address as set forth at the
beginning of the Agreement
Attention: Chief Executive Officer with copy to:
-17-
<PAGE> 81
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Michael O'Donnell
Notices shall be deemed given as of the date received.
12. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
13. MISCELLANEOUS.
13.1 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective legal representatives,
successors and permitted assigns.
13.2 HEADINGS. Paragraph headings are inserted for convenience of
reference only and do not form a part of this Agreement.
13.3 COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original.
13.4 AMENDMENT; WAIVER. This Agreement may be amended, modified,
superseded or canceled, and any of the terms may be waived, only by a written
instrument executed by each part or, in the case of waiver, by the party or
parties waiving compliance. The delay or failure of any party at any time or
times to require performance of any provisions shall in no manner affect the
rights at a later time to enforce the same. No waiver by any party of any
condition or of the breach of any term contained in this Agreement, whether by
conduct, or otherwise, in any one or more instances, shall be deemed to be, or
considered as, a further or continuing waiver of any such condition or of the
breach of such term or any other term of this Agreement.
-18-
<PAGE> 82
13.5 NO THIRD PARTY BENEFICIARIES. No third party including any
employee of any party to this Agreement, shall be a third party beneficiary of
this Agreement or have or acquire any rights by reason of this Agreement.
Nothing contained in this Agreement shall be deemed to constitute the parties
partners with each other or any third party.
13.6 ASSIGNMENT AND SUCCESSORS. This Agreement may not be assigned by
either party, except that each party may assign this Agreement and the rights
and interests of such party, in whole or in part, to any of its Affiliates, any
purchaser of all or substantially all of its assets or to any successor
corporation resulting from any merger or consolidation of such party with or
into such corporations.
13.7 FORCE MAJEURE. Neither Pfizer nor Microcide shall be liable for
failure of or delay in performing obligations set forth in this Agreement, and
neither shall be deemed in breach of its obligations, if such failure or delay
is due to natural disasters or any causes reasonably beyond the control of
Pfizer or Microcide.
13.8 SEVERABILITY. If any provision of this Agreement is or becomes
invalid or is ruled invalid by any court of competent jurisdiction or is deemed
unenforceable, it is the intention of the parties that the remainder of the
Agreement shall not be affected.
13.10 PATENT MARKING. Pfizer agrees to mark and have its sublicensees
mark all Licensed Products they sell or distribute pursuant to this Agreement in
accordance with the applicable statute or regulations in the country of
countries of their manufacture and sale.
13.12 COMPLIANCE WITH LAW. In exercising their rights under this
Agreement, the parties shall fully comply with the requirements of any and all
applicable laws, regulations, rules and orders of any governmental body having
jurisdiction over the exercise of rights under this Agreement.
-19-
<PAGE> 83
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives.
PFIZER INC. MICROCIDE
PHARMACEUTICALS, INC.
By:__________________________________ By:____________________________________
Title:_______________________________ Title:_________________________________
Date:________________________________ Date:__________________________________
cc: Pfizer Inc., Legal Division, Groton, CT 06340
-20-
<PAGE> 84
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
<PAGE> 1
EXHIBIT 10.10
LICENSE AND ROYALTY AGREEMENT
This LICENSE AND ROYALTY AGREEMENT (the "Agreement") is entered into as
of March 1, 1996 (the "Effective Date") by and between PFIZER INC., a Delaware
corporation, having an office at 235 East 42nd Street, New York, NY 10017 and
its Affiliates ("Pfizer") and MICROCIDE PHARMACEUTICALS, INC. ("Microcide"), a
California corporation, having an office at 850 Maude Avenue, Mountain View, CA
94043.
WHEREAS, Pfizer desires to obtain an exclusive license and sublicense
to Microcide's right, title and interest in the Patent Rights so that Pfizer can
manufacture, use or sell the Licensed Products; and
WHEREAS, Microcide is willing to grant such license and sublicense;
Therefore, in consideration of the mutual covenants and promises set
forth in this Agreement, the parties agree as follows:
1. DEFINITIONS.
The capitalized terms used in this Agreement and not defined elsewhere
in it shall have the meanings specified for such terms in this Section 1 and in
the Research Agreement.
