<PAGE>
As filed with the Securities and Exchange Commission on February 18, 2000.
Registration No. 333-96333
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
ADOLOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 7841 31-1429198
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
--------------
371 Phoenixville Pike
Malvern, Pennsylvania 19355
(610) 889-5779
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
John J. Farrar, Ph.D.
Chief Executive Officer
Adolor Corporation
371 Phoenixville Pike
Malvern, Pennsylvania 19355
(610) 889-5779
(Name, address including zip code, and telephone number, including area code,
of agent for service)
--------------
With copies to:
James A. Lebovitz, Esquire Luci Staller Altman, Esquire
Stephen C. Costalas, Esquire David L. Concannon, Esquire
Dechert Price & Rhoads John Bessonette, Esquire
4000 Bell Atlantic Tower Brobeck, Phleger & Harrison LLP
1717 Arch Street 1633 Broadway, 47th Floor
Philadelphia, Pennsylvania 19103 New York, New York 10019
(215) 994-4000 (212) 581-1600
--------------
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, 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>
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- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Amount maximum maximum Amount of
Title of each class of to be offering price aggregate registration
securities to be registered registered per unit offering price(1) fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.0001 per
share.................................. 6,900,000 shares $14.00 $96,600,000 $25,502.40
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
--------------
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 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS Subject to completion, dated February 18, 2000
- --------------------------------------------------------------------------------
6,000,000 Shares
Adolor Corporation
[LOGO]
Common Stock
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This is our initial public offering of shares of common stock. No public market
currently exists for our common stock. We expect the initial public offering
price to be between $12.00 and $14.00 per share.
We have applied to have our common stock listed on the Nasdaq National Market
under the symbol "ADLR."
Before buying any shares you should read the discussion of material risks of
investing in our common stock under "Risk Factors" beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Public offering price $ $
- -----------------------------------------------------------------------------------
Underwriting discounts and commissions $ $
- -----------------------------------------------------------------------------------
Proceeds, before expenses, to Adolor $ $
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</TABLE>
The underwriters may also purchase up to an additional 900,000 shares of common
stock from us at the public offering price, less the underwriting discounts and
commissions, within 30 days from the date of this prospectus. This option may
be exercised to cover over-allotments, if any. If the option is exercised in
full, the total underwriting discounts and commissions will be $ , and the
total proceeds, before expenses, to Adolor Corporation will be $ .
The underwriters are offering the common stock as set forth under
"Underwriting." Delivery of the shares will be made on or about , 2000.
Warburg Dillon Read LLC
Robertson Stephens
Pacific Growth Equities, Inc.
The date of this prospectus is , 2000.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors."
Our Business
We discover, develop and plan to commercialize novel and proprietary
pharmaceutical products for the treatment of pain and the side effects that are
caused by current narcotic pain treatments. We have a portfolio of product
candidates in development in Phase I to Phase II/III clinical trials as well as
a number of preclinical product candidates in research and development. Our
novel analgesic product candidates are designed to treat moderate-to-severe
pain and itch. We are also developing products that are intended to reduce the
most prevalent and severe side effects of current narcotics such as bowel
dysfunction, nausea and sedation. Since most of our product candidates target
peripheral opioid receptors (pain relief receptors outside of the central
nervous system), they should not exhibit the dose-limiting central nervous
system side effects of existing narcotics. We believe our product candidates
and drug discovery and development expertise have potential applicability to a
broad range of pain conditions. Combined 1999 prescription sales in the pain
management market were $9.1 billion in the United States and are estimated to
be $25.8 billion worldwide. The pain management market in the United States
grew 6% per year from 1994 to 1998, and grew 24% between 1998 and 1999,
primarily due to new product introductions.
Currently marketed analgesics have significant side effects, limited
efficacy or both. We believe our product candidates address these significant
unmet needs in the pain management market. Additionally, we may create new pain
management markets because the novel mechanisms of action of our product
candidates may provide more effective pain relief or relief of narcotic side
effects that currently have no existing effective therapy.
Our pipeline of product candidates originate through a combination of
internal research and development activities, in-licensed technologies and in-
licensed product candidates. Our research is focused on two of the three opioid
receptor types, mu and kappa, found in the peripheral nervous system. Our
initial drug discovery and development activities focus on three aspects of
pain management:
. reversal or prevention of gastrointestinal side effects of mu receptor
narcotic analgesics;
. novel mu and kappa analgesics that act on peripheral opioid receptors and
not in the central nervous system; and
. novel narcotic analgesic products with significantly reduced side
effects.
ADL 8-2698
ADL 8-2698 is a peripherally-acting, gastrointestinal tract-restricted mu
opioid receptor antagonist. We are developing orally-administered ADL 8-2698 to
block the adverse gastrointestinal side effects of narcotics without blocking
the beneficial analgesic effects. These gastrointestinal side effects include
narcotic bowel dysfunction, ileus, which is delayed recovery of bowel function
after surgery, and nausea.
We have three Phase II/III clinical trials evaluating efficacy for narcotic
bowel dysfunction in progress. We expect to complete enrollment for each Phase
II/III clinical trial by mid-year 2000. The duration for each clinical trial is
expected to be up to five weeks.
1
<PAGE>
We have completed three Phase II and five Phase I clinical trials for the
use of ADL 8-2698 in the treatment of narcotic bowel dysfunction. In these
trials, ADL 8-2698 reversed narcotic bowel dysfunction in 100% of the patients
without blocking the narcotics' pain relief or causing narcotic drug
withdrawal. In these trials, the range of effective doses was defined. We have
also begun a Phase II clinical trial with ADL 8-2698 in post-surgical ileus and
expect to complete enrollment in the third quarter of 2000. A preclinical trial
suggested that ADL 8-2698 may prevent narcotic-induced delays in recovery of
bowel function after abdominal surgery. Additionally, we have initiated a Phase
I clinical trial for the use of ADL 8-2698 in the reduction of narcotic-induced
nausea.
ADL 10-0101
ADL 10-0101 is our first peripheral kappa opioid analgesic product
candidate. Preclinical trials of ADL 10-0101 have suggested that the compound
may be effective for the treatment of inflammatory pain, itch and visceral
pain. Because ADL 10-0101 does not cross the blood-brain barrier and enter the
brain when administered at therapeutic doses, it is expected to avoid central
nervous system side effects.
We completed a Phase I clinical trial for ADL 10-0101 in the third quarter
of 1999 and began a Phase II clinical trial to evaluate the effectiveness of
ADL 10-0101 in the treatment of visceral pain. We expect to complete enrollment
by mid-year 2000. Additionally, we recently began two Phase I clinical trials
of ADL 10-0101 for relieving burn pain and dermal itch. We expect to complete
enrollment in these two trials by mid-year 2000.
ADL 2-1294
The active ingredient in ADL 2-1294 formulations is loperamide, a potent mu
opioid receptor stimulant that does not cross the blood-brain barrier to enter
the central nervous system. ADL 2-1294 therefore avoids the adverse central
nervous system side effects of mu narcotics.
An affiliate of SmithKline Beecham licensed the rights to develop and market
ADL 2-1294 topical formulations for dermal itch and pain, based in part on data
generated in our Phase I trials. Additionally, we have completed Phase II
clinical trials with ADL 2-1294 for the treatment of ophthalmic pain that
results from corneal abrasion or surgery. ADL 2-1294 was as effective as
morphine in preclinical models of inflammatory pain when applied locally to
sites of inflammation or irritation.
Other Product Opportunities
We are doing preclinical research and development work with two orally-
active peripheral kappa opioid analgesics, ADL 10-0116, ADL 1-0398 and an
injectable formulation of ADL 2-1294 for various pain indications.
Additionally, we are using our technology to create centrally-acting narcotic
analgesics with significantly fewer side effects or greater efficacy to more
effectively treat non-inflammatory pain indications that would be particularly
responsive to narcotics. We are developing ADL 1-0386 with a narcotic
analgesic, as a combination product that we expect to produce less sedation
than narcotics. If ultimately shown to be effective and approved by the United
States Food and Drug Administration, we believe these products will be
significant advances to current pain management therapy.
2
<PAGE>
Our Strategy
We plan to become the leader in discovering, developing and marketing
proprietary pain management pharmaceuticals by:
. pioneering the use of peripheral opioid receptors;
. pursuing clinical indications that allow rapid demonstration of efficacy;
. developing and marketing our products effectively;
. managing risk by creating a portfolio of product candidates; and
. developing non-addictive products for the treatment of moderate-to-severe
pain.
3
<PAGE>
This Offering
Unless otherwise indicated, information in this prospectus assumes (i) the
one-for-4.5 reverse stock split of our common stock and the conversion of all
outstanding shares of our mandatorily redeemable convertible preferred stock
into an aggregate of 15,514,667 shares of our common stock, including the
shares of series G mandatorily redeemable convertible preferred stock issued in
January 2000, on the closing of this offering; (ii) no exercise of the
underwriters' over-allotment option; and (iii) exercise and conversion of all
outstanding warrants to purchase shares of our mandatorily redeemable
convertible preferred stock into an aggregate of 80,688 shares of common stock
on the closing of this offering.
<TABLE>
<C> <S>
Common stock offered by us................. 6,000,000 shares
Common stock to be outstanding after this
offering.................................. 22,767,591 shares
Proposed Nasdaq National Market symbol..... ADLR
Use of proceeds............................ We intend to use the net proceeds
from this offering for the
continued development of existing
product candidates, research and
development of additional product
candidates, manufacturing,
commercialization and marketing
expenditures, expansion of our
facilities, working capital and
potential acquisitions of
products, technologies or
businesses.
</TABLE>
This information above excludes shares of common stock we are obligated to
issue upon exercise of outstanding options. These shares, if and when issued,
will include:
. 1,280,790 shares issuable upon the exercise of options outstanding as of
December 31, 1999, at a weighted average exercise price of $0.30 per
share of which options to purchase 742,071 shares of common stock were
then exercisable; and
. 592,164 shares issuable upon exercise of options granted after December
31, 1999, at a weighted average exercise price of $2.03 per share.
An additional 1,996,988 shares of common stock are reserved for issuance
under our Amended and Restated 1994 Incentive Compensation Plan.
Our principal executive offices are located at 371 Phoenixville Pike,
Malvern, Pennsylvania 19355. Our telephone number is (610) 889-5779. Our
website is http://www.adolor.com. The information found on our website is not a
part of this prospectus.
4
<PAGE>
Summary Financial Data
<TABLE>
<CAPTION>
Period from
Year ended December 31, August 9, 1993
-------------------------- (inception) to
Statement of operations data: 1997 1998 1999 December 31, 1999
- ----------------------------- ------- ------- -------- -----------------
<S> <C> <C> <C> <C>
(In thousands, except per share data)
Grant and license revenues....... $ -- $ 150 $ 11 $ 161
Operating expenses incurred
during the development stage:
Research and development....... 3,700 7,074 7,178 23,858
General and administrative..... 1,585 2,277 3,368 8,278
------- ------- -------- --------
Total operating expenses......... 5,285 9,351 10,546 32,136
------- ------- -------- --------
Net interest income (expense).... 486 385 404 1,521
------- ------- -------- --------
Net loss allocable to common
stockholders.................... (4,799) (8,816) (10,131) (30,454)
======= ======= ======== ========
Basic and diluted net loss per
share allocable to common
stockholders.................... $ (4.74) $ (7.99) $ (8.73)
Shares used in computing basic
and diluted net loss per share
allocable to common
stockholders.................... 1,013 1,103 1,161
Pro forma basic and diluted net
loss per share allocable to
common stockholders
(unaudited)..................... $ (.74)
========
Shares used in computing pro
forma basic and diluted share
allocable to common stockholders
(unaudited)..................... 13,622
========
</TABLE>
Please see Note 2 to our financial statements for an explanation of the
method used to calculate the net loss and pro forma net loss per share and the
number of shares used in the computation of per share amounts.
The pro forma balance sheet data give effect to the sale of series G
mandatorily redeemable convertible preferred stock in January 2000 and the
assumed exercise of all outstanding warrants for mandatorily redeemable
convertible preferred stock; and the conversion of the outstanding shares of
series A, B, C, D, E, F and G mandatorily redeemable convertible preferred
stock into an aggregate of 15,595,355 shares of common stock. The pro forma as
adjusted balance sheet data reflects the aforementioned pro forma adjustments
and the net proceeds from our sale of 6,000,000 shares of our common stock in
this offering at an assumed offering price to the public of $13.00 per share
after deducting underwriting discounts and commissions and estimated offering
expenses.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------
Pro Forma as
Balance sheet data: Actual Pro Forma adjusted
- ------------------- -------- -------------- ------------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C>
Cash, cash equivalents and short-term
investments............................ $ 5,264 $ 17,795 $ 89,335
Working capital......................... 3,069 15,600 87,140
Total assets............................ 6,258 18,789 90,329
Mandatorily redeemable convertible
preferred stock........................ 33,000 -- --
Deficit accumulated during the
development stage...................... (30,454) (30,454) (30,454)
Total stockholders' equity (deficit).... (29,590) 15,941 87,481
</TABLE>
5
<PAGE>
RISK FACTORS
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You should carefully consider the risks described below together with all
of the other information included in this prospectus before making an
investment decision. If any of the following risks actually occurs, our
business, financial condition or results of operations could be harmed. In
that case, the trading price or our common stock could decline, and you may
lose all or part of your investment.
Risks Related To Our Business
If we continue to incur operating losses for a period longer than anticipated,
we may be unable to continue our operations.
The extent of our future losses and the timing of profitability are highly
uncertain, and we may never achieve profitable operations. We have generated
operating losses since we began operations in November 1994. We have been
engaged in discovering and developing drugs since inception, which requires
significant research and development expenditures. We have no products that
have generated any revenue, and as of December 31, 1999, we had an accumulated
deficit of approximately $30.5 million. Even if we succeed in developing a
commercial product, we expect to incur losses for at least the next several
years and expect that these losses will increase as we expand our research and
development and sales and marketing activities. If the time required to
generate product revenues and achieve profitability is longer than
anticipated, we may be unable to continue our operations without additional
funding.
Our operating history provides you with a limited basis on which to make an
investment decision.
Successfully commercializing any of our product candidates entails
significant regulatory, manufacturing, sales and marketing, competitive and
financing risks. So far our operations have been limited to organizing and
staffing our company, conducting early stage research and development to
discover and develop drugs, and establishing strategic relationships we hope
will enable us successfully to develop and market drugs on a commercial basis.
These operations provide limited information for you to use in assessing our
ability to commercialize our product candidates and the advisability of
investing in our common stock.
Because our product candidates are in development, there is a high risk that
further development and testing will demonstrate that our product candidates
are not suitable for commercialization.
We have no products that have received regulatory approval for commercial
sale. All of our product candidates, including ADL 8-2698, ADL 2-1294 and ADL
10-0101 are in development, and we face the substantial technological risks of
failure inherent in developing drugs based on new technologies.
Our product candidates must satisfy rigorous standards of safety and
efficacy before they can be approved by the FDA and foreign regulatory
authorities for commercial use. We will need to conduct significant additional
research, animal testing, referred to as preclinical testing, and human
testing, referred to as clinical trials, to demonstrate the safety and
efficacy of our product candidates to the satisfaction of the United States
Food and Drug Administration, or FDA, and foreign regulatory authorities to
obtain product approval.
Preclinical testing and clinical development are long, expensive and
uncertain processes. It may take us several years to complete our testing, and
failure can occur at any stage of testing. Success in preclinical testing and
early clinical trials does not ensure that later clinical trials will be
successful. We may suffer significant setbacks in advanced clinical trials,
even after promising results in earlier trials. Based on results at any stage
of clinical trials, we may decide to discontinue development of our product
candidates.
Our clinical trials may fail to produce results satisfactory to the FDA or
foreign regulatory authorities. Negative or inconclusive results or adverse
medical events during a clinical trial could cause a clinical trial to be
repeated or a program to be terminated.
6
<PAGE>
We do not know whether planned clinical trials will begin on time or
whether any of our clinical trials will be completed on schedule or at all. We
do not know whether any clinical trials will result in marketable products.
Our product development costs will increase if we have delays in testing or
approvals or if we need to perform more or larger clinical trials than
planned. We typically rely on third-party clinical investigators to conduct
our clinical trials and other third-party organizations to perform data
collection and analysis, and as a result, we may face additional delaying
factors outside our control. If we experience significant delays, our
financial results and the commercial prospects for our products will be
harmed, our ability to become profitable will be delayed and our needs for
additional funding will increase.
We do not know whether our existing or any future clinical trials will
demonstrate sufficient safety and efficacy necessary to obtain the requisite
regulatory approvals or will result in marketable products. Our failure
adequately to demonstrate the safety and efficacy of our products under
development will prevent receipt of FDA and foreign regulatory approvals and,
ultimately, commercialization of our product candidates.
Because obtaining necessary regulatory approvals to market our products in the
United States and foreign jurisdictions is uncertain, we cannot predict
whether or when we will be permitted to commercialize our products.
The pharmaceutical industry is subject to stringent regulation by a wide
range of authorities. We cannot predict whether regulatory clearance will be
obtained for any product candidate we develop. A pharmaceutical product cannot
be marketed in the United States until it has completed rigorous preclinical
testing and clinical trials and an extensive regulatory clearance process
implemented by the FDA. Satisfaction of regulatory requirements typically
takes many years, is dependent upon the type, complexity and novelty of the
product and requires the expenditure of substantial resources for research and
development, testing, manufacturing, quality control, labeling and promotion
of drugs for human use. Since no peripherally restricted opioid analgesic or
narcotic antagonist drugs have been approved for marketing by the FDA or
international regulatory authorities, we do not know whether our research and
clinical approaches to developing new products for the pain management market
will lead to drugs that are considered safe and effective for indicated uses
by the FDA.
Before commencing clinical trials in humans, we must submit and receive
approval from the FDA of an Investigational New Drug, or IND, application.
Clinical trials are subject to oversight by institutional review boards and
the FDA and:
. must be conducted in conformance with the FDA's good laboratory practice
regulations;
. must meet requirements for institutional review board oversight;
. must meet requirements for informed consent;
. must meet requirements for good clinical practices;
. are subject to continuing FDA oversight;
. may require large numbers of test subjects; and
. may be suspended by us or the FDA at any time if it is believed that the
subjects participating in these trials are being exposed to unacceptable
health risks or if the FDA finds deficiencies in the IND application or
the conduct of these trials.
Before receiving FDA approval to market a product, we must demonstrate that
the product candidate is safe and effective on the patient population that
will be treated. In addition, we may encounter delays or rejections due to
additional government regulation, future legislation or administrative action
or changes in FDA policy that occur during the period of our product
development, clinical trials and FDA regulatory review. If we fail to comply
with applicable FDA or other applicable regulatory requirements we could be
subject to criminal prosecution, civil penalties, recall or seizure of
products, total or partial suspension of production or injunction, as well as
other regulatory actions against our product candidates or us.
7
<PAGE>
We have limited experience in conducting and managing the clinical trials nec-
essary to obtain regulatory approval.
If we receive regulatory clearance for a product candidate, this clearance
will be limited to those diseases and conditions for which we have
demonstrated in clinical trials that the product candidate is safe and
efficacious. We cannot ensure that any compound developed by us, alone or with
others, will prove to be safe and efficacious in clinical trials and will meet
all of the applicable regulatory requirements needed to receive marketing
clearance.
Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. This foreign regulatory approval process includes all of the
risks associated with FDA clearance described above.
Failure to attract, retain and motivate skilled personnel and cultivate key
academic collaborations will delay our product development programs and our
research and development efforts.
We are a small company with approximately 34 employees, and our success
depends on our continued ability to attract, retain and motivate highly
qualified management and scientific personnel and on our ability to develop
and maintain important relationships with leading academic institutions and
scientists. Competition for personnel and academic collaborations is intense.
In particular, our product development programs depend on our ability to
attract and retain highly skilled chemists, biologists and clinical
development personnel. If we lose the services of any of these personnel, in
particular, John J. Farrar, our President and Chief Executive Officer, it
could impede significantly the achievement of our research and development
objectives. If we fail to negotiate additional acceptable collaborations with
academic institutions and scientists, or if our existing academic
collaborations were to be unsuccessful, our product development programs may
be delayed. In addition, we will need to hire additional personnel and develop
additional academic collaborations as we continue to expand our research and
development activities. We do not know if we will be able to attract, retain
or motivate personnel or maintain relationships.
The concept of developing peripherally restricted opioid analgesic and nar-
cotic antagonist drugs is relatively new and may not lead to commercially suc-
cessful drugs.
Since there are no products on the market comparable to our product
candidates, we do not have any historical or comparative sales data to rely
upon to indicate that peripherally restricted opioid analgesic or narcotic
antagonist drugs will achieve commercial success in the marketplace. Market
acceptance of our product candidates will depend on a number of factors,
including:
. perceptions by members of the health care community, including
physicians, of the safety and efficacy of our product candidates;
. cost-effectiveness of our product candidates relative to competing
products;
. the availability of government or third-party payor reimbursement for our
product candidates; and
. the effectiveness of marketing and distribution efforts by us and our
licensees and distributors.
Other products that are currently sold for pain management are already
known to be safe and effective and have a history of successful sales in the
United States and elsewhere. Our new products, if any, will be competing with
drugs that have been approved by the FDA and have achieved commercial success
in the United States and elsewhere.
Many of our product development activities and almost all of our manufacturing
and marketing activities are, or will be, conducted by third parties. If these
third parties fail to perform these functions satisfactorily, our product de-
velopment could be delayed.
We rely, to a significant extent, on third parties to provide funding in
support of our research, to jointly conduct some research and preclinical
testing functions and to manufacture certain of our product candidates. If
8
<PAGE>
any of these third parties were to breach or terminate their agreement with us
or otherwise fail to conduct their activities successfully and in a timely
manner, the preclinical or clinical development or commercialization of the
affected product candidates or research programs could be delayed or
terminated. We cannot control the amount and timing of resources these third
parties devote to our programs or product candidates.