1.1 "RESEARCH AGREEMENT" means the Collaborative Research Agreement
between Pfizer and Microcide effective March 1, 1996.
1.2 "NET SALES" means the gross amount invoiced by Pfizer and any
sublicensee of Pfizer for sales to a third party or parties of Licensed
Products, less normal and customary trade discounts actually allowed, rebates,
returns, credits, taxes the legal incidence of which is on the purchaser and
separately shown on Pfizer's or any sublicensee of Pfizer's invoices and
transportation, insurance and
-1-
<PAGE> 2
postage charges, if prepaid by Pfizer or any sublicensee of Pfizer and billed on
Pfizer's or any sublicensee or Pfizer's invoices as a separate item.
1.3 "LICENSED PRODUCT" means any Product, the manufacture, use or sale
of which would infringe the Patent Rights in the absence of a license or
sublicense or which, if such Patent Rights are comprised of patent applications
alone, the manufacture, use or sale of such Product would infringe a claim
included in such applications as if such claim were issued in a patent.
1.4 "CLASS" means antibacterial agents having the same mechanism of
action or pharmacophores acting on a given target.
2. GRANT OF LICENSE, TERM, RIGHTS AND OBLIGATIONS.
2.1 LICENSE GRANTED TO PFIZER UNDER THE PATENT RIGHTS.
Subject to the terms and conditions of this Agreement, Microcide grants
to Pfizer the exclusive, worldwide license or sublicense, as the case may be,
including the right to grant sublicenses, to manufacture, use and sell Licensed
Products in the Area under all Microcide's right, title and interest in the
Patent Rights (the "License").
2.2 TERM OF LICENSE GRANT AND PAYMENT OF ROYALTIES.
Unless terminated earlier as provided below, the License shall commence
on the Effective Date and shall terminate on a country-by-country basis on the
expiration of the last to expire of the Patent Rights in each such country.
2.3 PFIZER OBLIGATIONS.
2.3.1 Pfizer shall use reasonably diligent efforts to exploit
Licensed Products commercially, including conducting clinical trials and
obtaining regulatory approvals.
-2-
<PAGE> 3
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
2.3.2 If Pfizer grants a sublicense pursuant to Section 2,
Pfizer shall guarantee that any sublicensee fulfills all of Pfizer's obligations
under this Agreement; provided, however, that Pfizer shall not be relieved of
its obligations pursuant to this Agreement. Pfizer shall provide Microcide a
copy of any such sublicense promptly following execution thereof.
2.4 TECHNICAL ASSISTANCE.
Microcide shall use reasonable efforts, consistent with its other
obligation and overall business strategy, to provide to Pfizer or any
sublicensee of Pfizer, at Pfizer's request and expense, any technical assistance
reasonably necessary to enable Pfizer or such sublicensee to manufacture, use or
sell each Licensed Product and to enjoy fully all the rights granted to Pfizer
pursuant to this Agreement at mutually convenient times and places.
2.5
[REDACTED]
-3-
<PAGE> 4
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
3. ROYALTIES, PAYMENTS OF ROYALTIES, ACCOUNTING FOR ROYALTIES, RECORDS,
MILESTONE PAYMENTS.
3.1 PATENT RIGHTS.
Pfizer shall pay Microcide a royalty based on the Net Sales of each
Licensed Product. Such royalty shall be paid with respect to each country of the
world from the date of the first commercial sale (the date of the invoice of
Pfizer or any sublicensee of Pfizer with respect to such sale) of such Licensed
Product in each such country until the expiration of the last Patent Right to
expire with respect to each such country and each such Licensed Product.
3.2
[REDACTED]
-4-
<PAGE> 5
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
3.3
[REDACTED]
3.4 PAYMENT DATES.
Royalties shall be paid by Pfizer on Net Sales within sixty (60) days
after the end of each calendar quarter in which such Net Sales are made. Such
payments shall be accompanied by a statement showing the Net Sales of each
Licensed Product by Pfizer and any sublicensee of Pfizer in each country, the
applicable royalty rate for such Licensed Product, and a calculation of the
amount of royalty due.