Our corporate collaborators may determine not to proceed with one of our
drug discovery and development programs. If funding from one or more of our
corporate collaborations were reduced or terminated, we would be required to
devote additional internal resources to product development or scale back or
terminate some development programs or seek alternative corporate
collaborators.
There have been a significant number of recent business combinations among
large pharmaceutical companies that have resulted in a reduced number of
potential future corporate collaborators. In addition, business combinations
may result in a newly combined company discontinuing projects that no longer
fit in the plans of the business as combined. If business combinations
involving our corporate collaborators were to occur, the effect could be to
diminish, terminate or cause delays in one or more of our corporate
collaborations.
We may not be able to negotiate additional corporate collaborations on
acceptable terms, if at all, and these collaborations may not be successful.
Our quarterly operating results may fluctuate significantly depending on the
initiation of new corporate collaboration agreements or the termination of
existing corporate collaboration agreements.
If we do not realize value from our retained commercialization rights, we may
not achieve our commercial objectives.
If we do not effectively exploit the commercialization rights we have
retained, we may not achieve profitability. In most of our corporate
collaborations, we have retained various commercialization rights for the
development and marketing of pharmaceutical products, including rights for
specific pharmaceutical indications or in specified geographical regions. We
may take advantage of these currently retained rights directly through
collaborations with others. The value of these rights, if any, will be largely
derived from our ability, directly or with collaborators, to develop and
commercialize drugs, the success of which is also uncertain.
The exploitation of retained commercialization rights requires sufficient
capital; significant technological, product development, manufacturing and
regulatory expertise and resources; and marketing and sales personnel. We may
not be able to develop or obtain these resources in sufficient quantity or at
a sufficient quality level to achieve our objectives. We will need to rely on
third parties for many of these resources. As a result, if we fail to
establish and maintain relationships to obtain these services cost-
effectively, our ability to realize value from our retained commercialization
rights could be materially reduced or eliminated.
If we fail to obtain the capital necessary to fund our operations, we will be
unable successfully to develop products.
We expect that significant additional financing will be required in the
future to fund operations. We do not know whether additional financing will be
available when needed, or that, if available, we will obtain financing on
terms favorable to our stockholders or to us. We have consumed substantial
amounts of cash to date and expect capital outlays and operating expenditures
to increase over the next several years as we expand our infrastructure and
research and development activities.
We believe that the net proceeds from the offering, existing cash and
investment securities and anticipated cash flow from existing collaborations
will be sufficient to support our current operating plan through the first
quarter of 2002. We have based this estimate on assumptions that may prove to
be wrong. Our future capital requirements depend on many factors that affect
our research, development, collaboration and sales and marketing activities.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
9
<PAGE>
To the extent we raise additional capital by issuing equity securities, our
stockholders may experience substantial dilution. To the extent we raise
additional funds through collaboration and licensing arrangements, we may be
required to relinquish some rights to our technologies or product candidates,
or grant licenses on terms that are not favorable to us. If adequate funds are
not available, we will not be able to continue developing our product
candidates.
Our commercial opportunity will be reduced or eliminated if our competitors
develop and market products that are more effective, have fewer side effects
or are less expensive than our product candidates.
Other companies have product candidates in clinical trials to treat each of
the conditions for which we are seeking to discover and develop product
candidates. These competing potential drugs may result in effective,
commercially successful products. Even if our collaborators or we are
successful in developing effective drugs, our products may not compete
effectively with these products or other successful products. Our competitors
may succeed in developing and marketing products either that are more
effective than those that we may develop, alone or with our collaborators, or
that are marketed before any products we develop are marketed.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts
and universities and public and private research institutions. In addition,
companies pursuing research in different but related fields represent
substantial competition. Many of the organizations competing with us have
substantially greater capital resources, larger research and development
staffs and facilities, greater experience in drug development and in obtaining
regulatory approvals and greater manufacturing and marketing capabilities than
we do. These organizations also compete with us to:
. attract qualified personnel;
. attract parties for acquisitions, joint ventures or other collaborations;
and
. license the proprietary technology of institutions that is competitive
with the technology we are practicing.
If our competitors successfully enter into partnering arrangements or
license agreements with academic research institutions, we will then be
precluded from pursuing those specific opportunities. Since each of these
opportunities is unique, we may not be able to find an acceptable substitute.
Companies and universities that have licensed product candidates to us for
clinical development and marketing are sophisticated competitors that could
develop similar products to compete with our products.
Licensing product candidates from other companies, universities, or
individuals does not prevent them from developing non-identical but
competitive products for their own commercial purposes, nor from pursuing
patent protection in areas that are competitive with us. The individuals who
created these technologies are sophisticated scientists and business people
who may continue to do research and development and seek patent protection in
the same areas that led to the discovery of the product candidates that they
licensed to us. The development and commercialization of successful new drugs
from our research program is likely to attract additional research by our
licensors and by other investigators who have experience in developing
products for the pain management market. By virtue of the previous research
that led to the discovery of the drugs or product candidates that they
licensed to us, these companies, universities, or individuals may be able to
develop and market competitive products in less time than might be required to
develop a product with which they have no prior experience.
Our agreement with an affiliate of SmithKline Beecham may not generate as much
revenue as we anticipate and may not generate any future revenue.
In July 1999 we granted an affiliate of SmithKline Beecham an exclusive
license to develop and commercialize certain compounds for use in products
designed to treat topical itch, muscle pain and joint pain in all countries
other than South Korea and North Korea. Assuming defined clinical and
regulatory milestones are
10
<PAGE>
met and sales are achieved, an affiliate of SmithKline Beecham has full
control and authority over the development, registration and commercialization
of these product candidates, subject to its obligation to use its reasonable
efforts to develop, obtain regulatory approval and market these product
candidates, taking into account the prospects for the product candidates. As a
result, we have no control over the further development of these product
candidates. Under our agreement, an affiliate of SmithKline Beecham has the
right in some circumstances to co-promote products it develops pursuant to the
license we granted it with other partners. An affiliate of SmithKline Beecham
may terminate this agreement at its discretion on a country by country basis
or on a product by product basis upon written notice to us if it determines
that circumstances do not warrant further development of that product. Also,
if an affiliate of SmithKline Beecham determines that payment of any of the
agreed-upon milestones or royalties would make development of the product
commercially infeasible, an affiliate of SmithKline Beecham has the right to
adjust those payments downwards.
It is difficult and costly to protect our intellectual property rights and we
cannot ensure their protection.
Our commercial success will depend in part on obtaining patent protection
on our products and successfully defending these patents against third party
challenges. The patent positions of pharmaceutical and biotechnology companies
can be highly uncertain and involve complex legal and factual questions. No
consistent policy regarding the breadth of claims allowed in biotechnology
patents has emerged to date. Accordingly, we cannot predict the breadth of
claims allowed in our patents or that may be developed by our collaborators.
The degree of future protection for our proprietary rights is uncertain,
and we cannot ensure that:
. we were the first to make the inventions covered by each of our pending
patent applications;
. we were the first to file patent applications for these inventions;
. others will not independently develop similar or alternative technologies
or duplicate any of our technologies;
. any of our pending patent applications will result in issued patents;
. any patents issued to us or our collaborators will provide a basis for
commercially viable products or will provide us with any competitive
advantages or will not be challenged by third parties;
. we will develop additional proprietary technologies that are patentable;
or
. the patents of others will not have an adverse effect on our ability to
do business.
In addition, we could incur substantial costs in litigation if we are
required to defend against patent suits brought by third parties or if we
initiate these suits.
Others have filed and in the future are likely to file patent applications
covering products and technologies that are similar, identical or competitive
to ours. We have been informed by the patent office that others may have
patent applications that may overlap with a patent application that we have
in-licensed covering certain receptors. We cannot assure you that any patent
application owned by a third party will not have priority over patent
applications filed or in-licensed by us, nor that we or our licensor will not
be involved in interference proceedings before the United States Patent and
Trademark Office. Any legal action against our collaborators or us claiming
damages and seeking to enjoin commercial activities relating to the affected
products and processes could subject us to potential liability for damages,
require our collaborators or us to obtain a license to continue to manufacture
or market the affected products and processes. We cannot predict whether we or
our collaborators would prevail in any of these actions or that any license
required under any of these patents would be made available on commercially
acceptable terms, if at all. We believe that there may be significant
litigation in the industry regarding patent and other intellectual property
rights. If we become involved in litigation, it could consume a substantial
portion of our managerial and financial resources.
11
<PAGE>
Although no third party has asserted a claim of infringement against us, we
are aware of an issued patent that relates to methods of treatment of symptoms
associated with the cold and flu. It is possible that a claim could be
asserted that certain ophthalmic uses of our ADL 2-1294 infringe this issued
patent. Based on our investigations to date, including discussions with
outside legal counsel, we do not believe that we infringe any valid and
enforceable claims of the patent, although we have not received an opinion of
patent counsel to that effect. If this patent is found to contain claims
infringed by the use of our ADL 2-1294 product and such claims are ultimately
found to be valid and enforceable, we may not be able to obtain a license at a
reasonable cost, or at all. In that event, we would be required to use an
alternative method of delivery for ophthalmic products based on ADL 2-1294,
which could materially reduce or eliminate the commercial viability of our ADL
2-1294 for ophthalmic uses.
We rely on trade secrets to protect technology in cases when we believe
patent protection is not appropriate or obtainable. However, trade secrets are
difficult to protect. While we require employees, academic collaborators and
consultants to enter into confidentiality agreements, we may not be able
adequately to protect our trade secrets or other proprietary information.
We are a party to various license agreements that give us rights to use
specified technologies in our research and development processes. If we are
not able to continue to license this technology on commercially reasonable
terms, our product development and research may be delayed. In addition, we
generally do not control the prosecution of in-licensed technology, and
accordingly are unable to exercise the same degree of control over this
intellectual property as we exercise over our internally developed technology.
For example, the University of California, San Diego is prosecuting the patent
for additional claims regarding the use of ADL 2-1294 for the treatment of
inflammatory pain.
Our research collaborators and scientific advisors have rights to publish
data and information in which we have rights. If we cannot maintain the
confidentiality of our technology and other confidential information in
connection with our collaborations, our ability to receive patent protection
or protect our proprietary information may be imperiled.
If we are unable to contract with third parties to manufacture our products in
sufficient quantities and at an acceptable cost, we may be unable to meet de-
mand for our products and lose potential revenues.
Completion of our clinical trials and commercialization of our product
candidates require access to, or development of, facilities to manufacture a
sufficient supply of our product candidates. We will depend on our
collaborators or third parties for the manufacture of compounds for
preclinical, clinical and commercial purposes in their FDA-approved
manufacturing facilities. Our products may be in competition with other
products for access to these facilities and suitable alternatives may be
unavailable. Consequently, our products may be subject to delays in
manufacture if collaborators or outside contractors give other products
greater priority than our products. For this and other reasons, our
collaborators or third parties may not be able to manufacture these products
in a cost-effective or timely manner. If the manufacture of these products is
not performed in a timely manner, the clinical trial development of our
product candidates or their submission for regulatory approval could be
delayed, and our ability to deliver products, if any are approved, on a timely
basis could be impaired or precluded. We may not be able to enter into
necessary third-party manufacturing arrangements on acceptable terms, if at
all. Our dependence upon others for the manufacture of our products may
adversely affect our future profit margin and our ability to commercialize
products, if any are approved, on a timely and competitive basis. We do not
intend to develop or acquire facilities for the manufacture of product
candidates for clinical trials or commercial purposes in the foreseeable
future.
If we are unable to create sales, marketing and distribution capabilities or
enter into agreements with third parties to perform these functions, we will
not be able to commercialize products.
We currently have no sales, marketing or distribution capability. In order
to commercialize products, if any are approved, we must internally develop
sales, marketing and distribution capabilities or make arrangements
12
<PAGE>
with third parties to perform these services. If we obtain FDA approval, we
intend to market some products, if any are approved, directly and rely on
relationships with one or more pharmaceutical companies with established
distributions systems and direct sales forces to market other products, if any
are approved. To market any of our products directly, we must develop a
marketing and sales force with technical expertise and with supporting
distribution capabilities. We may not be able to establish in-house sales and
distribution capabilities or relationships with third parties. To the extent
that we enter into co-promotion or other licensing arrangements, our product
revenues are likely to be lower than if we directly marketed and sold our
products, and any revenues we receive will depend upon the efforts of third
parties, which efforts may not be successful.
Our ability to generate revenues will be diminished if we fail to obtain ac-
ceptable prices or an adequate level of reimbursement for our products from
third-party payors.
The continuing efforts of government and third-party payors to contain or
reduce the costs of health care through various means will limit our
commercial opportunity. For example, in some foreign markets, pricing and
profitability of prescription pharmaceuticals are subject to government
control. In the United States, we expect that there will continue to be a
number of federal and state proposals to implement similar government control.
In addition, increasing emphasis on managed care in the United States will
continue to put pressure on the pricing of pharmaceutical products. Cost
control initiatives could decrease the price that any of our collaborators or
we would receive for any products in the future. Further, cost control
initiatives could adversely affect our collaborators' ability to commercialize
our products, and our ability to realize royalties from this
commercialization.
Our ability to commercialize pharmaceutical products, alone or with
collaborators, may depend in part on the extent to which reimbursement for the
products will be available from:
. government and health administration authorities;
. private health insurers; and
. other third-party payors.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Third-party payors, including Medicare, are
challenging the prices charged for medical products and services. Government
and other third-party payors increasingly are attempting to contain health
care costs by limiting both coverage and the level of reimbursement for new
drugs and by refusing, in some cases, to provide coverage for uses of approved
products for disease indications for which the FDA has not granted labeling
approval. Third-party insurance coverage may not be available to patients for
any products we discover and develop, alone or with collaborators. If
government and other third-party payors do not provide adequate coverage and
reimbursement levels for our products, market acceptance of these products
will be reduced.
If conflicts arise between our collaborators or advisors and us, they may act
in their self-interest, which may be adverse to your best interests.
If conflicts arise between us and our corporate or academic collaborators
or scientific advisors, the other party may act in its self-interest and not
in the interest of our stockholders. Some of our corporate or academic
collaborators are conducting multiple product development efforts within each
disease area that is the subject of the collaboration with us. Generally, in
each of our collaborations, we have agreed not to conduct independently, or
with any third party, any research that is competitive with the research
conducted under our collaborations. Our collaborations may have the effect of
limiting the areas of research that we may pursue, either alone or with
others. Our collaborators, however, may develop, either alone or with others,
products in related fields that are competitive with the products or product
candidates that are the subject of these collaborations. Competing products,
either developed by the collaborators or to which the collaborators have
rights, may result in their withdrawal of support for our product candidates.
13
<PAGE>
We may incur significant costs if Year 2000 compliance issues are not properly
addressed.
We use and rely on a wide variety of information technologies, computer
systems and scientific equipment containing computer chips dedicated to a
specific task. In addition to risks associated with our own computer systems
and equipment, we have relationships with, and are to varying degrees
dependent upon, a large number of third parties that provide information,
goods and services to us. These include financial institutions, suppliers,
vendors, research partners and governmental entities.
We completed our assessment of internal systems that could be affected by
the year 2000 issue prior to December 31, 1999 and found that our computer
systems would properly utilize dates past December 31, 1999. We have initiated
communications with our significant suppliers to determine the extent to which
we are vulnerable to those parties' failure to solve their own year 2000
issues. We will develop contingency plans in the event we become aware that
one or more of these third parties fails to solve their year 2000 issues in
such a way as to affect our operations. If significant numbers of these third
parties experience failures in their computer systems or equipment due to year
2000 non-compliance, it could affect our ability to engage in normal business
activities.
If product liability lawsuits are successfully brought against us, we may in-
cur substantial liabilities and may be required to limit commercialization of
our products.
The testing and marketing of medical products entail an inherent risk of
product liability. If we cannot successfully defend ourselves against product
liability claims, we may incur substantial liabilities or be required to limit
commercialization of our products. Our inability to obtain sufficient product
liability insurance at an acceptable cost to protect against potential product
liability claims could prevent or inhibit the commercialization of
pharmaceutical products we develop, alone or with corporate collaborators. We
currently carry clinical trial insurance but do not carry product liability
insurance. Our corporate collaborators or we may not be able to obtain
insurance at a reasonable cost, if at all. While under various circumstances
we are entitled to be indemnified against losses by our corporate
collaborators, indemnification may not be available or adequate should any
claim arise.
If we use biological and hazardous materials in a manner that causes injury or
violates laws, we may be liable for damages.
Our research and development activities involve the controlled use of
potentially harmful biological materials as well as hazardous materials,
chemicals and various radioactive compounds. We cannot completely eliminate
the risk of accidental contamination or injury from the use, storage, handling
or disposal of these materials. In the event of contamination or injury, we
could be held liable for damages that result, and any liability could exceed
our resources. We are subject to federal, state and local laws and regulations
governing the use, storage, handling and disposal of these materials and
specified waste products. The cost of compliance with these laws and
regulations could be significant.
Risks Related To This Offering
If our directors, officers and largest stockholders choose to act together,
they may be able to control our management and operations, acting in their
best interests and not necessarily those of other stockholders.
Following completion of the offering, our directors, executive officers and
principal stockholders and their affiliates will beneficially own
approximately % of our common stock, based on their beneficial ownership as
of December 31, 1999. Accordingly, they collectively will have the ability to
determine the election of all our directors and to determine the outcome of
most corporate actions requiring stockholder approval. They may exercise this
ability in a manner that advances their best interests and not necessarily
those of other stockholders.
14
<PAGE>
Anti-takeover provisions in our charter documents and under Delaware law may
make an acquisition of us, which may be beneficial to our stockholders, more
difficult.
Provisions of our amended and restated certificate of incorporation and by-
laws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us, even if doing so would benefit our stockholders.
In addition, until November 2000, Section 203 of the Delaware General
Corporation Law may discourage, delay or prevent a third party from acquiring
us.
Our stock price may be volatile, and your investment in our stock could de-
cline in value.
Prior to this offering, there has been no public market for the common
stock and an active public market for our common stock may not develop or be
sustained after the offering. The initial public offering price will be
determined by negotiations between the representatives of the underwriters and
us and may not be indicative of future market prices. Among the factors to be
considered in determining the initial public offering price of the common
stock, in addition to prevailing market conditions, will be:
. estimates of our business potential and earnings prospects;
. an assessment of our management; and
. the consideration of the above factors in relation to market valuations
of companies in related businesses.
The market prices for securities of biotechnology companies in general have
been highly volatile and may continue to be highly volatile in the future. The
following factors, in addition to other risk factors described in this
section, may have a significant impact on the market price of our common
stock:
. announcements of technological innovations or new commercial products by
our competitors or us;
. developments concerning proprietary rights, including patents;
. developments concerning our collaborations;
. publicity regarding actual or potential medical results relating to
products under development by our competitors or us;
. regulatory developments in the United States and foreign countries;
. litigation;
. economic and other external factors or other disasters or crises; or
. period-to-period fluctuations in financial results.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against the company. We may become involved in this type of
litigation in the future. Litigation of this type is often extremely expensive
and divert's management's attention and resources.
If our stockholders sell substantial amounts of our common stock after this
offering, the market price of our common stock may fall.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market price of
our common stock may fall. These sales also might make it more difficult for
us to sell equity or equity-related securities in the future at a time and
price that we deem appropriate. After completion of this offering, we will
have outstanding 22,767,591 shares of common stock, assuming no exercise of
outstanding options after December 31, 1999 and no exercise of the
underwriters' over-allotment option and exercise of all warrants outstanding
for mandatorily redeemable convertible preferred stock and conversion of all
outstanding shares of mandatorily redeemable convertible preferred stock,
including series G issued in January 2000 into shares of our common stock.
15
<PAGE>
If our stock price is volatile, we may become subject to securities litigation
that is expensive and could result in a diversion of resources.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Many companies in the biotechnology
industry have been subject to this type of litigation in the past. We may also
become involved in this type of litigation. Litigation is often expensive and
diverts management's attention and resources, which could have a material
adverse effect upon our business, financial condition and results of
operations.
Our management will have broad discretion in using the proceeds from this of-
fering, and therefore investors will be relying on the judgment of our manage-
ment to invest those funds effectively.
We intend to use the net proceeds from this offering to continue our
research and development efforts, commercialize our products, hire marketing,
research, development and administrative personnel, expand our facilities, for
working capital and for potential acquisitions of products, technologies or
businesses. We have not yet finalized the amount of net proceeds to be used
specifically for each of these purposes. Investors will be relying on the
judgment of our management regarding the application of these proceeds.
New investors will experience immediate and substantial dilution.
The purchase price of the shares of common stock offered by this prospectus
will be substantially higher than the unaudited pro forma tangible book value
of our outstanding equity shares. Any shares of common stock that investors
purchase in this offering will have a post-closing net tangible book value per
share of $9.16 per share less than the initial public offering price paid,
assuming an initial public offering price of $13.00 per share. Investors who
purchase shares in this offering will therefore experience immediate and
substantial dilution in the tangible net book value of their investment.
16
<PAGE>
FORWARD-LOOKING INFORMATION AND MARKET DATA
- -------------------------------------------------------------------------------
This prospectus may contain forward-looking statements that address, among
other things: the development and commercialization of our product candidates;
regulatory approval for our product candidates; the efficacy and safety of our
product candidates; our ability to establish sales and marketing capabilities;
protection of our proprietary rights; and competition in our markets. When
used in this prospectus, the words "anticipate," "believe," "estimate,"
"plan," "will," "intend" and "expect" and similar expressions identify
forward-looking statements. Although we believe that our plans, intentions and
expectations reflected in any such forward-looking statements are reasonable,
we can give no assurance that these plans, intentions or expectations will be
achieved. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied, by any such forward-looking
statements contained in this prospectus. Important factors that could cause
actual results to differ materially from our forward-looking statements are
set forth in this prospectus, including under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." All forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements set forth in this prospectus. We are under no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise.