3.5 ACCOUNTING.
The Net Sales used for computing the royalties payable to Microcide by
Pfizer shall be computed and paid in U.S. dollars by wire transfer to an account
designated by Microcide or other mutually acceptable means. For purposes of
determining the amount of royalties due, the amount of Net Sales in any foreign
currency shall be computed by (a) converting such amount into dollars at the
prevailing commercial rate of exchange for purchasing dollars with such foreign
currency as quoted by Citibank in New York on the last business day of the
calendar quarter for which the relevant
-5-
<PAGE> 6
royalty payment is to be made by Pfizer and (b) deducting the amount of any
governmental tax, duty, charge, or other fee actually paid in respect of such
conversion into, and remittance of dollars.
3.6 RECORDS.
Pfizer shall keep for three (3) years from the date of each payment of
royalties complete and accurate records of sales by Pfizer of each Licensed
Product in sufficient detail to allow the accruing royalties to be determined
accurately. Microcide shall have the right for a period of three (3) years after
receiving any report or statement with respect to royalties due and payable to
appoint at its expense an independent certified public accountant reasonably
acceptable to Pfizer to inspect the relevant records of Pfizer to verify such
report or statement. Pfizer shall make its records available for inspection by
such independent certified public accountant during regular business hours at
such place or places where such records are customarily kept, upon reasonable
notice from Microcide, to verify the accuracy of the reports and payments. Such
inspection right shall not be exercised more than once in any calendar year nor
more than once with respect to sales in any given period. Microcide agrees to
hold in strict confidence all information concerning royalty payments and
reports, and all information learned in the course of any audit or inspection.
The failure of Microcide to request verification of any report or statement
during said three-year period shall be considered acceptance of the accuracy of
such report, and Pfizer shall have no obligation to maintain records pertaining
to such report or statement beyond said three-year period. The results of each
inspection, if any, shall be binding on both parties.
-6-
<PAGE> 7
Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
3.7
[REDACTED]
-7-
<PAGE> 8
3.8 RENEGOTIATION OF ROYALTY RATES.
The parties acknowledge that the royalty rate set forth in Section 3.2
is based on the premise that Products will be administered to patients orally by
tablets or capsules which deliver the drug by dissolving passively in the
gastrointestinal tract, or parenterally by standard intramuscular or intravenous
formulations ("Existing Dosage Forms"). If Pfizer identifies or develops a
different method of administration ("New Dosage Form") with respect to a Product
or Products which represents a commercial opportunity for Pfizer or improves the
safety or efficacy of such Product, the parties shall negotiate a new royalty
rate for such Product in such New Dosage Form to account for development costs
and change sin the cost of goods, selling price and projected annual Net Sales.
3.9 ANIMAL HEALTH.
The royalty rates and milestone payments set forth above shall apply to
Products for the treatment of human bacterial disease only. If Pfizer chooses to
develop a Product for the treatment of such diseases in animals, the parties
agree to negotiate suitable royalty rates and milestone payments.
4. LEGAL ACTION.
4.1 ACTUAL OR THREATENED DISCLOSURE OR INFRINGEMENT.
When information comes to the attention of Pfizer to the effect that
any Patent Rights relating to a Licensed Product have been or are threatened to
be unlawfully infringed, Pfizer shall notify Microcide and Pfizer shall have the
right at Pfizer's expense, to take such action as it may deem necessary to
prosecute or prevent such unlawful infringement, including the right to bring or
defend any suit, action or proceeding involving any such infringement. Pfizer
shall notify Microcide promptly of the receipt of any such information and of
the commencement of any such suit, action or proceeding. If Pfizer determines
that it is necessary or desirable to Microcide to join any such suit,
-8-
<PAGE> 9
action or proceeding, Microcide shall, at Pfizer's expense, execute all papers
and perform such other acts as may be reasonably required to permit Pfizer to
act in Microcide's name and Pfizer shall hold Microcide free, clear harmless
from any and all costs and expenses of such litigation, including attorneys
fees. If Pfizer brings a suit, it shall have the right first to reimburse itself
out of any sums recovered in such suit or in its settlement for all costs and
expenses, including attorney's fees, related to such suit or settlement, and
twenty-five percent (25%) of any funds that shall remain from said recovery
shall be paid to Microcide and the balance of such funds shall be retained by
Pfizer. If Pfizer does not, within one hundred twenty (120) days after giving
notice to Microcide of the above-described information, notify Microcide of
Pfizer's intent to bring suit against any infringer. Microcide shall have the
right to bring suit for such alleged infringement, but it shall not be obligated
to do so, and many join Pfizer as party plaintiff, if appropriate, in which
event Microcide shall hold Pfizer free, clear and harmless from any and all
costs and expenses of such litigation, including attorneys' fees, and any sums
recovered in any such suit or its settlement shall belong to Microcide. However,
twenty-five percent (25%) of any such sums received by Microcide, after
deduction of all costs and expenses related to such suit or settlement,
including attorney's fees paid, shall be paid to Pfizer. Each party shall always
have the right to be represented by counsel of its own selection and at its own
expense in any suit instituted by the other for infringement under the terms of
this Section. If Pfizer lacks standing and Microcide has standing to bring any
such suit, action or proceeding, then Microcide shall do so at the request of
Pfizer and at Pfizer's expense.
4.2 DEFENSE OF INFRINGEMENT CLAIMS.
Microcide will cooperate with Pfizer at Pfizer's expense in the defense
of any suit, action or proceeding against Pfizer or any sublicensee of Pfizer
alleging the infringement of the intellectual
-9-
<PAGE> 10
property rights of a third party by reason of the manufacture, use or sale of
the Licensed Product. Pfizer shall give Microcide prompt written notice of the
commencement of any such suit, action or proceeding or claim of infringement and
will furnish Microcide a copy of each communication relating to the alleged
infringement. Microcide shall give to Pfizer all authority (including the right
to exclusive control of the defense of any such suit, action or proceeding and
the exclusive right after consultation with Microcide, to compromise, litigate,
settle or otherwise dispose of any such suit, action or proceeding), information
and assistance necessary to defend or settle any such suit, action or
proceeding; provided, Pfizer shall not make any admission regarding the
invalidity or unenforceability of any aspect of the Microcide Patent Rights or
Joint Patent Rights without the prior written consent of Microcide. If the
parties agree that Microcide should institute or join any suit, action or
proceeding pursuant to this Section, Pfizer may, at Pfizer's expense, join
Microcide as a defendant if necessary or desirable, and Microcide shall execute
all documents and take all other actions, including giving testimony, which may
reasonably be required in connection with the prosecution of such suit, action
or proceeding.
4.3 HOLD HARMLESS.
Microcide agrees to defend, protect, indemnify and hold harmless Pfizer
and any sublicensee of Pfizer, from and against any loss or expense arising from
any proved claim (i.e., established in a final judgment by a court of competent
jurisdiction, which judgment is unappealed or unappealable) of a third party
that it has been granted rights by Microcide that Pfizer or any sublicensee or
Pfizer in exercising their rights granted to Pfizer by Microcide pursuant to
this Agreement, has infringed upon such rights granted to such third party by
Microcide.
-10-
<PAGE> 11
4.4 THIRD PARTY LICENSES.
If the manufacture, use or sale by Pfizer of a Licensed Product in any
country would, in the opinion of both Pfizer and Microcide, infringe the patent
rights owned by a third party, Pfizer will attempt to obtain a license under
such patent rights or other intellectual property and shall pay all costs,
expenses and royalties due with respect to the acquisition and maintenance of
rights under any such third party license.
5. REPRESENTATION AND WARRANTY.
Microcide represents and warrants to Pfizer that it has the right to
grant the License granted pursuant to this Agreement, and that the License so
granted does not conflict with or violate the terms of any agreement between
Microcide and any third party.
6. TREATMENT OF CONFIDENTIAL INFORMATION.
6.1 CONFIDENTIALITY.
6.1.1 Pfizer and Microcide each recognize that the other's
Confidential Information constitutes highly valuable, confidential information.
Subject to Pfizer's rights and obligations pursuant to this Agreement, Pfizer
and Microcide each agree that during the term of the Research Agreement and for
five (5) years thereafter, it will keep confidential, and will cause its
Affiliates to keep confidential, all Microcide Confidential Information or
Pfizer Confidential Information, as the case may be, that is disclosed to it or
to any of its Affiliates pursuant to this Agreement.