Market data and forecasts used in this prospectus, including, for example,
estimates of the size and growth rates of the pain management market, have
been obtained from independent industry sources. We have not independently
verified the data obtained from these sources and we cannot assure you of the
accuracy or completeness of the data. Forecasts and other forward-looking
information obtained from these sources are subject to the same qualifications
and the additional uncertainties accompanying any estimates of future market
size.
USE OF PROCEEDS
- -------------------------------------------------------------------------------
We estimate that the net proceeds from the sale of the 6,000,000 shares of
common stock that we are selling in this offering will be $71.5 million after
deducting underwriting discounts and commissions and estimated offering
expenses and assuming an initial public offering price of $13.00 per share. If
the underwriters' over-allotment option is exercised in full, we estimate that
the net proceeds will be $82.4 million.
We anticipate using the net proceeds from the offering for general
corporate purposes, including the continued development of existing product
candidates, manufacturing, commercialization expenditures, research and
development for additional product opportunities, hiring of marketing,
development, research and administrative personnel, expansion of our
facilities and working capital. We may also use a portion of the net proceeds
to acquire or invest in businesses, products, or technologies that are
complimentary to our own. While we periodically engage in preliminary
discussions with respect to acquisitions, we are not currently a party to any
agreements or commitments, and we have no understandings with respect to any
acquisitions or investments.
The amounts and timing of our actual expenditures will depend on several
factors, including the progress of our product development efforts and the
amount of cash generated or used by our operations. We have not determined the
amount or timing of the expenditures in the areas listed above. Pending the
use of the net proceeds, we intend to invest the net proceeds in short-term,
investment-grade, interest-bearing instruments.
DIVIDEND POLICY
- -------------------------------------------------------------------------------
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain our future earnings, if any, to support the growth
and development of our business and do not anticipate paying cash dividends
for the foreseeable future.
17
<PAGE>
DILUTION
- -------------------------------------------------------------------------------
Our pro forma net tangible book value as of December 31, 1999 was
approximately $15.9 million, or $0.95 per share. This is based on a pro forma
number of shares outstanding as of December 31, 1999 of 16,767,591, consisting
of 1,172,236 shares of our common stock outstanding on December 31, 1999,
together with the 15,595,355 shares of common stock issuable upon conversion
of all outstanding shares of mandatorily redeemable convertible preferred
stock, including all shares of the series G mandatorily redeemable convertible
preferred stock issued in January and all shares upon the assumed exercise of
the preferred stock warrants.
Dilution per share represents the difference between the amount per share
paid by purchasers of shares of our common stock in this offering and the pro
forma net tangible book value per share of our common stock immediately
afterwards, after giving effect to the sale of 6,000,000 shares in this
offering. This represents an immediate increase in pro forma net tangible book
value of $2.89 per share to existing stockholders and immediate dilution in
net tangible book value of $9.16 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 before the
offering..................................................... $0.95
Increase per share attributable to new investors.............. $2.89
Pro forma net tangible book value per share of our common stock
after the offering............................................... $ 3.84
------
Dilution per share to new investors............................... $ 9.16
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1999, the total number of shares of common stock purchased from us and the
total consideration paid and the average price per share paid by existing
stockholders and by new investors in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders..... 16,767,591 73.6% $ 45,605,164 36.9% $ 2.72
New Investors............. 6,000,000 26.4% 78,000,000 63.1% $13.00
---------- ----- ------------ -----
Total..................... 22,767,591 100.0% $123,605,164 100.0%
========== ===== ============ =====
</TABLE>
The tables and calculations above assume no exercise of outstanding
options. At December 31, 1999, there were: 1,280,790 shares issuable upon the
exercise of options outstanding as of a weighted average exercise price of
$0.30 per share. Since December 31, 1999, we have issued options for 592,164
shares of common stock at a weighted average exercise price of $2.03. To the
extent that these options are exercised, there will be further dilution to new
investors. For a description of our stock option plan, please see "Management-
Employee benefit plans."
If the underwriters exercise their over-allotment option in full, the
following will occur:
. the number of shares of our common stock held by existing stockholders
will decrease to approximately 70.8% of the total number of shares of our
common stock outstanding after this offering;
. the number of shares of our common stock held by new public investors
will increase to 6,900,000, or approximately 29.2% of the total number of
shares of our common stock outstanding after this offering;
. an increase in pro forma tangible book value to $3.21 per share to
existing stockholders, and an immediate dilution of $8.84 per share to
new investors.
18
<PAGE>
CAPITALIZATION
- -------------------------------------------------------------------------------
The following table sets forth our capitalization as of December 31, 1999:
. On an actual basis;
. On a pro forma basis to give effect to:
. The sale of shares of series G mandatorily redeemable convertible
preferred stock in January 2000 for $12,306,000;
. The assumed exercise of all outstanding warrants for mandatorily
redeemable convertible preferred stock for an exercise price totalling
$225,000;
. the conversion of all outstanding shares of our mandatorily redeemable
preferred stock, including the series G issued in January and assuming
the exercise of the preferred stock warrants, into an aggregate of
15,595,355 shares of our common stock on the closing of this offering;
and
. On a pro forma as adjusted basis to give effect to the aforementioned pro
forma adjustments and:
. the receipt of the estimated net proceeds from our sale of 6,000,000
shares of common stock in this offering at an assumed offering price of
$13.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------------
Pro Forma
Pro Forma As Adjusted
Actual (unaudited) (unaudited)
-------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred
stock, at redemption value (aggregate
liquidation value of $39,443,518 at
December 31, 1999); $0.01 par value,
57,873,098 shares authorized, 57,510,002
issued and outstanding (none authorized,
issued or outstanding on a pro forma or pro
forma as adjusted basis)................... $ 33,000 -- --
Preferred stock; $0.01 par value, 1,000,000
shares authorized upon closing of this
offering, none issued and outstanding on a
pro forma as adjusted basis................ -- -- --
Stockholders' Deficit:
Common stock, par value $.0001 per share;
21,338,849 shares authorized (99,000,000
shares authorized on a pro forma as
adjusted basis); 1,172,236, 16,767,591 and
22,767,591 shares issued and outstanding
on an actual, pro forma and pro forma as
adjusted basis, respectively.............. -- 2 2
Additional paid-in capital................. 1,826 47,355 118,895
Deferred compensation...................... (962) (962) (962)
Deficit accumulated during the development
stage..................................... (30,454) (30,454) (30,454)
-------- ------- -------
Total stockholders' equity (deficit)..... (29,590) 15,941 87,481
-------- ------- -------
Total capitalization..................... 3,410 15,941 87,481
======== ======= =======
</TABLE>
The table above excludes 1,280,790 shares issuable upon the exercise of
options outstanding as of December 31, 1999 at a weighted average exercise
price of $0.30 per share.
19
<PAGE>
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------
The following selected financial data should be read in conjunction with
our financial statements and the related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The statement of operations data except as
otherwise indicated below for the three years ended December 31, 1999, for the
period from August 9, 1993 (inception) to December 31, 1999 and as of December
31, 1998 and 1999, are derived from our financial statements which have been
audited by KPMG LLP, independent certified public accountants, and are
included elsewhere in this prospectus. The statement of operations data for
the years ended December 31, 1995 and 1996 and the balance sheet data as of
December 31, 1995, 1996 and 1997 are derived from audited financial statements
not included in this prospectus. Historical results are not necessarily
indicative of the results to be expected in the future and should be read in
conjunction with the financial statements and notes thereto that are
incorporated by reference into this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Please see Note 2 to our financial statements for an explanation of the
method used to calculate the net loss and pro forma net loss per share and the
number of shares used in the computation of per share amounts.
<TABLE>
<CAPTION>
Period from
Years ended December 31, August 9, 1993
-------------------------------------------- (inception) to
Statement of operations December 31,
data 1995 1996 1997 1998 1999 1999
- ----------------------- ------- ------- ------- ------- -------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Grant and license
revenues............... $-- $-- $-- $150 $11 $ 161
Operating expenses
incurred during the
development stage:
Research and
development 2,110 3,695 3,700 7,074 7,178 23,858
General and
administrative....... 254 649 1,585 2,277 3,368 8,278
------- ------- ------- ------- -------- --------
Total operating expenses 2,364 4,344 5,285 9,351 10,546 32,136
------- ------- ------- ------- -------- --------
Net interest income
(expense).............. (28) 272 486 385 404 1,521
------- ------- ------- ------- -------- --------
Net loss allocable to
common stockholders.... $(2,392) $(4,072) $(4,799) $(8,816) $(10,131) $(30,454)
======= ======= ======= ======= ======== ========
Basic and diluted net
loss per share
allocable to common
stockholders........... $ (3.33) $ (4.78) $ (4.74) $ (7.99) $ (8.73)
Shares used in computing
basic and diluted net
loss per share
allocable to common
stockholders 718 851 1,013 1,103 1,161
Pro forma basic and
diluted net loss per
share allocable to
common stockholders
(unaudited)............ $(.74)
Shares used in computing
pro forma basic and
diluted net loss per
share allocable to
common stockholders
(unaudited)............ 13,622
<CAPTION>
Years Ended December 31,
--------------------------------------------
Balance sheet data 1995 1996 1997 1998 1999
- ------------------ ------- ------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash, cash equivalents
and short-term
investments............ $ 335 $ 5,071 $10,710 $12,046 $ 5,264
Working capital......... (1,148) 4,378 9,670 10,024 3,069
Total assets............ 478 5,738 11,508 12,773 6,258
Total long-term
obligations............ 13 255 174 66 --
Mandatorily redeemable
convertible preferred
stock.................. 1,500 11,105 21,375 30,475 33,000
Deficit accumulated
during the development
stage.................. (2,636) (6,708) (11,507) (20,322) (30,454)
Total stockholders'
deficit................ (2,536) (6,568) (11,264) (19,913) (29,590)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
You should read the following discussion and analysis in conjunction with
our "Selected Financial Data," our financial statements and the related notes
included elsewhere in this prospectus.
Background
We have devoted substantially all of our resources since we began our
operations in November 1994 to the discovery and development of novel and
proprietary pharmaceutical products for the treatment of pain and the side
effects that are caused by current pain treatments. We are a development stage
pharmaceutical company and have not generated any revenues from product sales.
We have not been profitable and, since our inception, we have incurred a
cumulative net loss of approximately $30.5 million through December 31, 1999.
These losses have resulted principally from costs incurred in research and
development activities and general and administrative expenses. We have three
product candidates in Phase II clinical trials and several other compounds in
preclinical studies.
Our revenues in the near term are expected to consist primarily of
milestone payments on certain of our product candidates licensed to others for
development. The more significant of these licenses is to an affiliate of
SmithKline Beecham for the development of ADL 2-1294 for topical treatment of
dermal pain and itch. These payments are dependent on continued development
and achievement of certain clinical and regulatory milestones by licensees and
will not, in any event, be material relative to our operating expenses. In the
event that our development efforts or those of our licensees result in
regulatory approval and successful commercialization of our product
candidates, we will generate revenues from sales of our products and from the
receipt of royalties on sales of licensed products. Product revenue will
depend on our ability to receive regulatory approvals for, and successfully
market, our product candidates.
We expect to incur additional operating losses for at least the next
several years. Research, development and clinical trial costs relating to
product candidates will continue to increase. Manufacturing, marketing and
sales costs will increase as we prepare for the commercialization of our
product candidates which, assuming regulatory approval, we expect to occur in
the year 2002.
We intend to expand our marketing activities in 2000 and 2001 in
preparation for the establishment of a sales force for our product candidates
in the United States. In international markets, we intend to rely on
collaborations with pharmaceutical companies to market and sell our product
candidates rather than establish our own sales force.
Milestone Payments, Royalties and License Fees
We paid Roberts Laboratories, Inc., which recently merged with Shire
Pharmaceuticals, plc, a total of $600,000 through December 31, 1999 for the
exclusive worldwide license to ADL 8-2698. Our license agreement with Roberts
requires us to make payments to Roberts if and when two milestones are
achieved. Roberts licensed the rights to ADL 8-2698 from Eli Lilly and
Company, and we assumed Roberts' obligations to Lilly. Under the agreement
with Lilly, we will make a milestone payment to Lilly if and when we receive
FDA approval to sell ADL 8-2698. We will be required to pay royalties to Lilly
and Roberts on any sales of ADL 8-2698.
Results Of Operations
Years Ended December 31, 1999 and 1998
Grant and license revenues. Our grant and license revenues were $10,965 for
the year ended December 31, 1999 compared to $149,983 in the same period in
1998, a decrease of $139,018. The revenue of $10,965 in
21
<PAGE>
1999 represents a portion of the $500,000 license fee received from an
affiliate of SmithKline Beecham on signing the agreement in July 1999. This
revenue is being recognized over the remaining life of the patents that were
licensed in that collaboration. Revenues in 1998 included $99,983 from a Phase
I federal Small Business Innovation Research, or SBIR, grant and $50,000 from
contract research revenue. We have no future obligations in connection with
these revenues.
Research and development expenses. Our research and development expenses
increased to approximately $7.2 million for the year ended December 31, 1999
compared to approximately $7.1 million in the same period in 1998. In 1999,
research and development costs were primarily for the Phase I and Phase II
clinical trials for ADL 8-2698, the Phase I and initiation of the Phase II
clinical trial for ADL 10-0101 and the completion of the Phase II clinical
trial for ADL 2-1294 for ophthalmic pain. Clinical development costs for
dermal pain and itch indications of ADL 2-1294 were lower in 1999 compared to
1998 because an affiliate of SmithKline Beecham licensed the rights to those
indications and is now responsible for the development expenses. We also
initiated development efforts on other new product candidates in 1999. In
1998, research and development expenses were primarily for the Phase I
clinical trials for ADL 2-1294 for dermal pain and itch, the Phase I clinical
trial for ADL-2-1294 for ophthalmic pain and the preclinical studies for ADL
10-0101.
General and administrative expenses. Our general and administrative
expenses increased to approximately $3.4 million for the year ended December
31, 1999 compared to $2.3 million in the same period in 1998. This increase is
primarily due to higher personnel costs, higher facility costs, the cost of
preliminary marketing efforts for ADL 8-2698 and the pursuit of corporate
collaborations.
Net interest income (expense). Our interest income was approximately the
same for the years ended December 31, 1999 and 1998 at $424,667 and $412,975,
respectively, because we had approximately the same average invested balances
in both years. Our interest expense for the same periods was $21,142 and
$28,028. Interest expense represents interest incurred on an equipment
financing facility.
Net loss. Our net loss was approximately $10.1 million for the year ended
December 31, 1999 compared to approximately $8.8 million in the same period of
1998. The increase reflects costs associated with expanded Phase II clinical
development costs together with higher personnel related costs.
Years ended December 31, 1998 and December 31, 1997
Grant and license revenues. Our grant and license revenues were $149,983
for the year ended December 31, 1998 compared to no revenues in the same
period in 1997. Revenues in 1998 included $99,983 from a Phase I SBIR grant
and $50,000 from contract research revenue. We had no future obligations in
connection with these revenues as of December 31, 1998.
Research and development expenses. Our research and development expenses
increased to approximately $7.1 million for the year ended December 31, 1998
compared to $3.7 million for the period ended December 31, 1997. This increase
was due to the cost of initiation of Phase II clinical trials for ADL 2-1294
for the treatment of ophthalmic pain, clinical development costs for dermal
pain and itch indications of ADL 2-1294, initiation of a Phase I clinical
trial of ADL 10-0101, and a $300,000 licensing fee paid to Roberts.
General and administrative expenses. Our general and administrative
expenses increased to $2.3 million for the year ended December 31, 1998
compared to $1.6 million in the same period in 1997. This increase is due to
costs for the filing of foreign patents, expansion of clinical development
staff and increased office space.
Net interest income (expense). Our interest income for the year ended
December 31, 1998 was $412,975 compared to interest income of $531,487 in the
same period in 1997. The decrease in interest income was the result of higher
levels of cash available for investment in 1997 versus 1998. Our interest
expense for the same periods was $28,028 and $45,930, respectively. Interest
expense represents interest incurred on an equipment financing facility.
22
<PAGE>
Net loss. Our net loss for the year ended December 31, 1998 was
approximately $8.8 million compared to a net loss of approximately $4.8
million in the same period in 1997. This increase was due to the expansion of
the Phase II clinical trials for ADL 2-1294 for the treatment of dermal pain
and itch and the progression of ADL 10-0101 from research into late
preclinical development.
Liquidity and capital resources
As of December 31, 1999, we had cash, cash equivalents and short term
investments of approximately $5.3 million, and working capital was
approximately $3.1 million. In January 2000 we sold series G mandatorily
redeemable convertible preferred stock, raising net proceeds of approximately
$12.3 million.
From inception through December 31, 1999, net cash used in operating
activities was approximately $26.4 million. Net cash used in investing
activities since inception was $3.3 million for the acquisition of laboratory
equipment, leasehold improvements and furniture and fixtures and office
equipment, and the purchases of short-term investments.
From inception through December 31, 1999, we have financed our operations
primarily from the net proceeds generated from the issuance of mandatorily
redeemable convertible preferred stock (preferred stock). As of December 31,
1999, we had received total net proceeds of approximately $33.0 million from
the sales of mandatorily redeemable convertible preferred stock. In addition,
we sold shares of series G mandatorily redeemable convertible preferred stock
in January 2000, raising total net proceeds of approximately $12.3 million.
The issuance of the shares of series G mandatorily redeemable convertible
preferred stock will result in a significant beneficial conversion feature
which will increase net loss per share in the first quarter of 2000.
We anticipate that our capital expenditures will be approximately $250,000
in 2000.
We lease our corporate and research and development facilities under an
operating lease expiring on November 30, 2001. We may extend this lease for
one additional four-year period at rental rates equal to the then fair rental
value as determined by our landlord. Current total minimum annual payments
under these leases are $224,290 for 2000 and $250,964 for 2001.
Research and development expenditures, including clinical trials, are
expected to increase as we continue to develop new product candidates. We
expect that our operating expenses and capital expenditures will increase in
future periods as a result of the manufacturing scale-up and in anticipation
of commercialization of our product candidates, assuming we receive the
necessary regulatory approvals. The initiation of commercial activities will
require the hiring of additional staff to coordinate contract manufacturing
services at multiple locations. Sales and marketing activities will require
hiring and training of a sales and marketing staff in late 2000 and 2001. As
of December 31, 1999, we may be required to pay up to an aggregate of $6.0
million upon the occurrence of certain future clinical and regulatory events
under various agreements (including our agreement with Roberts). We also
intend to hire additional research and development, clinical and
administrative staff. Our capital expenditure requirements will depend on
numerous factors, including the progress of our research and development
programs, the time required to file and process regulatory approval
applications, the development of commercial manufacturing capability, the
ability to obtain additional licensing arrangements, and the demand for our
product candidates, if and when approved by the FDA or other regulatory
authorities.
In January 2000, the Company granted 592,164 stock options at exercise
prices of $2.03 for which a substantial compensation charge will be recorded
over the respective vesting periods of the options.
We believe that our current cash position, capital leases for equipment and
the proceeds of this offering will be sufficient to fund our operations and
capital expenditures through the first quarter of 2002.
Income taxes
As of December 31, 1999, we had approximately $11,200,000 of Federal and
$8,300,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss
23
<PAGE>
carryforwards will begin expiring in 2009 and 2005, respectively, if not
utilized. In addition, the utilization of the state net operating loss
carryforwards is subject to a $2 million annual limitation. At December 31,
1999, we also had approximately $403,000 of Federal and $130,000 of state
research and development tax credit carryforwards, which begin expiring in
2011, and are available to reduce Federal and state income taxes.
The Tax Reform Act of 1986 (the Act) provides for a limitation on the
annual use of net operating loss and research and development tax credit
carryforwards (following certain ownership changes, as defined by the Act)
that could significantly limit our ability to utilize these carryforwards. We
may have experienced various ownership changes, as defined by the Act, as a
result of past financings. Accordingly, our ability to utilize the
aforementioned carryforwards may be limited. Additionally, because United
States tax laws limit the time during which these carryforwards may be applied
against future taxes, we may not be able to take full advantage of these
attributes for Federal income tax purposes.
Disclosure About Market Risk
Our exposure to market risk is principally confined to our cash equivalents
and investments, all of which have maturities of less than one year. We
maintain a non-trading investment portfolio of investment grade, liquid debt
securities that limits the amount of credit exposure to any one issue, issuer
or type of instrument. The fair value of these securities approximates their
cost.
Year 2000 Computer Systems Compliance
We completed our assessment of internal systems that could be affected by
the year 2000 issue prior to December 31, 1999 and found that our computer
systems would properly utilize dates past December 31, 1999. We have initiated
communications with our significant suppliers to determine the extent to which
we are vulnerable to those parties' failure to solve their own year 2000
issues. We will develop contingency plans in the event we become aware that
one or more of these third parties fails to solve their year 2000 issues such
that they may affect our operations. If significant numbers of these third
parties experience failures in their computer systems or equipment due to year
2000 non-compliance, it could affect our ability to engage in normal business
activities.
The statement contained in the foregoing year 2000 readiness disclosure is
subject to protection under the Year 2000 Information and Readiness Disclosure
Act.