6.1.2 Pfizer and Microcide each agree that any disclosure of
the other's Confidential Information to any officer, employee or agent of the
other party or of any of its Affiliates shall be made only if and to the extent
necessary to carry out its rights and obligations under this Agreement and shall
be limited to the maximum extent possible consistent with such responsibilities.
Subject to
-11-
<PAGE> 12
Pfizer's rights and obligations pursuant to this Agreement, Pfizer and Microcide
each agree not to disclose the other's Confidential Information to any third
parties under any circumstance without written permission from the other party
except to the extent necessary to exercise its right pursuant to this Agreement
or to comply with applicable law. Each party shall take such action, and shall
cause its Affiliates to take such action, to preserve the confidentiality of
each other's Confidential Information as it would customarily take to preserve
the confidentiality of its own Confidential Information. Each party will return
all the Confidential Information disclosed to the other party pursuant to this
Agreement, including all copies ands extracts of documents, within sixty (60)
days of the request upon the termination of this Agreement except for one (1)
copy which may be kept for archival purposes.
6.2 PUBLICITY.
Except as required by law, neither party may disclose the terms of this
Agreement nor the research described in it without the written consent of the
other party, which consent shall not be unreasonably withheld; provided,
however, that, upon execution of this Agreement, the parties will issue a press
release with respect to its contents; and, further provided, that copies of this
Agreement may be disclosed in confidence by Microcide to prospective investors,
banks and other sources of financing.
7. PROVISIONS CONCERNING THE FILING, PROSECUTION AND MAINTENANCE OF PATENT
RIGHTS.
The following provisions relate to the filing, prosecution and
maintenance of Patent Rights during the term of this Agreement:
-12-
<PAGE> 13
7.1 FILING, PROSECUTION AND MAINTENANCE BY MICROCIDE.
With respect to Microcide and Joint Patent Rights, Microcide shall have
the exclusive right and obligation:
(a) to file applications for letters patent on any
patentable invention included in Patent Rights;
provided, however, that Microcide shall consult with
Pfizer regarding countries in which such patent
applications should be filed and shall file patent
applications in those countries where Pfizer requests
that Microcide file such applications; and, further
provided, that Microcide, at its option and expense,
may file in countries where Pfizer does not request
that Microcide file such applications;
(b) to prosecute all pending and new patent applications
included within Patent Rights;
(c) to respond to oppositions, nullity actions,
re-examinations, revocation actions and similar
proceedings filed by third parties against the grant
of letters patent for such applications; and
(d) to maintain in force any letters patent included in
Patent Rights by duly filing all necessary papers and
paying any fees required by the patent laws of the
particular country in which such letters patent were
granted.
Microcide shall notify Pfizer in a timely manner of any decision to
abandon a pending patent application or an issued patent included in Patent
Rights. Thereafter, Pfizer shall have the option, at its expense, of continuing
to prosecute any such pending patent application or of keeping the issued patent
in force.
-13-
<PAGE> 14
7.1.1 COPIES OF DOCUMENTS. Microcide shall provide the Pfizer
copies of all patent applications that are part of the Patent Rights prior to
filing, for the purpose of obtaining substantive comment of Pfizer patent
counsel and inclusion of reasonable claims suggested by such counsel. Microcide
shall also provide to Pfizer copies of all documents relating to prosecution of
all such patent applications in a timely manner and shall provide to Pfizer
every six (6) months a report detailing their status. Pfizer shall provide to
Microcide every six (6) months a report detailing the status of all patent
applications that are a part of Patent Rights in which Pfizer employees or
consultants alone are named as inventors.
7.1.2 REIMBURSEMENT OF COSTS FOR FILING, PROSECUTING AND
MAINTAINING PATENT RIGHTS. Within thirty (30) days of receipt of invoices from
Microcide, Pfizer shall reimburse Microcide for all the costs of filings,
prosecuting, responding to opposition and maintaining patent applications and
patents in countries where Pfizer requests that patent applications be filed,
prosecuted and maintained. Such reimbursement shall be in addition to payments
made pursuant to the Research Agreement. However, Pfizer may, upon sixty (60)
days notice, request that Microcide discontinue filing or prosecution of patent
applications in any country and discontinue reimbursing Microcide for the costs
of filing, prosecuting, responding to opposition or maintaining such patent
application or patent in any country. Microcide shall pay all costs in those
countries in which Pfizer does not request that Microcide file, prosecute or
maintain patent applications and patents, but in which Microcide, at its option,
elects to do so.
7.1.3 PFIZER RIGHT TO PROSECUTE. Pfizer shall have the right
to file on behalf of and as an agent for Microcide all applications and take all
actions necessary to obtain patent extensions pursuant to 35 USC Section 156 and
foreign counterparts for Patent Rights described in this
-14-
<PAGE> 15
Section 6.1 licensed to Pfizer. Microcide agrees to sign, at Pfizer's expense,
such further documents and take such further actions as may be requested by
Pfizer in this regard.
7.2 FILING, PROSECUTION AND MAINTENANCE BY PFIZER. With respect to
Pfizer Patent Rights, Pfizer shall have those rights and duties ascribed to
Microcide in Section 7.1; provided, Microcide shall have no obligation to
reimburse Pfizer for the payment of any expenses incurred in connection with the
Pfizer Patent Rights.
7.3 DISCLAIMER. Neither party may disclaim a claim within Patent Right
without the consent of the other.
8. OTHER AGREEMENTS.
Concurrently with the execution of this Agreement, Microcide and Pfizer
shall enter into the Research Agreement. This Agreement, the Research Agreement,
the Stock Purchase Agreement and the Confidentiality Agreement of are the sole
agreements with respect to the subject matter and supersede all other agreements
and understanding between the parties with respect to same.
9. TERMINATION AND DISENGAGEMENT.
9.1 EVENTS OF TERMINATION. The following events shall constitute events
of termination ("Events of Termination").
(a) Any written representation or warranty by Microcide
or Pfizer, or any of its officers, made under or in
connection with this Agreement shall prove to have
been incorrect in any material respect when made and
concerning which the declaring party knew or should
have known the correct version.
(b) Microcide or Pfizer shall fail in any material
respect to perform or observe any term, covenant or
understanding contained in this Agreement or in any
of the
-15-
<PAGE> 16
other documents or instruments delivered pursuant to,
or concurrently with, this Agreement, and any such
failure shall remain unremedied for sixty (60) days
after written notice to the failing party; provided,
in the case of a failure to pay any amount due
hereunder, any failure to pay such amount within ten
(10) business days after written notice to the
failing party shall be an event of termination.
9.2 TERMINATION. Upon the occurrence of any Event of Termination, the
party not responsible may, by thirty (30) days notice to the other party,
terminate this Agreement.
9.3 Termination of this Agreement by either party, with or without
cause, will not terminate the licenses granted pursuant to Section 5.2(b) of the
Research Agreement.
9.4 Pfizer shall have the right at any time to terminate this Agreement
in whole or as to any portion of Microcide Patent Rights or Joint Patent Rights
upon ninety (90) days notice.
9.5 Termination of this Agreement for any reason shall be without
prejudice to:
(a) the rights and obligations of the parties provided in
Sections 3, 6, 7 with respect to Joint Patent Rights,
10, 12, and 13;
(b) Microcide's right to receive all royalty payments and
other payments accrued hereunder; or
(c) any other remedies which either party may otherwise
have..
10. INDEMNIFICATION.
Pfizer will indemnify, defend and hold Microcide and its Affiliates and
their respective directors, officers, employees and agents (the "Microcide
Indemnitees") harmless from and against any damages, liabilities, settlements,
costs, legal fees, and other expenses incurred in connection with
-16-
<PAGE> 17
any claim against the Microcide Indemnitees based on any action or omission of
Pfizer or its sublicensee and their respective agents or employees related to
manufacture, use, sale or other distribution of Licensed Products or other
exercise of the rights granted Pfizer under this Agreement including, without
limitation, any product liability claims; provided, however, that the foregoing
shall not apply (i) if the claim is found in a final judgment to be based upon
the negligence, recklessness or willful misconduct of Microcide, or (ii) if
Microcide fails to give Pfizer prompt notice of any claim it receives within
fifteen (15) days of such receipt and such failure materially prejudices Pfizer
with respect to any claim or action to which Pfizer's obligation pursuant to
this Section applies. Pfizer, in its sole discretion, shall choose legal
counsel, shall control the defense of such claim or action, and shall have the
right to settle same on such terms and conditions it deems advisable; provided,
however, than an Microcide Indemnitee shall have the right to retain its own
counsel, if representation of such Microcide Indemnitee by the counsel retained
by Pfizer would be inappropriate due to actual or potential differing interests
between Pfizer and any other party represented by such counsel in such
proceeding.