24
<PAGE>
BUSINESS
- -------------------------------------------------------------------------------
Overview of Our Business
We discover, develop and plan to commercialize novel and proprietary
pharmaceutical products for the treatment of pain and the side effects that
are caused by current pain treatments. We have a portfolio of product
candidates in development in Phase I to Phase II/III clinical trials. Our
novel analgesic product candidates are designed to treat moderate-to-severe
pain and itch. We are also developing products that are intended to reduce the
most prevalent and severe side effects of current narcotics, such as nausea,
sedation and the treatment of symptoms of narcotic induced bowel dysfunction
such as constipation. Since most of our product candidates target peripheral
opioid receptors (those outside of the central nervous system), they should
not exhibit the dose-limiting central nervous system side effects of existing
narcotics. We believe our product candidates and drug discovery and
development expertise have potential applicability to a broad range of pain
conditions. Combined 1999 prescription sales in the pain management market
were $9.1 billion in the United States and are estimated to be $25.8 billion
worldwide.
Currently marketed analgesics have well-defined adverse side effects that
limit their ability to meet the needs of physicians and their patients.
Moreover, the increased emphasis on treating pain has highlighted the need for
improved products. We believe our product candidates address significant unmet
needs in the pain management market. In addition, we believe we may create new
pain management markets with some of our product candidates because their
novel mechanisms of action may provide effective pain relief or relief of
narcotic side effects that currently have no existing effective therapy.
Our drug discovery capabilities and pipeline of product candidates
originate through a combination of internal research and development
activities, in-licensed technologies and in-licensed product candidates. Our
initial drug discovery and development activities focus on three aspects of
pain management:
. reversal or prevention of gastrointestinal, or GI, side effects of
narcotics;
. novel analgesics that act on peripheral opioid receptors not in the
central nervous system; and
. novel narcotic analgesic products with significantly reduced side
effects.
Our compound ADL 8-2698 has completed multiple Phase I and Phase II
clinical trials that indicated that it may be effective in reversing the
severe constipating effects associated with narcotic bowel dysfunction. We are
currently conducting three Phase II/III trials for this indication and a Phase
II trial with ADL 8-2698 for the treatment of bowel dysfunction, or ileus,
that frequently follows abdominal surgery. Based on our initial clinical
results, we have started a Phase I clinical trial for ADL 8-2698 in
combination with a narcotic with a goal of producing a combination narcotic
product that treats pain and does not induce nausea.
We have additional compounds in clinical development that target peripheral
opioid analgesia receptors. Our compound ADL 10-0101, which is being developed
for the treatment of visceral and post-surgical pain, is in a Phase II
clinical trial for the treatment of visceral pain. In addition, ADL 10-0101 is
in a Phase I clinical trial for the treatment of traumatic injury pain. We
have completed Phase II clinical trials for ADL 2-1294 for the treatment of
pain from corneal abrasion or ophthalmic surgery. We have also completed two
Phase I clinical trials with ADL 2-1294 where it demonstrated preliminary
efficacy in the treatment of dermal burn pain. An affiliate of SmithKline
Beecham, our development partner for the commercialization of the dermal
product candidate, is developing topical ADL 2-1294 under an exclusive license
from us for the treatment of dermal pain and itch.
We plan to build a sales and marketing organization to sell our products to
hospitals, surgeons, oncologists and pain management specialists. We intend to
enter into strategic relationships with and grant additional licenses to
pharmaceutical companies to gain access to broader market segments, including
general practitioners and international markets.
25
<PAGE>
Overview Of Pain Management Industry
Approximately 106 million patients experience acute or chronic pain
annually in the United States resulting from the three most frequent causes:
cancer, surgery and back pain. Because pain impairs one's ability to carry out
a productive life, pain in general and chronic pain in particular are serious
health and economic problems.
Types of pain. Pain is commonly classified into three broad categories
based upon its presumed cause and sensory characteristics: somatic pain,
visceral pain and neurogenic pain. Somatic pain can be produced by injuries to
skin, muscle, bones or joints and is typically characterized as a sharp pain
that is localized to an area of injury. Visceral pain can be produced by
distention, injury or inflammation of internal organs and is typically
characterized by diffuse, poorly localized, dull and vague pain. Neurogenic
pain can be produced by injuries or inflammation of nerves and is typically
characterized by diffuse, burning pain. Patients may simultaneously experience
more than one type of pain.
Pain management market. Prescription pain management sales in 1999 were
$9.1 billion in the United States. Growth in the pain management market has
been significant in recent years and is expected to continue. The prescription
pain management market in the United States grew 6% per year from 1994 to
1998, and grew 24% between 1998 and 1999. This accelerating growth rate
appears to be primarily attributable to recent product introductions in this
market. For example, COX-2 inhibitors, non-narcotic prescription analgesics,
were introduced early in 1999 and had 1999 sales of $1.5 billion. We believe
that the rapid acceptance of COX-2 inhibitors illustrates that there are still
many unmet medical needs in the pain management market and that physicians are
willing to prescribe new and improved products as they become available.
There has been an increasing focus on pain management in the healthcare
industry. Recently published guidelines of the World Health Organization and
the United States Agency for Health Care Policy and Research encourage the use
of stronger analgesic therapy for treating cancer pain. In 1993, the American
Board of Medicine designated the treatment of pain as a recognized specialty
for physicians, and the number of physicians receiving specialty training in
pain management increased more than tenfold in the subsequent five years. In
addition, as of 1999, all United States hospitals and health care facilities
have been required to assess the adequacy of pain treatment for each patient
on a daily basis to achieve accreditation by the Joint Commission on
Accreditation of Healthcare Organizations.
The pain management market for drugs used to treat patients with moderate-
to-severe and mild-to-moderate pain is growing due to the following factors:
. increasing recognition of the need for effective pain management and its
therapeutic benefits;
. rapid market acceptance of new products with novel mechanisms of action;
. targeted markets that permit cost-effective selling and marketing; and
. growth in the aged population with an associated increased incidence of
pain.
Sales of prescription pain management products are shown in the following
table:
Pain Management Market -- United States
<TABLE>
<CAPTION>
U.S. Sales
--------------------
Market Segment 1997 1998 1999
- -------------- ------ ------ ------
(In millions)
<S> <C> <C> <C>
Moderate-to-severe pain (Narcotics)...................... $2,430 $2,720 $3,203
Mild-to-moderate pain (NSAIDs, COX-2 inhibitors)......... $2,973 $2,666 $3,755
Topical pain, itch and special purpose analgesics
(Corticosteroids, antihistamines)....................... $1,599 $1,915 $2,104
------ ------ ------
Total Pain Management Market............................. $7,002 $7,301 $9,062
====== ====== ======
</TABLE>
26
<PAGE>
Current therapies to counteract pain. Narcotics such as morphine are
considered the most effective analgesics and are widely used to treat patients
with moderate-to-severe pain. These narcotics produce pain relief by
stimulating opioid receptors in the central nervous system, which consists of
the brain and spinal cord. Advances in narcotics during the past 20 years have
primarily been in improved methods for the delivery of existing narcotics
rather than the discovery of new drugs. Patients who suffer severe pain may
simultaneously receive more than one formulation of narcotic and receive other
classes of analgesic medications.
Non-narcotic analgesics, including non-steroidal anti-inflammatory drugs,
or NSAIDs, such as ibuprofen or acetaminophen, are widely used to treat mild-
to-moderate pain. NSAIDs are thought to produce analgesia by inhibiting
activity of cyclooxygenase enzymes (COX-1 and COX-2), thereby reducing
inflammation at the site of injury or disease. Some NSAIDs require a
prescription, and others are available as over-the-counter medications. Recent
advances in NSAID analgesia have focused on reducing adverse GI side effects.
Deficiencies of current therapies to counteract pain. Although narcotics
are considered the most effective analgesics, many patients who use them do
not obtain complete pain relief, and they are ineffective for other patients.
Narcotic analgesics also produce a wide range of adverse side effects that may
include narcotic bowel dysfunction, sedation, nausea, vomiting, decreased
respiratory function, addiction and death. In addition, due to their potential
for abuse, narcotics are strictly regulated by the United States Drug
Enforcement Agency, or DEA, under the Controlled Substances Act, which imposes
on narcotics strict registration, record-keeping and reporting requirements,
security controls and restrictions on prescriptions.
Although NSAIDs are generally effective for mild or moderate pain, many
patients are unable to tolerate NSAIDs because of GI side effects. Traditional
NSAIDs can produce significant adverse effects on the stomach and GI tract,
including GI ulcers and bleeding. In addition, prolonged use can cause liver
and kidney failure. COX-2 inhibitors appear to produce fewer GI ulcers than
NSAIDs but may be less effective for acute pain. For most patients with
moderate-to-severe pain, NSAIDs and COX-2 inhibitors do not produce complete
pain relief.
Background On Opioid Analgesia
Pain transmission signals. When tissues such as the skin, muscles and
joints become inflamed or are injured, pain receptors in those tissues are
activated, and electrical pain signals are transmitted from the injured
tissues through nerve fibers into the spinal cord. Within the spinal cord, the
electrical pain signals are received by a second set of nerve fibers that
continue the transmission of the signal up the spinal cord and into the brain.
Within the brain, additional nerve fibers transmit the electrical signals to
the "pain centers" of the brain where these signals are perceived as pain.
Pain receptors are also present in internal, or visceral, organs such as the
intestines, uterus, cervix and bladder. These pain receptors also send pain
signals when the organs are inflamed or distended.
Opioid receptors block pain transmission Signals. Opioid receptors are
receptors on the surface of nerves that block transmission of pain. There are
three types of opioid receptors, mu, kappa and delta, each of which produces
analgesia. All marketed narcotic drugs interact with mu opioid receptors in
the brain and spinal cord. When these central nervous system opioid receptors
are activated with narcotics such as morphine, the perception of pain is
reduced. However, activating these opioid receptors in the brain with
narcotics often results in serious side effects such as sedation, decreased
respiratory function and addiction. Because of the potential to cause
addiction, drugs that are able to activate mu opioid receptors in the brain
(narcotics) are regulated, or scheduled, under the Controlled Substances Act.
Compounds that activate kappa opioid receptors in the brain also produce
analgesia and sedation but are far less likely than narcotics to decrease
respiratory function. Studies in animals and humans suggest that opioid drugs
that activate the kappa receptors are unlikely to cause addiction. However,
prototype kappa opioid compounds that were designed to work in the brain have
produced adverse central nervous system side effects, including visual and
auditory disturbances, unpleasant mood changes and hallucinations. These side
effects have
27
<PAGE>
prevented the development of centrally-acting kappa analgesics that act on
receptors in the central nervous system.
Our Approach To Pain Management
Peripheral opioid analgesia. Scientists have shown that mu and kappa opioid
receptors are present on nerve endings in the skin, joints and visceral
organs. Activation of these opioid receptors, which are outside of the central
nervous system, with mu or kappa opioid analgesics reduces pain related to
injury or inflammation by decreasing pain transmission from the peripheral
nerves into the spinal cord. Proof-of-concept studies in animals and humans
have shown that small doses of morphine, applied locally to inflamed tissues
such as skin, joints and eyes are effective in reducing pain. These findings
demonstrate the effectiveness of stimulating peripheral mu opioid receptors to
produce pain relief. These findings have created the opportunity for us to
develop an entirely new class of analgesics that selectively stimulate opioid
receptors in inflamed tissues but do not stimulate receptors in the central
nervous system thereby avoiding central nervous system side effects. These
pain medications are called peripheral opioid analgesics. Our peripheral
opioid analgesics were effective in preclinical studies of itch, and our
peripheral kappa opioid analgesics are effective in blocking the visceral pain
originating from internal organs such as the bowel and cervix. In our
preclinical studies, our peripheral opioid analgesics have delivered near
complete pain relief without detectable side effects at therapeutic doses.
Because our peripheral analgesics do not cross the blood-brain barrier and
enter the brain at therapeutic doses, they do not cause addiction or other
adverse central nervous system side effects. These peripheral analgesics
should not cause sedation, decreased respiratory function or addiction. As a
result, we expect that these analgesics will not be subject to regulation
under the Controlled Substances Act.
Peripheral opioid receptors in the GI tract. Just as there are opioid
receptors on peripheral nerves that regulate the transmission of pain signals
into the spinal cord, there are also opioid receptors in the GI tract that
reduce bowel functions such as motility and water absorption. Stimulation of
these bowel mu opioid receptors by narcotics causes constipation associated
with narcotic bowel dysfunction. Scientists have shown that blocking these
receptors with opioid receptor antagonist drugs during administration of
narcotics prevents or reverses the effects of narcotic bowel dysfunction.
These findings have created the opportunity to develop a new class of
therapeutics called GI tract-restricted narcotic antagonists. GI tract-
restricted narcotic antagonists, when co-administered with narcotics, block
the side effects of the narcotics on the GI tract but do not block the
narcotics' analgesia because the antagonists do not cross the blood-brain
barrier.
Development of novel peripherally-restricted products. We use our
biological, chemical and analytical technology expertise to create novel
proprietary peripheral opioid analgesics and GI tract-restricted narcotic
antagonists. Within our analgesia program, we use computer-assisted chemical
design technology and medicinal chemistry to synthesize compounds that do not
readily pass the blood-brain barrier into the central nervous system. We then
use cloned human mu, kappa and delta opioid receptors to select the compounds
that are effective at very low concentrations and are highly specific for one
receptor type (usually kappa) over other receptor types. We conduct
preclinical studies to confirm the analgesic activity of the compounds and to
confirm that the compounds are not passing through the blood-brain barrier to
give central nervous system side effects. We have demonstrated in a number of
preclinical trials of inflammatory and visceral pain that our peripherally
restricted kappa analgesics are as effective as narcotics, such as morphine,
without causing central nervous system side effects. In addition, we have
demonstrated that our peripheral kappa analgesics are active in preclinical
trials of itch. Similarly, we have shown in preclinical and clinical trials
that our GI tract-restricted narcotic antagonists, including our lead compound
ADL 8-2698, block the adverse side effects of narcotics on the GI tract
without blocking analgesia.
Itch sensations are carried by the same nerves that carry pain signals to
the brain, and we have found that many of our peripherally-restricted
analgesics are effective in treating itch in preclinical trials. These drugs
may be effective as topical, injectable or oral medications for relieving itch
in a wide variety of diseases including eczema and allergic dermatitis.
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Peripherally-active opioid analgesics may not be effective in relieving all
types of pain. Therefore, the development of centrally-active opioid
analgesics with reduced side effects is one of our longer-term goals. We
believe that centrally-acting compounds have the ability to treat nerve damage
pain and some cancer pain.
Our Strategy
Our goal is to become the leading discoverer, developer and marketer of
proprietary pain management pharmaceuticals. We plan to pursue this objective
by implementing the following strategies:
Pioneer the use of peripheral opioid receptors in pain management. We focus
on clinical conditions that can be treated by either stimulating or blocking
peripheral opioid receptors. These conditions include narcotic induced bowel
dysfunction, inflammatory pain and itch and visceral pain. We have broad
biological and chemical expertise to support drug discovery. Our leading
technology includes our expertise in opioid receptors in analgesic pathways,
cloned human opioid, orphan and chimeric receptors and the chemical synthesis
of compounds that do not readily cross the blood-brain barrier. We are using
our knowledge about opioid receptors to develop ADL 8-2698, ADL 2-1294, ADL
10-0101, ADL 10-0116 and ADL 1-0398, all of which are peripherally restricted
opioid receptor compounds, for a variety of these clinical indications.
Pursue clinical indications that allow rapid demonstration of efficacy. We
try to expedite drug development by targeting pain management indications in
which animal pharmacology experiments are predictive of efficacy in humans,
established and reproducible clinical end points are available and relatively
short and inexpensive clinical trials are possible and appropriate. For
instance, in our peripheral kappa opioid analgesic program for inflammatory
pain, we have chosen to examine clinical indications like post-surgical pain
and burn pain rather than arthritis pain because the first two clinical
indications can be tested in much shorter and less expensive clinical trials.
We intend to study the arthritis pain indication at a later time.
Develop and market our products effectively. We plan to maintain commercial
rights in the United States for a number of our product candidates. We intend
to market certain of our product candidates to surgeons, hospitals,
oncologists and pain management specialists. In addition, we have established
and will continue selectively to establish collaborations with pharmaceutical
companies and leading academic institutions to enhance our research,
development and commercialization activities. We have licensed topical ADL 2-
1294 to an affiliate of SmithKline Beecham for treatment of dermal pain and
itch. We believe our broad biological and chemical expertise to support drug
discovery will continue to generate opportunities for collaborative
arrangements.
Manage risk by creating a portfolio of product candidates. We have a
portfolio of product candidates in clinical development, each of which is
being developed for multiple indications. We conduct multiple parallel
clinical trials and examine multiple clinical indications on all of our
product candidates. For example, ADL 8-2698 is being evaluated in parallel
clinical trials for reversal of narcotic bowel dysfunction, treatment of post-
surgical ileus and prevention of narcotic-induced nausea.
Develop non-DEA regulated products. We develop product candidates that do
not (unless used in combination with narcotics) contain regulated controlled
substances. We believe this lack of regulation by the DEA will give our
products a competitive advantage in markets like the out-patient care market
in which non-addictive products are favored. For example, patients with mild-
to-moderate pain are not routinely treated with narcotic analgesics because of
the addictive potential of these regulated products. We believe our peripheral
kappa analgesics will be effective in relieving pain and will not be regulated
by the DEA.
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Products in Development
Our current product candidates according to clinical indication and stage
of development are:
<TABLE>
<C> <S> <C>
Product Candidate (Mode of Delivery) Clinical Indication Development Status
------------------------------------ ------------------- ------------------
Reversal of Narcotic-Induced GI Side Effects
GI Tract-Restricted mu Antagonists
ADL 8-2698 (oral) Narcotic bowel Phase II/III
dysfunction
ADL 8-2698 (oral) Post-surgical ileus Phase II
Treatment of Pain or Itch
Peripherally Restricted kappa Analgesics
ADL 10-0101 (injectable) Visceral/post-surgical Phase II
pain
ADL 10-0101 (injectable) Traumatic injury pain Phase I
ADL 10-0101 (injectable) Dermal itch Phase I
ADL 10-0101 (topical) Ophthalmic itch Preclinical
ADL 10-0116 (oral) Inflammatory/visceral Preclinical
pain and itch
ADL 1-0398 (oral) Inflammatory/visceral Research
pain and itch
Peripherally Restricted mu Analgesics
ADL 2-1294 (topical) Ophthalmic pain Phase II
ADL 2-1294 (topical) Dermal pain Phase I/II
ADL 2-1294 (topical) Dermal itch Phase I
ADL 2-1294 (injectable) Joint pain Preclinical
Central Analgesics
ADL 8-2698 combination with narcotic (oral) GI side effect-free Phase I
narcotic
ADL 1-0386 combination with narcotic (oral) Non-sedating narcotic Research
</TABLE>
GI-Restricted mu Antagonists
ADL 8-2698
ADL 8-2698 is a peripherally-acting, GI tract-restricted mu opioid receptor
antagonist. ADL 8-2698 is designed to block the adverse side effects of
narcotics on the GI tract without blocking the beneficial analgesic effects.
We are developing ADL 8-2698 to treat or prevent narcotic bowel dysfunction
and ileus.
Narcotic bowel dysfunction
Coordinated rhythmic contractions of the intestines move the intestinal
contents forward as a part of the normal digestive process.
[GRAPHIC depicting normal bowel function.]
When morphine or similar narcotic analgesics enter the intestines, they
activate narcotic receptors and disrupt the normal rhythmic movements. The
disruption may cause uncoordinated non-propulsive contractions or cramps. The
dose of morphine required to disrupt bowel function is lower than the dose of
morphine required to produce pain relief. The use of morphine can produce
symptoms of narcotic bowel dysfunction that include hard, dry stools,
straining with bowel movements and inability to completely evacuate the
bowels. Patients may also experience abdominal cramping or spasms with
bloating and abdominal distention. The discomfort associated with narcotic
bowel dysfunction can be so severe as to limit dosing of the narcotic and
therefore the degree of pain relief.
[GRAPHIC depicting narcotic bowel dysfunction.]
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When taken orally, ADL 8-2698 selectively blocks the intestinal narcotic
receptors, restoring normal bowel function. Because only traces of ADL 8-2698
are absorbed from the bowel into the bloodstream, it is considered a GI tract-
restricted narcotic antagonist. Narcotic analgesics are still absorbed
normally into the blood stream and produce their desired analgesic effects in
the brain.
[GRAPHIC depicting reversal of narcotic bowel dysfunction by ADL 8-2698.]
Laxative and stool lubricant medications are used in an attempt to treat
narcotic bowel dysfunction in patients receiving chronic narcotic therapy, but
they are only fully effective in a limited patient population. Clinical trials
and interviews with medical care givers indicate that as many as 80% of
patients receiving chronic narcotic analgesics experience moderate to severe
narcotic bowel dysfunction. Market research indicates that over 2.7 million
patients receive chronic narcotics for pain. These patients comprise our
potential population for the use of ADL 8-2698 to prevent or treat narcotic
bowel dysfunction.
Development status. We have three Phase II/III clinical trials evaluating
efficacy for narcotic bowel dysfunction in progress. We expect to complete
enrollment for each Phase II/III clinical trial by mid-year 2000. The duration
of each clinical trial is expected to be up to five weeks. Our studies are
designed to further refine the optimal dose for reversing narcotic bowel
dysfunction in patients receiving long-term treatment with oral narcotics.
A total of 124 volunteers and patients have received ADL 8-2698 in the
three Phase II and five Phase I clinical trials completed to date. Two of the
Phase II trials were designed to identify the optimal dose of ADL 8-2698 for
reversing severe narcotic bowel dysfunction in patients receiving chronic
narcotic therapy. In these trials, ADL 8-2698 was found to effectively reverse
narcotic bowel dysfunction in 100% of the patients, and the range of effective
doses was clearly defined. Specifically, effectiveness of ADL 8-2698 increased
from 0% to 100% as the dose was increased from 0.125mg to 3mg (P<0.0001).