11. NOTICES.
All notices shall be in writing mailed via certified mail, return
receipt requested, courier, or facsimile transmission addressed as follows, or
to such other address as may be designated from time to time:
If to Pfizer: To Pfizer at its address as set forth at the
beginning of this Agreement
Attention: President, Central Research, with a
copy to: Office of the General Counsel
If to Microcide: Microcide at its address as set forth at the
beginning of the Agreement
Attention: Chief Executive Officer with copy to:
-17-
<PAGE> 18
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Michael O'Donnell
Notices shall be deemed given as of the date received.
12. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
13. MISCELLANEOUS.
13.1 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective legal representatives,
successors and permitted assigns.
13.2 HEADINGS. Paragraph headings are inserted for convenience of
reference only and do not form a part of this Agreement.
13.3 COUNTERPARTS. This Agreement may be executed simultaneously in two
or more counterparts, each of which shall be deemed an original.
13.4 AMENDMENT; WAIVER. This Agreement may be amended, modified,
superseded or canceled, and any of the terms may be waived, only by a written
instrument executed by each part or, in the case of waiver, by the party or
parties waiving compliance. The delay or failure of any party at any time or
times to require performance of any provisions shall in no manner affect the
rights at a later time to enforce the same. No waiver by any party of any
condition or of the breach of any term contained in this Agreement, whether by
conduct, or otherwise, in any one or more instances, shall be deemed to be, or
considered as, a further or continuing waiver of any such condition or of the
breach of such term or any other term of this Agreement.
-18-
<PAGE> 19
13.5 NO THIRD PARTY BENEFICIARIES. No third party including any
employee of any party to this Agreement, shall be a third party beneficiary of
this Agreement or have or acquire any rights by reason of this Agreement.
Nothing contained in this Agreement shall be deemed to constitute the parties
partners with each other or any third party.
13.6 ASSIGNMENT AND SUCCESSORS. This Agreement may not be assigned by
either party, except that each party may assign this Agreement and the rights
and interests of such party, in whole or in part, to any of its Affiliates, any
purchaser of all or substantially all of its assets or to any successor
corporation resulting from any merger or consolidation of such party with or
into such corporations.
13.7 FORCE MAJEURE. Neither Pfizer nor Microcide shall be liable for
failure of or delay in performing obligations set forth in this Agreement, and
neither shall be deemed in breach of its obligations, if such failure or delay
is due to natural disasters or any causes reasonably beyond the control of
Pfizer or Microcide.
13.8 SEVERABILITY. If any provision of this Agreement is or becomes
invalid or is ruled invalid by any court of competent jurisdiction or is deemed
unenforceable, it is the intention of the parties that the remainder of the
Agreement shall not be affected.
13.10 PATENT MARKING. Pfizer agrees to mark and have its sublicensees
mark all Licensed Products they sell or distribute pursuant to this Agreement in
accordance with the applicable statute or regulations in the country of
countries of their manufacture and sale.
13.12 COMPLIANCE WITH LAW. In exercising their rights under this
Agreement, the parties shall fully comply with the requirements of any and all
applicable laws, regulations, rules and orders of any governmental body having
jurisdiction over the exercise of rights under this Agreement.
-19-
<PAGE> 20
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives.
PFIZER INC. MICROCIDE
PHARMACEUTICALS, INC.
By:__________________________________ By:____________________________________
Title:_______________________________ Title:_________________________________
Date:________________________________ Date:__________________________________
cc: Pfizer Inc., Legal Division, Groton, CT 06340
-20-
<PAGE> 21
CONFIDENTIAL
CONFIDENTIAL TREATMENT
REQUESTED