There were no adverse effects at therapeutic doses beyond the expected GI
symptoms, such as the abdominal cramping associated with restoring normal
bowel function. The third Phase II clinical trial demonstrated that ADL 8-2698
does not reverse pain relief produced by morphine after dental surgery
(P=0.9). This high P value was a favorable response because it demonstrated
that ADL 8-2698 did not cross the blood-brain barrier to block pain relief in
the central nervous system.
In three Phase I clinical trials, ADL 8-2698 reversed the adverse GI side
effects of oral morphine (P<0.01), intravenous morphine (P<0.01) and oral
loperamide (P<0.01). Two additional Phase I ascending dose safety and
tolerance studies demonstrated safety of up to 120 mg per day for three days
and up to 54 mg per day for four days.
Post-surgical ileus
Post-surgical ileus is a form of temporary bowel dysfunction that regularly
follows abdominal surgery. Symptoms of post-surgical ileus include abdominal
distention, nausea, vomiting, abdominal cramps and constipation. These
symptoms may prevent eating and prolong recovery from surgery. After abdominal
surgery, bowels generally resume normal function in three to five days.
Clinical trials indicate that the use of narcotics to treat post-surgical pain
delays recovery of normal bowel function by an average of one day. Since
virtually all patients receive narcotics for pain relief after major surgery,
current pain treatment may actually slow recovery, delay time until patients
can eat, delay hospital discharge and therefore increase the cost of medical
care. We believe ADL 8-2698 may result in considerable cost savings by
speeding recovery from ileus, which may result in earlier discharge of
patients from hospitals.
There are no current effective treatments for post-surgical ileus or the
effects of narcotics on ileus. Of the 30 million annual surgical procedures in
the United States, market research indicates that more than nine million have
an increased risk of post-surgical ileus. We believe that these patients will
comprise the addressable market for an ADL 8-2698 post-surgical ileus product.
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Development status. We have begun a Phase II clinical trial and expect to
complete enrollment in the third quarter of 2000. In a preclinical trial, ADL
8-2698 reversed narcotic-induced delays in recovery of bowel function after
abdominal surgery. These results suggest that ADL 8-2698 may speed recovery of
bowel function after surgery.
Peripherally Restricted kappa Analgesics
We use advanced chemical design technology to create proprietary topical,
injectable and oral peripheral kappa opioid receptor-specific compounds that
do not cross the blood-brain barrier at therapeutic doses. These compounds are
significantly more effective than NSAIDs and are equally effective as
narcotics in relieving inflammatory pain in preclinical trials. We expect to
develop oral formulations to address broader markets in chronic inflammatory
pain, such as prescription anti-arthritics. These markets include the anti-
arthritic pain market that accounted for over $2.9 billion in United States
prescription sales in 1999. We believe these peripheral kappa agonists will be
the first opioid analgesics to address the pain of chronic inflammatory
disease without producing adverse psychological effects associated with
central kappa agonists, including visual and auditory disturbances, unpleasant
mood changes and hallucinations. Preclinical studies show that our peripheral
kappa agonists are particularly effective against visceral pain. Because of
these preclinical results, we have begun clinical trials for the treatment of
visceral pain in humans.
ADL 10-0101
ADL 10-0101 is our first peripheral kappa analgesic product candidate.
Preclinical trials suggest that ADL 10-0101 may be effective in treatment of
inflammatory pain, itch and visceral pain. Because ADL 10-0101 does not cross
the blood-brain barrier and enter the brain when administered at therapeutic
doses, ADL 10-0101 is expected to avoid central nervous system side effects.
Visceral and post-surgical pain
Visceral pain can be caused by inflammation or distention of abdominal
organs as a result of surgical or diagnostic procedures or from acute or
chronic disease. Preclinical data indicated that our peripheral kappa
analgesics are more effective than narcotics for blocking pain in visceral
organs. Data from the United States Center for Disease Control, or CDC,
indicate that there are over 12 million annual cases of acute abdominal pain
and 5.4 million GI endoscopy diagnostic office procedures that we believe will
comprise our addressable patient population for an injectable ADL 10-0101
product.
Development status. We completed a Phase I clinical trial in the third
quarter of 1999 and began a Phase II clinical trial evaluating the efficacy of
ADL 10-0101 in the treatment of visceral pain. We expect to complete
enrollment by mid-year 2000.
Traumatic injury pain
Traumatic dermal injury pain may be caused by burns, abrasions or surgical
procedures. Minor traumatic injury pain is currently treated with over-the-
counter medications containing emollients or local anesthetics. Emollients are
soothing but have little or no analgesic activity; local anesthetics have a
relatively short duration of action and may be irritating to the skin.
Moderate-to-severe traumatic injury pain is frequently treated with NSAIDs or
narcotic analgesics. We believe that ADL 10-0101 may produce greater analgesia
with fewer side effects than existing medications for inflammatory pain. Data
from the CDC indicate that there are over 44 million annual cases of
inflammatory pain that we believe will comprise the addressable market for an
ADL 10-0101 product.
Development status. We recently began a Phase I clinical trial to assess
safety and preliminary efficacy of ADL 10-0101 for relieving burn pain. We
expect to complete enrollment by mid-year 2000.
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<PAGE>
Dermal itch
Dermal itch results from eczema, allergic dermatitis, or exposure to harsh
chemicals or plants. Minor dermal itch is currently treated with over-the-
counter medications containing emollients, local anesthetics, antihistamines,
or corticosteriods. Local anesthetics may be irritating to the skin and
corticosteroids cause skin thinning and other adverse effects with chronic
use. Moderate-to-severe itch is frequently treated with prescription
corticosteroids or with oral antihistamines, both of which may cause serious
side effects when used acutely or chronically, including sedation and adverse
effects on the immune system and on the regulation of normal body hormones. We
believe that ADL 10-0101 for dermal itch may produce greater relief with fewer
side effects than existing medications. Data from the CDC indicate that there
are over 14 million annual cases of dermal itch that we believe will
constitute the addressable market for a dermal anti-itch product.
Development status. Preclinical trials indicate that ADL 10-0101 may be
effective in treating itch. Based on these results, we recently began a Phase
I clinical trial to assess safety and preliminary efficacy of ADL 10-0101 for
relieving dermal itch. We expect to complete enrollment by mid-year 2000. If
our clinical trial shows that ADL 10-0101 is effective, we will develop a
topical product.
Ophthalmic itch
Ophthalmic itch may be caused by allergies, colds, flu, inflammation,
infection, surgery or exposure to irritants. Minor ophthalmic itch is
currently treated with over-the-counter eye drops and allergy medications.
More severe itch is treated with prescription corticosteroids, antihistamines
or other anti- inflammatory drugs formulated as either eye drops or oral
medications. Recent market research indicates that there are over 7.9 million
patients annually who have eye itch from conjunctivitis, keratitis, uveitis or
following ophthalmologic surgery. We believe these patients comprise our
potential population for use of ADL 10-0101 to treat ophthalmic itch.
Development status. We have completed preclinical eye safety studies with
an ophthalmic solution of ADL 10-0101. Based on these results, we plan to file
an IND for this product in late 2000. If our clinical trial shows that ADL 10-
0101 is effective, we will develop a topical product.
ADL 10-0116
Chronic Inflammatory/Visceral Pain and Itch
ADL 10-0116 is our second-generation peripheral kappa analgesic compound.
In preclinical inflammatory pain trials, ADL 10-0116 demonstrated a long
duration of action and high peripheral selectivity. In addition, ADL 10-0116
was shown to be active when administered orally. As an orally-active drug, ADL
10-0116 may expand the market that can be achieved with ADL 10-0101 by
treating acute and chronic pain conditions in clinical indications where an
injectable product would not be used.
Moderate-to-severe pain often requires the use of narcotic analgesics.
Preclinical data indicated that our peripheral kappa analgesics are as
effective as narcotics for inflammatory pain and more effective than narcotics
for blocking pain in visceral organs. Data from the CDC indicate that there
are over 44 million patients who have chronic inflammatory musculoskeletal
pain and 12 million cases of acute abdominal pain that we believe will
constitute a portion of the addressable market for an oral peripheral kappa
analgesic product.
Development status. This product candidate is in preclinical development.
ADL 1-0398
Chronic inflammatory/visceral pain
ADL 1-0398 is another second generation peripheral kappa analgesic similar
to ADL 10-0116. The compound is active in multiple types of inflammatory pain
in preclinical trials. In addition, ADL 1-0398 has greater peripheral
restriction than other peripheral kappa analgesics.
33
<PAGE>
Development status. This product candidate is in preclinical research.
Peripherally Restricted mu Analgesics
ADL 2-1294
The active ingredient in all of our formulations containing ADL 2-1294 is
loperamide, the same active ingredient in the over-the-counter anti-diarrheal
product, Imodium(R) A-D. The compound patent for loperamide has expired, and
we have secured method-of-use and formulation patents for a number of pain and
itch indications. Loperamide, like morphine, is a potent mu opioid receptor
stimulant. Unlike morphine, loperamide does not cross the blood-brain barrier
and enter the central nervous system. The compound is also very poorly
absorbed from the intestinal tract following oral administration. As a result,
the compound does not cause sedation or depress respiratory function, is not
considered to be addictive and is the only mu opioid agonist that is not
scheduled as a controlled substance. When applied locally to sites of
inflammation or irritation, ADL 2-1294 is as effective as morphine in
preclinical models of inflammatory pain and is effective in preclincial trials
for the relief of itch. Pain from burns and other dermal injuries was selected
as the initial clinical target for topical formulations of ADL 2-1294. We are
also evaluating ophthalmic and injectable formulations for treatment of pain.
Based in part on data generated in our Phase I trials, an affiliate of
SmithKline Beecham licensed the rights to develop and market ADL 2-1294
topical formulations for dermal itch and pain.
Ophthalmic pain
We are targeting ophthalmic pain that results from corneal abrasion or
surgery. Eye drops containing corticosteroids or an anti-inflammatory NSAID
are often used following corneal surgery or corneal abrasion but may inhibit
wound healing and cause other adverse side effects. Our collaborators have
demonstrated the efficacy of eye drops containing morphine for pain control
following ophthalmic surgery. ADL 2-1294 activates the same receptors as
morphine and has the competitive advantage that it is not a controlled
substance and therefore will not have prescription restrictions. We believe
that eye drops containing ADL 2-1294 will be more effective and produce fewer
adverse side effects than current therapy. Data from the CDC indicate that
there are 5.7 million annual cases of surgery on eyes or injury to the cornea
that we believe will compose the addressable market for an ophthalmic
peripheral mu analgesic product.
Development status. Our Phase II study demonstrated that ADL 2-1294 reduced
the severity of pain following corneal abrasions and surgeries to a greater
extent than placebo. ADL 2-1294 resulted in a 56% reduction of pain, but this
effect was not statistically significant (P=0.12). In addition, a Phase II
pilot study suggested that topical administration of ADL 2-1294 was as
effective as topical morphine in reducing corneal pain. We believe we can
improve the efficacy of ADL 2-1294 by improving its formulation. Consequently,
we intend to continue the clinical development of this product candidate.
Dermal pain
Dermal pain may be caused by trauma, burns, abrasions or surgical
procedures. Minor dermal pain is currently treated with over-the-counter
medications containing emollients or local anesthetics. Moderate-to-severe
dermal pain is frequently treated with NSAIDs or narcotic analgesics. We
believe that a topical formulation of ADL 2-1294 for dermal pain may produce
greater analgesia with fewer side effects than existing medications. Data from
the CDC indicate that there are 14.5 million annual cases of dermal pain
requiring emergency room treatment that we believe will comprise our potential
patient population for a topical ADL 2-1294 dermal analgesic product.
Development status. Topically applied ADL 2-1294 was determined to be safe
and had preliminary analgesic efficacy in burn pain (P<0.05) in our Phase I
safety and efficacy burn pain trials. These two Phase I studies demonstrated
statistically significant analgesic efficacy in burn pain (P<0.05) without
dermal or systemic side effects. We initiated a Phase II study evaluating
efficacy in treating pain associated with skin graft surgery but stopped the
study because of slow enrollment.
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Based in part on preliminary data generated in our Phase I trials, an
affiliate of SmithKline Beecham licensed the rights to develop and market ADL
2-1294 topical formulations for dermal pain.
Dermal itch
Dermal itch results from eczema, allergic dermatitis, or exposure to harsh
chemicals or plants. Minor dermal itch is currently treated with over-the-
counter medications containing emollients, local anesthetics, antihistamines,
or corticosteriods. Local anesthetics may be irritating to the skin and
corticosteroids cause skin thinning and other adverse effects with chronic
use. Moderate-to-severe itch is frequently treated with prescription
corticosteroids or with oral antihistamines, both of which may cause serious
side effects when used acutely or chronically, including sedation and adverse
effects on the immune system and on the regulation of normal body hormones.
We believe that a topical formulation of ADL 2-1294 for dermal itch may
have greater efficacy and produce fewer side effects than existing
medications. ADL 2-1294 may be prepared in different formulations for use in
both the prescription and over-the-counter drug markets. Data from the CDC
indicate that there are 14 million annual cases of chronic dermal itch that we
believe will comprise our potential patient population for a dermal ADL 2-1294
anti-itch product.
Development status. Based in part on preliminary data generated in our
Phase I trials, an affiliate of SmithKline Beecham licensed the rights to
develop and market ADL 2-1294 formulations for a topical ADL 2-1294 dermal
anti-itch product.
Joint pain
Joint pain after arthroscopic surgery limits mobility and recovery.
Injection of morphine into a joint can reduce pain and speed recovery from
arthroscopic surgery. ADL 2-1294 demonstrated analgesic efficacy in
preclinical studies of joint pain. We have incorporated ADL 2-1294 into two
prototypic formulations suitable for delivery to joints following surgical
procedures. These formulations may also provide benefits after injection into
painful inflamed joints as an alternative to cortisone therapy. In addition,
preclinical safety studies found no dose-limiting side effects that would
prevent advancement into clinical development. Recent market research
indicates that, in the United States, there are 1.1 million outpatient
arthroscopic knee surgical procedures and 2.7 million patients who receive
local injections of corticosteroids for joint pain that we believe will
comprise our potential patient population for a long acting analgesic ADL 2-
1294 injectable product.
Development status. This product is in preclinical development.
Central Analgesics
We expect centrally-acting narcotics to be more effective than peripheral
opioid analgesics in a number of non-inflammatory painful conditions such as
nerve damage or neuropathic pain as well as most cancer pain. However,
narcotics have dose-limiting side effects that limit their effectiveness. One
of our longer-term goals is to use our technology to create centrally-acting
narcotic analgesics with significantly fewer side effects or greater efficacy
to more effectively treat non-inflammatory indications that would be
particularly responsive to narcotics. We are developing two narcotic
combination products that we expect to have fewer narcotic side effects. We
believe these products will provide significant advances on current narcotic
therapy.
ADL 8-2698 Combination With Narcotic
GI side effect-free narcotic analgesic
Acute nausea or vomiting occurs in up to 33% of patients who receive oral
narcotics and in up to 80% of patients who receive injectable narcotics
following surgery or trauma. This is due in part to direct effects of
narcotics on the GI tract. Data from a Phase I clinical trial suggested that
ADL 8-2698 may reduce the severity
35
<PAGE>
of nausea caused by morphine. We believe that a combination of ADL 8-2698 with
a short acting oral narcotic analgesic, in a fixed dose, will produce a new
narcotic analgesic combination product that produces less nausea than
currently available narcotic analgesics.
Recent market research shows that there were 34 million units of oral
prescription narcotics sold at the wholesale level in 1999 that were intended
for the treatment of acute or chronic pain, each of which contained sufficient
medication for one to 20 prescriptions at the retail level.
Development status. A Phase I clinical trial suggested a trend for reduced
severity of morphine-induced nausea, but the difference was not statistically
significant (P=0.07). We recently began a larger Phase I clinical trial and
expect to complete enrollment by mid-year 2000.
ADL 1-0386 Combination With Narcotic
Non-sedating narcotic analgesic
Sedation and decreased mental function are dangerous side effects of
current narcotic analgesics. Preclinical data indicates that ADL 1-0386 blocks
the sedation produced by morphine and centrally active kappa analgesics
without blocking the analgesic effects of these drugs. It also blocks the
sedation produced by other classes of sedating drugs. Unlike our other
analgesic and narcotic antagonist compounds, ADL 1-0386 does not stimulate or
block brain or peripheral opioid receptors. We believe that a combination
product containing ADL 1-0386 and a narcotic analgesic could be used in all
instances where oral narcotic drugs are used to treat acute or chronic pain
conditions, including non-inflammatory neuropathic or nerve damage pain and
cancer pain.
Development status. This product candidate is in preclinical research.
Commercialization
We have developed a balanced commercialization strategy that combines
utilizing strategic alliances with major pharmaceutical partners to access
broad distribution networks or markets outside the United States, with
maintaining commercial rights within the United States to certain focused
distribution networks where a relatively small sales force can be effective.
We intend to develop a sales and marketing management team and may use a
contract sales force for marketing certain of our products to surgeons,
hospitals, oncologists and pain management specialists.
Our Strategic Relationships
We pursue strategic relationships that are intended to offer us
independence and flexibility in the development and commercialization of our
products. We have chosen to license technology to major pharmaceutical
companies that have broad marketing capabilities in therapeutic areas outside
of our focus and to companies in geographic areas where we do not expect to
have direct sales capabilities.
SmithKline Beecham Affiliate
In July 1999, we licensed worldwide rights (excluding South Korea and North
Korea) to the development and commercialization of our product candidate ADL
2-1294 to SB Pharmaco Puerto Rico Inc., an affiliate of SmithKline Beecham
plc, for the topical indications of dermal pain and itch. We retain the
prescription rights to ADL 2-1294 for certain topical dermal indications as
well as rights outside the topical dermal field, including ophthalmic,
mucosal, post-surgical and joint pain indications.
Under the license agreement, we received a $500,000 up-front license fee.
In the event that ADL 2-1294 receives regulatory approval in the United
States, the European Union and Japan for a total of at least six clinical
indications and is successfully launched commercially in prescription and
over-the-counter forms in each of those
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<PAGE>
jurisdictions, we would be entitled to up to $38.5 million of milestone
payments. We could also earn additional milestone payments of up to $6.0
million in the event that an additional six indications using ADL 2-1294 are
developed and approved for sale in the United States, the European Union or
Japan. Achieving these milestones is subject to numerous uncertainties,
including risks related to product development and testing, regulatory
approval and market acceptance. In addition, we will receive royalties based
on product sales, if any. SB Pharmaco will be responsible for all development
costs.
SB Pharmaco can terminate the agreement on a country by country basis, in
its entirety, or on a product by product basis if it determines that the
product is not marketable in a specified territory. Upon termination in this
circumstance, all of the rights granted to SB Pharmaco under the license
agreement in the relevant country or for the relevant product will terminate
and revert to us.
In connection with the licensing of ADL 2-1294, S.R. One, Limited, an
affiliate of SmithKline Beecham purchased $2.5 million in series F mandatorily
redeemable preferred stock and was granted a warrant to purchase shares of
preferred stock convertible into an aggregate of 27,778 shares of common stock
for an aggregate exercise price of $125,000 and agreed to purchase an
additional $500,000 of our capital stock upon the achievement of a certain
regulatory milestone.
Kwang Dong Pharmaceutical Company, Ltd.
In November 1997, we licensed rights to the development and
commercialization of our product candidate ADL 2-1294 to Kwang Dong
Pharmaceutical Company, Ltd. for the indication of topical dermal pain in
South Korea and North Korea. Kwang Dong has a right of first refusal to
acquire a license for other routes of administration of ADL 2-1294 in South
Korea and North Korea.
Under the license agreement and a stock purchase agreement, we received a
$1.2 million equity investment, and we may receive up to an aggregate $800,000
from milestone payments if certain clinical and regulatory milestones are met.
In addition, we will receive royalties based on product sales, if any, in
South Korea and North Korea. Kwang Dong will be responsible for all
development costs.
Roberts Laboratories Inc.
In June 1998, we entered into a license agreement with Roberts Laboratories
Inc. under which we licensed the compound that is the basis of our ADL 8-2698
product candidates. Roberts recently merged with Shire Pharmaceuticals, plc.
Roberts had licensed the compound from Eli Lilly and Company in November 1996.
The license agreement affords us an exclusive worldwide license to make, use,
sell or import the compound, subject to certain rights of Eli Lilly.
Under the license agreement, we paid a $300,000 up-front license fee to
Roberts, and Roberts is entitled to receive milestone payments if certain
clinical and regulatory milestones are met. In addition, we are required to
pay Eli Lilly a milestone payment on behalf of Roberts. Both Roberts and Eli
Lilly will receive royalties based on product sales, if any. We will be
responsible for all development costs. In 1999, we paid $300,000 to Roberts to
exercise certain licensing rights as defined in the agreement. We may pay up
to $1.9 million in additional future milestone payments under this agreement.
The agreement expires upon the later of either the life of the last to
expire of Lilly's patents encompassing the licensed compound or fifteen years
from November 5, 1996. Upon termination of the agreement, we can not make, use
or sell any compound or product, but we may sell whatever stock of the
compound we have on hand at the time. In this circumstance we would be
required to make royalty payments provided for in the agreement.
Other relationships
We have licensed technology from academic institutions and entities
including the University of California at Los Angeles, the University of
California at San Diego and the University of Minnesota.
37
<PAGE>
Intellectual Property
We seek United States and international patent protection for major
components of our technology. We also rely on trade secret protection for
certain of our confidential and proprietary information, and we use license
agreements both to access external technologies and assets and to convey
certain intellectual property rights to others. Our commercial success will be
dependent in part on our ability to obtain commercially valuable patent claims
and to protect our intellectual property portfolio.
As of February 1, 2000, we had exclusive rights to 61 issued patents, 28 of
which are United States patents, and 132 patent applications, 16 of which are
United States patent applications, relating to technologies used in our
business.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including ours, are generally uncertain and involve complex legal
and factual questions. Our business could be hurt by any of the following:
. the pending patent applications to which we have exclusive rights may not
result in issued patents;
. the claims of any patents which are issued may not provide meaningful
protection;
. we may not be successful in developing additional proprietary
technologies that are patentable;
. patents licensed or issued to us or our customers may not provide a basis
for commercially viable products or provide us with any competitive
advantages and may be challenged by third parties; and
. others may have patents that relate to our technology or business.
In addition, patent law relating to the scope of claims in the technology
field in which we operate is still evolving. The degree of future protection
for some of our rights, therefore, is uncertain. Furthermore, others may
independently develop similar or alternative technologies, duplicate any of
our technologies, and if patents are licensed or issued to us, design around
the patented technologies licensed to or developed by us. In addition, we
could incur substantial costs in litigation if we are required to defend
ourselves in patent suits brought by third parties or if we initiate such
suits.
Enactment of legislation implementing the General Agreement on Tariffs and
Trade has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patent protection for
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of issuance. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
effective filing date of the application. Because the time from filing to
issuance of biotechnology patent applications is often more than three years,
a 20-year term from the effective date of filing may result in a substantially
shortened period of patent protection which may harm our patent position. If
this change results in a shorter period of patent coverage, our business could
be harmed to the extent that the duration and level of the royalties we are
entitled to receive from our partners are based on the existence of a valid
patent covering the product subject to the royalty obligation.
With respect to proprietary know-how that is not patentable and for
processes for which patents are difficult to enforce, we rely on trade
protection and confidentiality agreements to protect our interests. We believe
that several elements of our drug discovery system involve proprietary know-
how, technology or data that are not covered by patents or patent
applications. We have taken security measures to protect our proprietary know-
how and technologies and confidential data and continue to explore further
methods of protection. While we require all employees, consultants and
customers to enter into confidentiality agreements, we cannot be certain that
proprietary information will not be disclosed, that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, or that we can
meaningfully protect our trade secrets. In the case of arrangements with our
customers that require the sharing of data, our policy is to make available to
our customers only such data as is relevant to our agreements with such
customers, under controlled circumstances, and only during the contractual
term of those agreements, and subject to a duty of confidentiality on the part
of our customer. However, such measures may not adequately protect our data.
Any
38
<PAGE>
material leak of confidential data into the public domain or to third parties
may cause our business, financial condition and results of operations to be
harmed.
We are a party to various license agreements that give us rights to use
technologies and biological materials in our research and development
processes. We may not be able to maintain such rights on commercially
reasonable terms, if at all. Failure by us to maintain such rights could harm
our business.
Manufacturing
We have no manufacturing facilities. We contract with qualified third
parties for the manufacture of bulk active pharmaceutical ingredients and
production of clinical/commercial supplies. These products are provided in
strict compliance with standard certified good manufacturing practices
procedures reviewed by the FDA (cGMPs). We have entered into an agreement with
Oread Laboratories, Inc. under which Oread will manufacture ADL 8-2698 for
trial and commercial uses. We maintain confidentiality agreements with
potential and existing contract manufacturers for both active drug and
formulated product in order to protect our proprietary rights. Earlier stage
new chemical entities are synthesized in our laboratories, and scaleup
quantities and good manufacturing practices materials for preclinical
toxicology evaluations are conducted by qualified third parties in strict
compliance with cGMPs.
Government Regulation
In the United States, pharmaceutical products intended for therapeutic or
diagnostic use in humans are subject to rigorous FDA regulation. The process
of completing clinical trials and obtaining FDA approvals for a new drug is
likely to take a number of years and require the expenditure of substantial
resources. There can be no assurance that any product will receive FDA
approval on a timely basis, if at all.
The drug approval process
The usual steps required before a new pharmaceutical product for use in
humans may be marketed in the United States include: (i) preclinical studies,
(ii) submission to the FDA of an Investigational New Drug application (IND),
which must become effective before human clinical trials commence, (iii)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the product, (iv) submission of a New Drug Application (NDA) to
the FDA, and (v) FDA approval of the NDA prior to any commercial sale or
shipment of the product.
Preclinical studies include laboratory evaluation of product chemistry and
formulation, as well as preclinical studies, to assess the potential safety
and efficacy of the product. The results of the preclinical studies are
submitted to the FDA as a part of an IND and are reviewed by the FDA prior to
the commencement of human clinical trials. Unless the FDA objects to, or
otherwise responds to, an IND, the IND becomes effective 30 days following its
receipt by the FDA.
Human clinical trials are typically conducted in three sequential phases
that may overlap:
. Phase I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion. In addition, it is sometimes possible to
assess efficacy in Phase I trials for analgesia.
. Phase II: Involves studies in a limited patient population to identify
possible adverse effects and safety risks, to determine the efficacy of
the product for specific targeted diseases and to determine dosage
tolerance and optimal dosage.
. Phase II/III: Data from Phase II clinical trials can be considered to
fulfill Phase III criteria in certain situations. This can occur when a
dose tested in a Phase II study is proven to be the optimal dose and this
dose is also statistically more effective than placebo. Classification of
the data as Phase III can only be determined after the study is complete,
the data analyzed and presented to the FDA for review.
39
<PAGE>
. Phase III: When Phase II evaluations demonstrate that a dosage range of
the product is effective and has an acceptable safety profile, Phase III
trials are undertaken to further evaluate dosage, clinical efficacy and
to further test for safety in an expanded patient population at
geographically dispersed clinical study sites.
Scientists use statistical techniques to compare responses produced by
drugs versus placebos in clinical trials of drug effectiveness. Statistical
analyses estimate the probability that a positive effect is actually produced
by our drug. This probability is expressed as a "P-value" which refers to the
likelihood that a drug response occurred just "by chance." When a P-value is
reported as P<0.05, the probability that the drug produced its effect "by
chance" is less than 5% and the probability that the drug produced a
reproducible positive effect is greater than 95%. When a P-value is reported
as P<0.01, the probability that the drug produced the positive effect is
greater than 99%. These values are reported in several instances above to
indicate how certain we are that we have obtained beneficial responses in our
clinical drug trials. P-values greater than 0.05 and equal to or less than
0.10 are generally not considered statistically significant by themselves but
may indicate a strong trend in data that provides support for further clinical
research.
Efficacy studies for analgesics
Analgesic efficacy can initially be assessed in Phase I clinical trials.
Human experimental pain models represent an important link between preclinical
research and clinical trials in patients. We use validated human experimental
pain models, such as the burn pain model, to evaluate efficacy of our products
during some of our Phase I clinical trials. Historical results from
preclinical and earlier clinical trials may not be predictive of the results
of later trials.
For analgesic drugs, Phase II efficacy studies have sometimes served as
pivotal studies. Phase III studies for these products normally focus greater
attention on safety in larger patient populations rather than on efficacy.
There can be no assurance that Phase I, Phase II, or Phase III testing will be
completed successfully within any specified time period, if at all, with
respect to any of our products subject to such testing. Furthermore, the FDA
may suspend clinical trials at any time if there is concern that the
participants are being exposed to an unacceptable health risk.
The results of pharmaceutical development, preclinical studies, and
clinical trials are submitted to the FDA in the form of an NDA for approval of
the marketing and commercial shipment of the product. The FDA may require
additional testing or information before approving the NDA. The FDA may deny
an NDA approval if safety, efficacy, or other regulatory requirements are not
satisfied. Moreover, if regulatory approval of the product is granted, such
approval may require post-marketing testing and surveillance to monitor the
safety of the product or may entail limitations on the indicated uses for
which the product may be marketed. Finally, product approval may be withdrawn
if compliance with regulatory standards is not maintained or if problems occur
following initial marketing.
Other regulatory requirements
The FDA mandates that drugs be manufactured in conformity with GMP
regulations. If approval is granted, requirements for labeling, advertising,
record keeping and adverse experience reporting will apply. Failure to comply
with these requirements could result, among other things, in suspension of
regulatory approval, recalls, injunctions or civil or criminal sanctions. We
may also be subject to regulations under other federal, state, and local laws,
including the Occupational Safety and Health Act, the Environmental Protection
Act, the Clean Air Act, national restrictions on technology transfer, and
import, export, and customs regulations. In addition, any of our products that
contains one of our product candidates in combination with narcotics will be
subject to DEA regulations relating to manufacturing, storage, distribution
and physician prescribing procedures. There can be no assurance that any
portion of the regulatory framework under which we currently operate will not
change and that such change will not have a material adverse effect on our
current and anticipated operations.
40
<PAGE>
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
sales and marketing efforts in those countries. The approval procedure varies
in complexity from country to country, and the time required may be longer or
shorter than that required for FDA approval.
The Controlled Substances Act imposes various registration, record-keeping
and reporting requirements, procurement and manufacturing quotas, labeling and
packaging requirements, security controls and a restriction on prescription
refills on certain pharmaceutical products. A principal factor in determining
the particular requirements, if any, applicable to a product is its actual or
potential abuse profile. A pharmaceutical product may be "scheduled" as a
Schedule I, II, III, IV or V substance, with Schedule I substances considered
to present the highest risk of substance abuse and Schedule V substances the
lowest.
Competition
Our success will depend, in part, upon our ability successfully to achieve
market share at the expense of existing and established products in the
relevant target markets. We believe that our ability to compete successfully
is based on our technical expertise in peripheral opioid analgesia and our
ability to maintain advanced scientific technologies, to develop a
differentiated product pipeline, to obtain successful regulatory approval for
novel pain management pharmaceuticals, and to sustain patent protection for
our portfolio.
Many companies currently sell either generic or proprietary narcotic
formulations. In addition, a number of technologies are being developed to
increase narcotic potency as well as to provide alternatives to narcotic
therapy for pain management, several of which are in clinical trials or are
awaiting approval from the FDA. Several companies and one university are
developing new products for the treatment of narcotic induced bowel
dysfunction or chronic constipation.
In addition, Merck KGaA is developing asimadoline (Phase II) as a
peripherally selective kappa opioid analgesic for the treatment of pain
associated with rheumatoid arthritis.
There may be additional competitors or products under development which we
have not listed above or of which we are not aware.
Human Resources
As of January 18, 2000, we had 34 full-time employees and one part-time
employee, including ten employees with Ph.D. or M.D. degrees. Twenty-four of
our employees are engaged in research and development activities at our
laboratory facility. Most of our senior management and professional employees
have had prior experience in pharmaceutical or biotechnology companies. None
of our employees is covered by collective bargaining agreements. We believe
that our relations with our employees are good.
Facilities
We currently occupy 24,340 square feet of leased office and laboratory
space in Malvern, Pennsylvania. The lease expires in November 2001. We believe
the current facility will be adequate to meet our near-term space
requirements. We also believe that suitable additional space will be available
to use, when needed, on commercially reasonable terms.
Legal Proceedings
We are not a party to any legal proceedings.
41
<PAGE>
MANAGEMENT
- -------------------------------------------------------------------------------
The following table provides information, as of January 31, 2000, regarding
our directors and executive officers:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
John J. Farrar.................. 55 President, Chief Executive Officer and
Director
Randall L. Carpenter............ 46 Vice President, Clinical Research &
Development and Regulatory Affairs
Deanne D. Garver................ 42 Vice President, Preclinical Development and
Projects Management
Alan L. Maycock................. 58 Vice President, Exploratory Research and
Drug Discovery
Gwen A. Melincoff............... 47 Vice President, Business Development
Peter J. Schied................. 57 Vice President, Chief Financial Officer and
Secretary
Frank Baldino, Jr.(2)........... 46 Director
Ellen M. Feeney(1).............. 40 Director
David M. Madden(1).............. 37 Director
C. Christopher Moller........... 46 Director
Claude H. Nash(2)............... 56 Director
Robert T. Nelsen(2)............. 36 Director
</TABLE>
- ---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
John J. Farrar, Ph.D. Dr. Farrar joined us as our President, Chief
Executive Officer and a Director in November 1994. Previously, Dr. Farrar was
Senior Vice President and Director of Biological Research at the Research
Division of Sterling Winthrop Pharmaceuticals, and had responsibility for
approximately 225 scientists conducting drug discovery research. Prior to
that, Dr. Farrar was Group Director of Biological Research at Hoffman-LaRoche
and oversaw research programs in the areas of immunology, cancer and virology.
Dr. Farrar received a B.A. in Zoology and an M.S. in Microbiology from Miami
University and a Ph.D. in Microbiology/Immunology from the University of Notre
Dame.
Randall L. Carpenter, M.D. Dr. Carpenter joined us as our Vice President of
Clinical Research & Development and Regulatory Affairs in November 1998. From
April 1997 to November 1998, he was Director and Associate Director of
Clinical Research, Astra, U.S.A. and Astra Pain Control, Sweden, and was
responsible for the Anesthesia, Pain Management and Intensive Care divisions
where he supervised a portfolio of 23 drugs and was medically responsible for
19 clinical trials, two NDAs and seven supplemental NDAs. From November 1994
to April 1997, Dr. Carpenter was an Associate Professor in the Department of
Anesthesia at the Bowman Gray School of Medicine of Wake Forest University.
Dr. Carpenter holds an adjunct faculty position in the Department of
Anesthesiology at Duke University Medical Center. Dr. Carpenter received an
M.D. from the University of Michigan Medical School.
Deanne D. Garver, Ph.D. Dr. Garver joined us as our Vice President,
Preclinical Development and Projects Management in July 1998. From March 1995
to July 1998, she was Associate Project Director, Cardiopulmonary Project
Management, at SmithKline Beecham Pharmaceuticals, where she led project teams
through clinical trials in Phases I-III and was responsible for development
strategy and operational plans for therapeutic approaches to asthma and
chronic obstructive pulmonary disease and for anticoagulation drugs. Dr.
Garver received a B.A. from the College of Notre Dame of Maryland and a Ph.D.
from the Medical College of Virginia at Virginia Commonwealth University.
42
<PAGE>
Alan L Maycock, Ph.D. Dr. Maycock joined us as our Vice President of
Exploratory Research and Drug Discovery in January 1995. From April 1988 to
January 1995, Dr. Maycock worked at the Research Division of Sterling Winthrop
Pharmaceuticals, where, during the last year of his employment he was Senior
Director of Biochemistry and directed drug discovery programs targeted at
specific enzymes and receptors in several therapeutic areas, including
inflammation, the central nervous system and immunomodulation. From 1974 to
1988, Dr. Maycock held various positions at Merck Sharp & Dohme Research
Laboratories, most recently as Associate Director of Inflammation Research.
Dr. Maycock received a B.A. in Chemistry from Harvard College and an M.S. and
Ph.D. in Organic Chemistry from MIT.
Gwen A. Melincoff. Ms. Melincoff joined us as our Vice President, Business
Development in January 1999. From October 1994 to January 1999, she was
Director of Business Development at NanoSystems, a subsidiary of Eastman Kodak
and, after October 1998, a division of Elan Corporation, plc, where she was
responsible for identifying and implementing the marketing and business
development strategies. Ms. Melincoff received a B.S. in Biology from George
Washington University and a M.S. in Management--Health Care Administration
from Penn State University.
Peter J. Schied Mr. Schied joined us as our Vice President, Chief Financial
Officer and Secretary in June 1997. From March 1993 to May 1997, he was Chief
Financial Officer and Vice President of Finance for Transcell Technologies,
Inc., a healthcare services company. Mr. Schied previously held senior level
finance positions for healthcare companies including Greenwich
Pharmaceuticals, Inc., Foster Medical Corporation, Rorer Group, Inc.,
International Division and Bristol-Myers Company, International Division. Mr.
Schied received a B.S. in Engineering and an M.B.A. in Finance and
International Business from Drexel University.
Frank Baldino, Jr., Ph.D. Dr. Baldino joined us as a Director in March
1996. Dr. Baldino is the founder of Cephalon, Inc. a biotechnology company
involved in the development of therapeutics for neurological disorders, sleep
disorders and cancer. He has served as President, Chief Executive Officer and
a Director of Cephalon since that company's inception in 1987. Dr. Baldino
holds adjunct academic appointments, including Adjunct Professor of
Pharmacology at Temple University Medical School, Adjunct Professor of
Physiology and Biophysics and Adjunct Professor of Neurology at Hahnemann
University Hospital. He currently serves as a Director of ViroPharma, Inc.,
Pharmacopeia, Inc., The Jackson Laboratory and the Biotechnology Industry
Organization. Dr. Baldino received a Ph.D. in Pharmacology from Temple
University and a B.S. in Biology from Muhlenberg College.
Ellen M. Feeney Ms. Feeney joined us as a Director in November 1994. Ms.
Feeney is a private investor who focuses on investments in the life sciences
area. From 1989 to 1999, she was a General Partner of Weiss, Peck & Greer
Venture Partners. Prior to that, she was a partner of Hambrecht & Quist Life
Science Ventures. She serves as a Director of several privately-held
companies. Ms. Feeney received a B.S. in Biology from Duke University and an
M.S. in Human Genetics from the University of California.
David M. Madden. Mr. Madden joined us as a Director in January 2000. He has
been a Managing Member of Pharmaceutical Partners, LLC, a private investment
management firm specializing in the acquisition of royalty interests in
pharmaceutical products, since 1997. From 1992 to 1995, Mr. Madden was
President, Chief Executive Officer and a Director of Selectide Corporation, a
development stage pharmaceutical company, that was acquired by Marion Merrill
Dow in 1995. Mr. Madden was a consultant to Marion Merrill Dow during part of
1995. Mr. Madden has a B.S. in Electrical Engineering from Union College and
an M.B.A. from Columbia University.
C. Christopher Moller, Ph.D. Dr. Moller joined us as a Director in February
1996. Dr. Moller has been a Managing Director of TL Ventures since 1995, and
its predecessor funds since 1990, where he works extensively with early-stage
life sciences and bioinformatic companies providing business, technical and
strategic consulting. Dr. Moller currently serves on the boards of Assurance
Medical, eMerge Interactive, Inc., Genomics Collaborative, OraPharma, Inc.,
and Who? Vision Systems, Inc. and several privately-held companies. Dr. Moller
has a B.A. in Chemistry from Pomona College and a Ph.D. in Immunology from the
University of Pennsylvania.
43
<PAGE>
Claude H. Nash, Ph.D. Dr. Nash joined us as a Director in January 2000. He
has served as Chief Executive Officer, President and a Director of ViroPharma
Incorporated since that company's inception in 1994. From 1983 to 1994, Dr.
Nash served as Vice President, Infectious Disease and Tumor Biology at
Schecing-Plough Research Institute. Dr. Nash has a B.S. in Biology and
Chemistry from Lamar University, an M.S. in Microbiology and a Ph.D. in
Microbial Genetics and Biochemistry from Colorado State University.
Robert T. Nelsen Mr. Nelsen has been a Director since our inception. Since
July 1994, he has served as a managing director of various venture capital
funds associated with ARCH Venture Partners, including ARCH Venture Fund II,
L.P., ARCH Venture Fund III, L.P. and ARCH Venture Fund IV, L.P. From April
1987 to July 1994, Mr. Nelsen was a Senior Manager at ARCH Development
Corporation, a company affiliated with the University of Chicago, where he was
responsible for new company formation. Mr. Nelsen serves on the board of
directors of Caliper Technologies Corp., a publicly held, lab-chip systems
developer and manufacturer, and several privately-held companies. He received
a B.S. in Biology and Economics from the University of Puget Sound and an
M.B.A. from the University of Chicago.
Composition of Board of Directors
Currently we have seven members on our Board of Directors. Each of our
directors was elected in accordance with provisions of our Certificate of
Incorporation. Ms. Feeney and Mr. Nelson were nominated to our Board of
Directors by holders of our series A mandatorily redeemable convertible
preferred stock and Mr. Moller was nominated to our Board of Directors by
holders of our series B mandatorily redeemable convertible preferred stock.
Upon the closing of this offering the provisions of our Certificate of
Incorporation pursuant to which Ms. Feeney and Messrs. Nelson and Moller were
elected will terminate.
Scientific Advisors
We have established relationships with leading scholars in the fields of
chemistry, molecular biology, pharmacology and preclinical development. Our
scientific advisors consult on matters relating to the development of the
products described elsewhere in this prospectus. Our scientific advisors are
reimbursed for their reasonable expenses and may also receive options to
purchase shares of our common stock. Our scientific advisors are:
<TABLE>
<CAPTION>
Advisor University Affiliation Professional Concentration
- ------- ---------------------- --------------------------
<S> <C> <C>
Thomas Burks, Ph.D. University of Texas Opioid Pharmacology
Jerry Collins, Ph.D. Yale University Pharmacology
Alan Cowan, Ph.D. Temple University Pharmacology
James Eisenach, M.D. Wake Forest University Pharmacology
Mary Jeanne Kreek, M.D. The Rockefeller University Molecular Neurobiology
Mark Wentland, Ph.D. Rennselaer Polytechnic Institute Chemistry
Tony Yaksh, Ph.D. University of California, San Diego Pharmacology
Lei Yu, Ph.D. University of Cincinnati Molecular Biology
Clinical Advisors
We have established relationships with leading scholars who consult on
matters relating to clinical trial design, marketing and regulatory issues.
Our clinical advisors are reimbursed for their reasonable expenses and may
also receive options to purchase shares of our common stock. Our clinical
advisors are:
<CAPTION>
Advisor University Affiliation Professional Concentration
- ------- ---------------------- --------------------------
<S> <C> <C>
James Eisenach, M.D. Wake Forest University Pain Management
Rosemarie Fisher, M.D. Yale University Gastroenterology
Thomas Garvey, M.D. George Washington University Clinical Trial Design/
FDA Requirements
Jerry Jaffe, M.D. University of Maryland Opioid Pharmacology/Addiction
Henrik Kehlet, M.D.,
Ph.D. Hvidovre University, Denmark Surgical Recovery/Outcome
Mary Jeanne Kreek, M.D. The Rockefeller University Gastroenterology
</TABLE>
44
<PAGE>
Committees Of The Board
The compensation committee reviews and makes recommendations to the Board
regarding the compensation to be provided to our Chief Executive Officer and
our directors. In addition, the compensation committee reviews compensation
arrangements for our other executive officers and administers our equity
compensation plans. The current members of the compensation committee are
Messrs. Baldino, Nash and Nelsen.
The audit committee reviews and monitors our corporate financial reporting,
external audits, internal control functions and compliance with laws and
regulations that could have a significant effect on our financial condition or
results of operations. In addition, the audit committee has the responsibility
to consider and recommend the appointment of, and to review fee arrangements
with, our independent auditors. The current members of the audit committee are
Ms. Feeney and Mr. Madden.
Director Compensation And Other Arrangements
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. We also have
granted stock options to each member of our board of directors.
Compensation Committee Interlocks And Insider Participation
Mr. Nelsen, a member of the board of directors of ARCH Venture Partners, is
a member of our compensation committee. See "Certain Transactions" for a
description of transactions between ARCH Venture Fund III, L.P., an affiliate
of ARCH Venture Partners, and us.
Executive Compensation
The following table sets forth the total compensation earned by our chief
executive officer and each of our most highly compensated executive officers,
other than the chief executive officer, who earned more than $100,000 during
the fiscal year ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------------
Shares
Other Underlying
Name and Principal Position Salary Bonus Compensation(1) Options
- --------------------------- -------- ------- --------------- ------------
<S> <C> <C> <C> <C>
John J. Farrar.................. $211,319 $21,305 $7,210 110,502
President, Chief Executive
Officer and Director
Randall L. Carpenter............ 183,462 -- 25,723 28,098
Vice President, Clinical
Research & Development and
Regulatory Affairs
Deanne D. Garver................ 132,500 9,730 -- 23,309
Vice President, Preclinical
Development and Projects
Management
Alan L. Maycock................. 153,935 -- -- 57,738
Vice President, Exploratory
Research and Drug Discovery
Peter J. Schied................. 158,222 6,948 -- 46,808
Vice President, Chief Financial
Officer and Secretary
</TABLE>
- ---------------------
(1) Consists of life insurance premiums paid by us for Dr. Farrar and
temporary living expenses paid by us for Dr. Carpenter.
45
<PAGE>
Employment agreements
In October 1994, we entered into an at will employment agreement with Dr.
Farrar in connection with which he purchased 503,644 shares of our common
stock for $1,150. Dr. Farrar is eligible for an annual performance bonus based
on our attaining goals and objectives established by the Board of Directors.
We will use all reasonable good faith efforts to allow Dr. Farrar the
opportunity to maintain at least a 5% interest in the Company.
In January 1995, we entered into an at will employment agreement with Dr.
Maycock, in connection with which we granted him options to purchase 77,777
shares of our common stock at an exercise price of $.113 per share. Dr.
Maycock is eligible for an annual performance bonus based on our attaining
goals and objectives established by our Board of Directors. Dr. Maycock is
entitled to a $15,000 one-time severance payment if his employment with us is
terminated, subject to certain qualifications with respect to the financial
condition of Adolor.
In May 1997, we entered into an at will employment agreement with Mr.
Schied, in connection with which we granted him options to purchase 111,111
shares of our common stock at an exercise price of $.315 per share. We provide
Mr. Schied with term life insurance equal to two times his base salary. If Mr.
Schied is terminated pursuant to a change of control or for any other reason
other than just cause, we (or our successor) are obligated to continue to pay
Mr. Schied at his then current base salary rate for six months following such
termination. We may defer these severance payments in certain circumstances.
The following table contains information concerning grants of stock options
to purchase shares of our common stock of each of the officers named in the
summary compensation table during the year ended December 31, 1999.
Option Grants During the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Potential Realizable
Percentage Value at Assumed Annual
Number of of Total Rates of Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to Price Option Term
Options Employees (per Expiration ------------------------
Name Granted in 1999 Share) Date 5% 10%
- ---- ---------- ---------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
John J. Farrar.......... 106,666 24.50 $0.34 1/15/09 $2,222,120 $3,560,634
1,320 0.34 5/21/09 27,506 44,063
3,512 0.59 8/31/09 72,314 116,365
792 0.59 9/28/09 16,308 26,242
10,489 1.35 11/15/09 207,951 339,515
Randall L. Carpenter.... 16,666 6.24 $0.34 1/15/09 $ 347,288 $ 556,330
1,528 0.34 5/21/09 31,841 51,006
2,682 0.59 8/31/09 55,224 88,864
1,149 0.59 9/28/09 23,659 38,071
9,195 1.35 11/15/09 182,297 297,630
Deanne D. Garver........ 16,666 10.39 $0.34 1/15/09 $ 347,288 $ 556,330
764 0.34 5/21/09 15,920 25,503
6,641 0.59 7/27/09 136,742 220,041
1,468 0.59 8/31/09 30,227 48,640
357 0.59 9/28/09 7,351 11,829
Alan L. Maycock......... 8,296 12.81 $0.34 1/1/09 $ 172,873 $ 276,930
50,000 0.34 1/15/09 1,041,907 1,669,058
2,130 0.34 5/21/09 44,385 71,102
2,937 0.59 8/31/09 60,475 97,314
792 0.59 9/28/09 16,308 26,242
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Potential Realizable
Percentage Value at Assumed Annual
Number of of Total Rates of Stock Price
Securities Options Exercise Appreciation for
Underlying Granted to Price Option Term
Options Employees (per Expiration -----------------------
Name Granted in 1999 Share) Date 5% 10%
- ---- ---------- ---------- -------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Schied......... 38,888 5.17 $0.34 1/15/09 $ 810,353 $ 1,298,126
1,331 0.34 5/21/09 27,763 44,430
7,613 0.59 6/2/09 156,756 252,246
3,352 0.59 8/31/09 69,020 111,064
824 0.59 9/28/09 16,967 27,302
</TABLE>
The following table contains information concerning stock options to
purchase common stock held as of December 31, 1999 by each of the officers
named in the summary compensation table who have stock options.
Year-End December 31, 1999 Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-The Money Options at
Shares End Fiscal Year-End
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Farrar.......... 0 0 86,534 89,761 $1,119,088 $1,158,465
Randall L. Carpenter.... 0 0 28,145 69,744 $ 363,091 $ 900,127
Deanne D. Garver........ 0 0 28,784 52,670 $ 371,831 $ 680,709
Alan L. Maycock......... 0 0 99,373 42,037 $1,286,972 $ 499,759
Peter J. Schied......... 0 0 98,170 77,569 $1,268,798 $ 463,780
</TABLE>
On January 13, 2000, we granted stock options to purchase an aggregate of
592,134 shares of our common stock to certain of our employees. Drs. Farrar,
Carpenter, Garver and Maycock and Mr. Schied received options to purchase
213,333, 106,666, 33,333, 42,275, and 42,222 shares respectively. These
options have a weighted average exercise price of $2.03 per share, vest in
equal installments over four years, and expire on the tenth anniversary of the
date of grant.
Employee Benefit Plans
Amended and Restated 1994 Equity Compensation Plan
We adopted the Amended and Restated 1994 Equity Compensation Plan,
effective as of February 4, 2000. Under the plan, we will be authorized to
grant options to eligible individuals for up to a total of 3,277,778 shares of
our common stock. The plan will authorize us to grant either options intended
to constitute incentive stock options under the Internal Revenue Code of 1986,
as amended, or non-qualified stock options. Under the plan, the committee or
the board of directors will determine the exercise price of each option
granted, provided that the minimum exercise price is equal to the fair market
value of the underlying stock on the date the option is granted. The maximum
term of any option will be ten years from the date of grant. Options granted
will be exercisable at the determination of the committee or the board of
directors, and the options will vest according to the vesting schedule which
shall be determined by the Board or the committee. Within any one-year period,
an employee may not receive options to purchase more than 1,000,000 shares of
our common stock. Options to acquire 1,280,790 shares of our common stock were
outstanding at December 31, 1999, at a weighted average exercise price of $.30
per share.
Eligibility. Officers and other employees of ours, non-employee members of
the Board, and consultants are eligible to participate in the plan and receive
non-qualified stock options. Under the plan, only our officers and other
employees are eligible to receive incentive stock options.
Change in Control. The plan includes the following change in control
provisions which may result in the accelerated vesting of outstanding option
grants and stock issuances:
47
<PAGE>
In a merger or consolidation, sale of all or substantially all assets or
the sale of all or a majority of the outstanding stock liquidation or
dissolution or any similar transactions, unless otherwise provided in an
optionee's Grant Letter, the vesting and exercisability of all options that
are outstanding and unexercised as of such Change of Control, to the extent
unvested, and any unvested shares held by the optionee shall be accelerated
such that all outstanding options are fully vested and exercisable and all
Shares held by the optionee are fully vested, and, if Adolor does not survive
Adolor shall, if Adolor does not cash-out all outstanding options, require the
successor corporation to assume all outstanding options and to substitute such
options with awards involving the common stock of such successor corporation
on terms and conditions necessary to preserve the rights of optionees with
respect to such options. The Committee or the Board, in its sole discretion,
may require the cancellation of all outstanding vested options in exchange for
a cash payment in an amount equal to the excess, if any, of the fair market
value of the common stock underlying the unexercised portion of the option as
of the date of the change of control over the option price of such portion.
Federal Tax Consequences of Stock Options.
In general, neither the grant nor the exercise of an incentive stock option
will result in taxable income to an option holder or a deduction to us. To
receive special tax treatment as an incentive stock option under the Internal
Revenue Code as to shares acquired upon exercise of an incentive stock option,
an option holder must neither dispose of such shares within two years after
the incentive stock option is granted nor within one year after the exercise
of the option. In addition, the option holder must be an employee at all times
between the date of grant and the date three months, or one year in the case
of disability, before the exercise of the option. Special rules apply in the
case of the death of the option holder. Incentive stock option treatment under
the Internal Revenue Code generally allows the sale of our common stock
received upon the exercise of an incentive stock option to result in any gain
being treated as a capital gain to the option holder, but we will not be
entitled to a tax deduction. However, the exercise of an incentive stock
option, if the holding period rules described above are satisfied, will give
rise to income includable by the option holder in his or her alternative
minimum tax in an amount equal to the excess of the fair market value of the
stock acquired on the date of the exercise of the option over the exercise
price.
If the holding rules described above are not satisfied, gain recognized on
the disposition of the shares acquired upon the exercise of an incentive stock
option will be characterized as ordinary income. Such gain will be equal to
the difference between the exercise price and the fair market value of the
shares at the time of exercise. Special rules may apply to disqualifying
dispositions where the amount realized is less than the value at exercise. We
will generally be entitled to a deduction equal to the amount of such gain
included by an option holder as ordinary income. Any excess of the amount
realized upon such disposition over the fair market value at exercise will
generally be long-term or short-term capital gain depending on the holding
period involved. Notwithstanding the foregoing, in the event that the exercise
of the option is permitted other than by cash payment of the exercise price,
various special tax rules may apply.
No income will be recognized by an option holder at the time a non-
qualified stock option is granted. Generally, ordinary income will, however,
be recognized by an option holder at the time a vested non-qualified stock
option is exercised in an amount equal to the excess of the fair market value
of the underlying common stock on the exercise date over the exercise price.
We will generally be entitled to a deduction for federal income tax purposes
in the same amount as the amount included in ordinary income by the option
holder with respect to his or her non-qualified stock option. Gain or loss on
a subsequent sale or other disposition of the shares acquired upon the
exercise of a vested non-qualified stock option will be measured by the
difference between the amount realized on the disposition and the tax basis of
such shares, and will generally be long-term capital gain depending on the
holding period involved. The tax basis of the shares acquired upon the
exercise of any non-qualified stock option will be equal to the sum of the
exercise price of such non-qualified stock option and the amount included in
income with respect to such option. Notwithstanding the foregoing, in the
event that exercise of the option is permitted other than by cash payment of
the exercise price, various special tax rules apply.
48
<PAGE>
Unless the holder of an unvested non-qualified stock option makes an 83(b)
election as described below, there generally will be no tax consequences as a
result of the exercise of an unvested option until the stock received upon
such exercise is no longer subject to a substantial risk of forfeiture or is
transferable. Generally, when the shares have vested, the holder will
recognize ordinary income, and we will be entitled to a deduction, equal to
the difference between the fair market value of the stock at such time and the
exercise price paid by the holder for the stock. Subsequently realized changes
in the value of the stock generally would be treated as long-term or short-
term capital gain or loss, depending on the length of time the shares were
held prior to disposition of such shares. In general terms, if a holder were
to make an 83(b) election under Section 83(b) of the Internal Revenue Code
upon the exercise of the unvested option, the holder would recognize ordinary
income on the date of the exercise of such option, and we would be entitled to
a deduction, equal to:
. the fair market value of the stock received pursuant to such exercise as
though the stock were not subject to a substantial risk of forfeiture or
transferable, minus
. the exercise price paid for the stock.
If an 83(b) election were made, there would generally be no tax
consequences to the holder upon the vesting of the stock, and all subsequent
appreciation in the stock would generally be eligible for capital gains
treatment.
Additional special tax rules may apply to those option holders who are
subject to the rules set forth in Section 16 of the Securities Exchange Act of
1934. The foregoing tax discussion is a general description of certain
expected federal income tax results under current law, and all affected
individuals should consult their own advisors if they wish any further details
or have special questions.
Section 162(m). Section 162(m) of the Internal Revenue Code may preclude us
from claiming a federal income tax deduction if we pay total remuneration in
excess of $1 million to the chief executive officer or to any of the other
four most highly compensated officers in any one year. Total remuneration
would generally include amounts received upon the exercise of stock options
granted under the plan and the value of shares received when restricted shares
become transferable or such other time when income is recognized. An exception
does exist, however, for performance-based compensation which includes amounts
received upon the exercise of stock options pursuant to a plan approved by
stockholders that meets certain requirements. The Amended and Restated 1994
Equity Compensation Plan is intended to make grants of stock options and stock
appreciation rights that meet the requirements of performance-based
compensation. Other awards have been structured with the intent that such
awards may qualify as such performance based compensation if so determined by
the compensation committee.
49
<PAGE>
CERTAIN TRANSACTIONS
- -------------------------------------------------------------------------------
In July 1999, we licensed worldwide rights (excluding South Korea and North
Korea) to the development and commercialization of our product candidate ADL
2-1294 to SB Pharmaco Puerto Rico Inc., an affiliate of SmithKline Beecham
plc, for the topical indications of dermal pain and itch. Under the license
agreement, we received a $500,000 up-front license fee. In the event that ADL
2-1294 meets specified regulatory approval requirements and is successfully
launched commercially in prescription and over-the-counter forms in each of
specified jurisdictions, we would be entitled to up to $38.5 million of
milestone payments, with the potential of additional milestone payments of up
to $6.0 million. In addition, we will receive royalties based on product
sales, if any. SB Pharmaco will be responsible for all development costs.
SB Pharmaco can terminate the agreement on a country by country basis, in
its entirety, or on a product by product basis if it determines that the
product is not marketable in a specified territory. Upon termination in this
circumstance, all of the rights granted to SB Pharmaco under the license
agreement in the relevant country or for the relevant product will terminate
and revert to us. In connection with the licensing of ADL 2-1294, S.R. One,
Limited, an affiliate of SmithKline Beecham purchased $2.5 million in series F
mandatorily redeemable Preferred Stock, was granted a warrant to purchase
shares of preferred stock convertible into an aggregate of 27,776 shares of
common stock for an aggregate exercise price of $125,000 and agreed to
purchase an additional $500,000 of our capital stock upon the achievement of
certain regulatory milestones.
In January 2000, we issued an aggregate of 12,306,000 shares of series G
mandatorily redeemable convertible preferred stock at a purchase price of
$1.00 per share, for aggregate consideration of $12,306,000. Of that amount,
we issued 250,000 shares to Technology Leaders II, L.P. Dr. Moller, one of our
directors, is the managing director of the general partner of the general
partner of Technology Leaders II, L.P. We also issued 2,500,000 shares to ARCH
Venture Fund III, L.P. Mr. Nelsen, a director of ours, is the general partner
of the general partner of the general partner of ARCH Venture Fund III, L.P.
We also issued 273,000 shares to WPG Enterprise Fund II, L.L.C. and 227,000
shares to Weiss, Peck & Greer Venture Associates III, L.L.C. Ms. Feeney, one
of our directors, nominated to our board by Weiss, Peck & Greer Venture
Partners III, the Fund Investment Advisory Member of WPG Enterprise Fund II,
L.L.C. and Weiss, Peck & Greer Venture Associates III, L.L.C., was a general
partner of Weiss, Peck & Greer Venture Partners, from 1989 to 1999. On the
closing of this offering, the series G preferred stock will automatically
convert into 2,734,656 shares of common stock.
50
<PAGE>
PRINCIPAL STOCKHOLDERS
- -------------------------------------------------------------------------------
The following table sets forth certain information regarding beneficial
ownership of our common stock as of January 31, 2000, and as adjusted to
reflect the sale of shares offered hereby, and by:
. each person (or group of affiliated persons) who is known by us to own
more than five percent of the outstanding shares of our common stock,
. each of our directors and our executive officers named in the summary
compensation table and
. all of our executive officers and directors as a group.
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. Unless otherwise noted, we believe that all
persons named in the table have sole voting and sole investment power with
respect to all shares beneficially owned by them. All figures include shares
of common stock issuable upon the exercise of options or warrants exercisable
within 60 days of January 31, 2000, which are deemed to be outstanding and to
be beneficially owned by the person holding those options or warrants for the
purpose of computing the percentage ownership of that person.
<TABLE>
<CAPTION>
Percent of Shares
Outstanding
--------------------
5% Beneficial Owners, Directors, Number of Shares Before the After the
Nominees for Director, Named Officers Beneficially Owned Offering Offering
- ------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Robert T. Nelsen(1)................... 2,478,833 14.77% 10.88%
WPG Venture Partners III, L.P.(2)..... 2,449,730 14.59 10.75
Alta California Partners, L.P.(3)..... 2,423,306 14.45 10.64
Falcon Technology Partners, L.P.(4)... 2,050,262 12.22 9.00
Technology Leaders Management,
Inc.(5).............................. 1,727,509 10.30 7.59
Christopher Moller(6)................. 1,727,509 10.30 7.59
ARCH Venture Fund III, L.P.(7)........ 1,624,337 9.69 7.13
S.R. One, Limited(8).................. 1,533,067 9.13 6.73
One Liberty Partners III, L.P.(9)..... 961,639 5.72 4.21
ARCH Venture Fund II, L.P.(10)........ 841,269 5.01 3.69
John J. Farrar(11).................... 674,298 4.00 2.95
Alan L. Maycock(12)................... 244,205 1.45 1.07
Peter J. Schied(13)................... 109,080 * *
Randall L. Carpenter(14).............. 34,215 * *
Deanne D. Garver(15).................. 33,920 * *
Gwen A. Melincoff(16)................. 23,691 * *
Frank Baldino, Jr. ................... 22,222 * *
Ellen M. Feeney....................... 1,944 * *
David Madden.......................... 0 * *
Claude Nash........................... 0 * *
All directors and executive officers
as a group (12 persons).............. 5,430,602 31.42 23.32
</TABLE>
- ---------------------
* Less than 1%
(1) Includes (i) 814,629 shares and a warrant to purchase 13,227 shares
owned by ARCH Venture Fund II, L.P. and (ii) 1,624,337 shares owned by
ARCH Venture Fund III, L.P. Mr. Nelsen is the general partner of the
general partner of the general partner of ARCH Venture Fund III, L.P.
and a managing director of the general partner of ARCH Venture Fund II,
L.P. Mr. Nelsen disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest therein.
(2) Includes (i) 1,331,641 shares and a warrant to purchase 14,444 shares
owned by WPG Enterprise Fund II, LP; (ii) 1,065,180 shares and a warrant
to purchase 12,010 shares owned by Weiss, Peck & Greer Venture
Associates III, L.P.; and (iii) 26,455 shares owned by WPG LifeScience
Entrepreneur Fund. WPG Venture
51
<PAGE>
Partners III, L.P. is the Fund Investment Advisory Member of Weiss, Peck &
Greer Venture Associates III, L.P., WPG Enterprise Fund II, L.P. and WPG
LifeScience Entrepreneur Fund. The address for WPG Venture Partners III,
L.P. is 555 California Street, Suite 3130, San Francisco, CA 94104.
(3) Alta California Management Partners, L.P. is the General Partner of Alta
California Partners, L.P. The address of Alta California Management
Partners, L.P. is One Embarcadero Center, Suite 4050, San Francisco, CA
94111.
(4) Includes a warrant to purchase 13,227 shares. The address of Falcon
Technology Partners, L.P. is 600 Dorset Road, Devon, PA 19833.
(5) Includes (i) 956,374 shares owned by Technology Leaders II, L.P. and
(ii) 764,768 shares owned by Technology Leaders II Offshore C.V.
Technology Leaders Management, Inc. controls the general partner of each
of these entities. The address of Technology Leaders Management, Inc. is
435 Devon Park Drive, Building 700, Wayne, Pennsylvania 19087.
(6) Includes (i) 956,374 shares owned by Technology Leaders II, L.P. and
(ii) 764,768 shares owned by Technology Leaders II Offshore C.V. Mr.
Moller is a managing director of Technology Leaders Management, Inc.,
which controls the general partner of both Technology Leaders II, L.P.
and Technology Leaders II Offshore C.V. Mr. Moller disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
(7) The address of ARCH Venture Fund III, L.P. is 8725 West Higgens Rd.
Suite 290 Chicago, IL 60631.
(8) Includes a warrant to purchase 27,777 shares. The address of S.R. One
Limited is 4 Tower Bridge, 200 Bar Harbor Drive, Suite 250, West
Conshohocken, PA 19428.
(9) One Liberty Partners III, L.P. is the General Partner of One Liberty
Fund III, L.P. The address of One Liberty Ventures is 150 Cambridge Park
Drive, Cambridge, MA 02140.
(10) Includes a warrant to purchase 13,227 shares. The address of ARCH
Venture Fund II, L.P. is 8725 West Higgens Rd. Suite 290 Chicago, IL
60631.
(11) Includes currently exercisable options to purchase 94,184 shares of
common stock.
(12) Includes currently exercisable options to purchase 103,402 shares of
common stock.
(13) Consists of currently exercisable options to purchase 109,080 shares of
common stock.
(14) Consists of currently exercisable options to purchase 34,215 shares of
common stock.
(15) Consists of currently exercisable options to purchase 33,920 shares of
common stock.
(16) Consists of currently exercisable options to purchase 23,691 shares of
common stock.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
- -------------------------------------------------------------------------------
General
The following summary assumes the amendment and restatement of our
certificate of incorporation and bylaws to read in their entirety as provided
in the forms of amended and restated certificate of incorporation and bylaws
filed as exhibits to the registration statement of which this prospectus forms
a part. It also reflects changes to our capital structure that will become
effective immediately prior to or upon the closing of this offering. Upon
completion of this offering, our authorized capital stock will consist of
99,000,000 shares of common stock, $0.0001 par value, and 1,000,000 shares of
undesignated preferred stock, $0.01 par value. The following description of
our capital stock does not purport to be complete and is subject to, and
qualified in it entirety by, our certificate of incorporation and bylaws,
which we have included as exhibits to the registration statement of which this
prospectus forms a part.
Common Stock
As of December 31, 1999, there were 1,172,236 shares of our common stock
outstanding. As of February 4, 2000, 3,277,778 shares of our common stock were
reserved for issuance pursuant to our Amended and Restated 1994 Incentive
Compensation Plan. Upon completion of the offering, there will be 22,767,591
shares of common stock outstanding.
The holders of our common stock are entitled to dividends as our board of
directors may declare from legally available funds, subject to the
preferential rights of the holders of our preferred stock. The holders of our
common stock are entitled to one vote per share on any matter to be voted upon
by stockholders. Our certificate of incorporation does not provide for
cumulative voting. No holder of our common stock will have any preemptive
right to subscribe for any shares of capital stock issued in the future.
Upon any voluntary or involuntary liquidation, dissolution, or winding up
of our affairs, the holders of our common stock are entitled to share ratably
in all assets remaining after payment of creditors and subject to prior
distribution rights of our preferred stock. All of the outstanding shares of
common stock are, and the shares offered by us will be, fully paid and non-
assessable.
Preferred Stock
As of the closing of this offering, no shares of our preferred stock will
be outstanding. Our certificate of incorporation provides that our board of
directors may by resolution establish one or more classes or series of
preferred stock having the number of shares and relative voting rights,
designation, dividend rates, liquidation, and other rights, preferences, and
limitations as may be fixed by them without further stockholder approval. The
holders of our preferred stock may be entitled to preferences over common
stockholders with respect to dividends, liquidation, dissolution, or our
winding up in such amounts as are established by our board of directors
resolutions issuing such shares.
The issuance of our preferred stock may have the effect of delaying,
deferring or preventing a change in control of us without further action by
the holders and may adversely affect voting and other rights of holders of our
common stock. In addition, issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire
a majority of the outstanding shares of voting stock. At present, we have no
plans to issue any shares of preferred stock.
Registration Rights
In conjunction with this offering the holders of our common stock and
warrants exercisable for our common stock that had demand rights agreed not to
demand registration of their common stock until 180 days after the effective
date of this prospectus without the prior written consent of Warburg Dillon
Read LLC. After this
53
<PAGE>
180-day period, any one of these holders may require us to file a registration
statement under the Securities Act with respect to at least % of his, her or
its shares eligible for demand rights if the gross offering price would be
expected to exceed $ million. We are required to use our best efforts to
effect the registration, subject to certain conditions and limitations. In
addition, if 180 days after the date of this offering, we prepare to register
any of our securities under the Securities Act, for our own account or the
account of our other holders, we will send notice of this registration to
holders of the shares eligible for demand and piggy-back registration rights.
Subject to certain conditions and limitations, they may elect to register
their eligible shares. If we are able to file a registration statement on Form
S-3, the holders of shares eligible for demand rights may register their
common stock along with that registration. The expenses incurred in connection
with such registrations will be borne by us, except that we will pay expenses
of only one registration on Form S-3 at a holder's request per year.
Options
As of December 31, 1999, options to purchase a total of 1,280,790 shares of
common stock were outstanding at a weighted average exercise price of $.30.
Options to purchase a total of 3,277,778 shares of common stock are reserved
under the Amended and Restated 1994 Incentive Compensation Plan. Please see
"Management--Employee benefit plans" and "Shares eligible for future sale."
Warrants
As of December 31, 1999, there were warrants outstanding to purchase 52,910
shares of series B convertible preferred stock and 27,778 shares of series F
convertible preferred stock. These warrants expire on the earlier of the
closing of an initial public offering or October 2000 and August 2004,
respectively.
Section 203 of the Delaware General Corporation Law; Certain Anti Takeover,
Limited Liability and Indemnification Provisions
We are subject to Section 203 of the Delaware General Corporation Law,
which regulates acquisitions of Delaware corporations. 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 becomes an interested stockholder, unless:
. our board of directors approved the business combination or the
transaction in which the person became an interested stockholder prior to
the date the person attained this status;
. upon consummation of the transaction that resulted in the person becoming
an interested stockholder, the person owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to the date the person became an interested stockholder,
our board of directors approved the business combination and the
stockholders other than the interested stockholder authorized the
transaction at an annual or special meeting of stockholders.
Section 203 defines a "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the corporation;
. in general, any transaction that results in the issuance or transfer by
the corporation of any stock of the corporation to the interested
stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
54
<PAGE>
In general, Section 203 defines an "interested stockholder" as any person
who, together with the person's 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.
No Stockholder Action by Written Consent; Special Meetings
Our certificate of incorporation provides that stockholder action can only
be taken at an annual or special meeting of stockholders and prohibits
stockholder action by written consent in lieu of a meeting. Our bylaws provide
that special meetings of shareholders may be called only by our Board of
Directors or our Chief Executive Officer. Our shareholders are not permitted
to call a special meeting of shareholders or to require that our Board of
Directors call a special meeting.
Number of Directors; Removal; Filling Vacancies
Our certificate of incorporation and bylaws provide that our Board of
Directors has the authority to determine the number of directors to constitute
the Board, and to fix their terms of office. Further, subject to the rights of
the holders of any series of our preferred stock, if any, our certificate of
incorporation and bylaws authorize our Board of Directors to elect additional
directors under specified circumstances and fill any vacancies that occur in
our Board of Directors by reason of death, resignation, removal, or otherwise.
A director so elected by our Board of Directors to fill a vacancy or a newly
created directorship holds office until the next election of the class for
which such director has been chosen and until his or her successor is elected
and qualified. Subject to the rights of the holders of any series of our
preferred stock, if any, our certificate of incorporation and bylaws also
provide that directors may be removed only for cause and only by the
affirmative vote of holders of a majority of the combined voting power of the
then outstanding stock of Adolor. The effect of these provisions is to
preclude a stockholder from removing incumbent directors without cause and
simultaneously gaining control of our Board of Directors by filling the
vacancies created by such removal with its own nominees.
Indemnification
We have included in our certificate of incorporation and bylaws provisions
to (i) eliminate the personal liability of our directors for monetary damages
resulting from breaches of their fiduciary duty to the extent permitted by the
Delaware General Corporation Law and (ii) indemnify our directors and officers
to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, including circumstances in which indemnification is otherwise
discretionary. We believe that these provisions are necessary to attract and
retain qualified persons as directors and officers.
By-laws
Our bylaws are subject to adoption, amendment, alteration, repeal, or
rescission either by our Board of Directors by a vote of a majority of all
directors in office, without the assent or vote of our stockholders, or by the
affirmative vote of the holders of a majority of the outstanding shares of
voting securities.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is StockTrans, Inc.
The Transfer Agent's address is 7 East Lancaster Avenue, Ardmore, PA 19003,
and its telephone number is (610) 649-7300.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
- -------------------------------------------------------------------------------
Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could reduce prevailing market prices. Furthermore, since no shares
will be available for sale shortly after this offering because of contractual
and legal restrictions on resale as described below. Sales of substantial
amounts of our common stock in the public market after any restrictions on
sale lapse could adversely affect the prevailing market price of the common
stock and impair our ability to raise equity in the future.
Upon completion of this offering, we will have 22,767,591 outstanding
shares of common stock. Of these shares, the 6,000,000 shares sold in this
offering will be freely transferable without restriction or further
registration under the Securities Act, except for any shares purchased by an
affiliate of Adolor. The remaining 16,767,591 shares of common stock held by
existing stockholders are restricted securities. Restricted securities may be
sold in the public market only if registered or if they qualify for exemption
from registration described below under Rules 144, 144 (k) or 701 promulgated
under the Securities Act.
As a result of contractual restrictions described below and the provisions
of Rules 144, 144(k) and 701, the restricted shares will be available for sale
in the public market as follows:
. unless held by affiliates the 6,000,000 shares sold in the public
offering will be freely tradeable upon completion of the offering;
. shares will be eligible for sale upon the expiration of the lock-up
agreements, described below, beginning 180 days after the date of this
prospectus; and
. shares will be eligible for sale upon the exercise of vested options
180 days after the date of this prospectus.
Lock-Up Agreements
All of our directors, officers, employees and the holders of all of our
securities have entered into lock-up agreements in connection with this
offering. These lock-up agreements generally provide that these holders will
not offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of Warburg Dillon Read LLC.
Notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements may not be
sold until these agreements expire or are waived by Warburg Dillon Read LLC.
Holders of 100% of our stock have entered into lock-up agreements.
Rule 144
In general, under Rule 144 as currently in effect, after the expiration of
the lock-up agreements, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately 227,675 shares immediately after this
offering; and
. the average weekly trading volume of our common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information
about us.
56
<PAGE>
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, may sell these
shares without complying with the manner of sale, public information, volume
limitation or notice requirements of Rule 144.
Rule 701
Rule 701, as currently in effect, permits our employees, officers,
directors or consultants who purchased shares pursuant to a written
compensatory plan or contract to resell such shares in reliance upon Rule 144,
but without compliance with certain restrictions. Rule 701 provides that
affiliates may sell their Rule 701 shares under Rule 144 90 days after
effectiveness without complying with the holding period requirement and that
non-affiliates may sell such shares in reliance on Rule 144 90 days after
effectiveness without complying with the holding period, public information,
volume limitation or notice requirements of Rule 144.
Registration Rights
Upon completion of this offering, the holders of shares of common
stock, or their transferees, will be entitled to rights with respect to the
registration of their shares under the Securities Act. Registration of their
shares under the Securities Act would result in these shares becoming freely
tradeable without restriction under the Securities Act, except for shares
purchased by affiliates, immediately upon the effectiveness of such
registration.
Stock Options
We intend to file a registration statement under the Securities Act after
the effective date of this offering to register shares to be issued pursuant
to our employee and director benefit plans. As a result, any options or rights
exercised under the 1994 equity incentive plan will also be freely tradable in
the public market. However, shares held by affiliates will still be subject to
the volume limitation, manner of sale, notice and public information
requirements of Rule 144, unless otherwise resalable under Rule 701. As of
January 31, 2000, we had granted options to purchase shares of common stock
that had not been exercised. In addition, as of that date we had reserved
shares for possible future issuance under our Amended and Restated 1994
Incentive Compensation Plan.
57
<PAGE>
UNDERWRITING
- -------------------------------------------------------------------------------
We have entered into an underwriting agreement with the underwriters named
below. Warburg Dillon Read LLC, FleetBoston Robertson Stephens Inc. and
Pacific Growth Equities, Inc. are acting as representatives of the
underwriters.
The underwriting agreement provides for the purchase of a specific number
of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares, but is not responsible for the
commitment of any other underwriter to purchase shares. Subject to the terms
and conditions of the underwriting agreement, each underwriter has severally
agreed to purchase the number of shares of common stock set forth opposite its
name below.
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Warburg Dillon Read LLC.....................................
FleetBoston Robertson Stephens Inc..........................
Pacific Growth Equities, Inc................................
----
Total.....................................................
====
</TABLE>
This is a firm-commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other
than those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to certain securities dealers at that price less a
concession of $ per share. The underwriters may also allow to dealers, and
those dealers may reallow, a concession not in excess of $ per share to
certain other dealers. After the shares are released for sale to the public,
the representatives may change the offering price and other selling terms at
various times.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of additional shares of our
common stock to cover over-allotments. If the underwriters exercise all or
part of this option, they will purchase shares covered by the option at the
public offering price that appears on the cover page of this prospectus, less
the underwriting discount. If this option is exercised in full, the
underwriters will purchase shares from us, at the public offering price
and the total proceeds to us will be $ million. The underwriters have
severally agreed that, to the extent the over-allotment option is exercised,
each of the underwriters will purchase a number of additional shares
proportionate to its initial amount reflected in the above table.
The following table provides information regarding the amount of the
underwriting discounts and commissions to be paid to the underwriters by us:
<TABLE>
<CAPTION>
No Exercise of Over- Full Exercise of Over-
Allotment Option Allotment Option
-------------------- ----------------------
<S> <C> <C>
Per Share........................... $ $
Total............................... $ $
</TABLE>
We estimate that the total expenses of this offering, excluding the
underwriting discounts and commissions, will be approximately $ .
58
<PAGE>
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.
We and our directors, executive officers, and all of the holders of our
common stock and securities convertible into or exercisable or exchangeable
for common stock issued prior to this offering, have agreed pursuant to
certain "lock-up" agreements with the underwriters that we and they will not
offer, sell, contract to sell, pledge, grant any option to sell, or otherwise
dispose of, directly or indirectly, and shares of common stock or securities
convertible into or exercisable or exchangeable for common stock for a period
of 180 days after the date of this prospectus without the prior written
consent of Warburg Dillon Read LLC. Warburg Dillon Read LLC, in its sole
discretion, may release the shares subject to the lock-up agreements in whole
or in part at any time with or without notice. However, Warburg Dillon Read
LLC has no current plan to do so.
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of our common stock for our officers,
directors, employees, clients, friends and related persons who express an
interest in purchasing these shares. The number of shares of our common stock
available for sale to the general public will be reduced to the extent these
persons purchase these reserved shares. The underwriters will offer any shares
not so purchased by these persons to the general public on the same basis as
the other shares in this initial public offering.
Prior to his offering, there has been no public market for our common
stock. Consequently, the offering price for our common stock will be
determined by negotiations between us and the underwriters and will not
necessarily be related to our asset value, net worth or other established
criteria of value. The factors to be considered in these negotiations, in
addition to prevailing market conditions, are expected to include the history
of and prospects for the industry in which we compete, an assessment of our
management, our prospects, our capital structure and certain other factors as
were deemed relevant.
Rules of the Securities and Exchange Commission may limit the ability of
the underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids for or
purchases of the shares for the purpose of pegging, fixing or maintaining
the price of the shares, so long as stabilizing bids do not exceed a
specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is
created in connection with this offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open
market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of these transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as to
the effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or
otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the number of shares offered.
59
<PAGE>
LEGAL MATTERS
- -------------------------------------------------------------------------------
The validity of our common stock offered hereby will be passed upon for us
by Dechert Price & Rhoads, Philadelphia, Pennsylvania. Dechert Price & Rhoads
beneficially owns 44,444 shares of our common stock. Attorneys associated with
Dechert Price & Rhoads beneficially own an aggregate of 17,628 shares of our
common stock.
Certain legal matters in connection with the offering will be passed upon
for the underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
- -------------------------------------------------------------------------------
The financial statements of Adolor Corporation, a development stage
company, as of December 31, 1998 and 1999, and for each of the years in the
three-year period ended December 31, 1999 and for the period from August 9,
1993 (inception) to December 31, 1999, have been included herein in reliance
upon the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
- -------------------------------------------------------------------------------
We have filed with the Commission, Washington, D.C. 20549, a Registration
Statement on Form S-1 under the Securities Act with respect to our common
stock offered hereby. This prospectus does not contain all of the information
set forth in the registration statement and the exhibits and schedules to the
registration statement. For further information with respect to Adolor and our
common stock offered hereby, reference is made to the Registration Statement
and the exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this prospectus concerning the contents of any
contract or any other document are not necessarily complete; reference is made
in each instance to the copy of such contract or any other document filed as
an exhibit to the registration statement. Each such statement is qualified in
all respects by such reference to such exhibit. The registration statement,
including exhibits and schedules thereto, may be inspected without charge at
the Commission's principal office in Washington, D.C., and copies of all or
any part thereof may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048 after payment of fees prescribed by the
Commission. The Commission also maintains a World Wide Web site which provides
online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Financial Statements:
Balance Sheets at December 31, 1998 and 1999............................ F-3
Statements of Operations for the years ended December 31, 1997, 1998 and
1999 and for the period from August 9, 1993 (inception) to December 31,
1999................................................................... F-4
Statements of Stockholders' Deficit for the period from August 9, 1993
(inception) to December 31, 1993 and for the years ended December 31,
1994, 1995, 1996, 1997, 1998 and 1999.................................. F-5
Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999 and for the period from August 9, 1993 (inception) to December 31,
1999................................................................... F-6
Notes to Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
When the transaction referred to in the second paragraph in Note 12 of the
Notes to Financial Statements has been consummated, we will be in a position
to render the following report.
KPMG LLP
Independent Auditors' Report
The Stockholders and Board of Directors
Adolor Corporation:
We have audited the accompanying balance sheets of Adolor Corporation (A
Development Stage Company) as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' deficit and cash flows for each of the
years in the three-year period ended December 31, 1999 and for the period from
August 9, 1993 (inception) to December 31, 1999. 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 Adolor Corporation (A
Development Stage Company) as of December 31, 1998 and 1999, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1999 and for the period from August 9, 1993
(inception) to December 31, 1999, in conformity with generally accepted
accounting principles.
Princeton, New Jersey
January 28, 2000, except as to the third
through fifth paragraphs of
note 12 which are as of
February 4, 2000 and the second
paragraph which is as of
F-2
<PAGE>
BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
Pro forma
December 31,
December 31 December 31 1999 (note
1998 1999 2)
----------- ----------- ------------
Assets (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............. $ 9,972,731 3,472,164 16,003,164
Short-term investments................ 2,073,322 1,791,531 1,791,531
Prepaid expenses and other current as-
sets................................. 122,709 190,893 190,893
----------- ----------- -----------
Total current assets................... 12,168,762 5,454,588 17,985,588
Equipment and leasehold improvements,
net.................................. 571,478 765,504 765,504
Other assets.......................... 32,920 38,298 38,298
----------- ----------- -----------
Total assets........................... $12,773,160 6,258,390 18,789,390
=========== =========== ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Notes payable--current portion........ $ 89,764 65,703 65,703
Accounts payable...................... 924,238 564,742 564,742
Accrued expenses...................... 1,131,242 1,729,119 1,729,119
Deferred licensing fees............... -- 26,316 26,316
----------- ----------- -----------
Total current liabilities.............. 2,145,244 2,385,880 2,385,880
Notes payable, less current portion... 65,703 -- --
Deferred licensing fees............... -- 462,719 462,719
----------- ----------- -----------
Total liabilities...................... 2,210,947 2,848,599 2,848,599
----------- ----------- -----------
Mandatorily redeemable convertible pre-
ferred stock, at redemption value
(aggregate liquidation value of
$39,443,518 at December 31, 1999)
(converts into 12,780,000 common
shares on an unaudited pro forma basis
at December 31, 1999 upon consummation
of the offering contemplated herein):
Series A, $0.01 par value; 6,000,000
shares authorized, issued and
outstanding......................... 1,500,000 1,500,000 --
Series B, $0.01 par value; 23,107,145
shares authorized, 22,869,049 issued
and outstanding..................... 9,605,000 9,605,000 --
Series C, $0.01 par value; 13,814,286
shares authorized, issued and
outstanding......................... 9,670,000 9,670,000 --
Series D, $0.01 par value; 960,000
shares authorized, issued and
outstanding ........................ 1,200,000 1,200,000 --
Series E, $0.01 par value; 11,366,667
shares authorized, 11,333,334 and
11,366,667 shares issued and out-
standing at December 31, 1998 and
1999, respectively.................. 8,500,000 8,525,000 --
Series F, $0.01 par value, 2,625,000
shares authorized, none and
2,500,000 shares issued and out-
standing at December 31, 1998 and
1999, respectively.................. -- 2,500,000 --
----------- ----------- -----------
30,475,000 33,000,000 --
----------- ----------- -----------
Stockholders' deficit:
Common stock, par value $.0001 per
share. 21,338,849 shares authorized;
1,140,242 and 1,172,236 shares issued
and outstanding at December 31, 1998
and 1999, respectively (16,767,591
shares on an unaudited pro forma
basis at December 31, 1999 assuming
exercise of warrants and upon
automatic conversion)................ 114 117 1,677
Additional paid-in capital............ 702,483 1,825,245 47,354,685
Deferred compensation................. (293,157) (961,882) (961,882)
Deficit accumulated during the devel-
opment stage......................... (20,322,227) (30,453,689) (30,453,689)
----------- ----------- -----------
Total stockholders' equity (deficit)... (19,912,787) (29,590,209) 15,940,791
----------- ----------- -----------
Commitments
Total liabilities and stockholders'
deficit............................... $12,773,160 6,258,390 18,789,390
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
STATEMENTS OF OPERATIONS
Years ended December 31, 1998 and 1999, and for the period from August 9, 1993
(inception) to December 31, 1999
<TABLE>
<CAPTION>
Period from
August 9,
1993
Year ended December 31, (inception) to
------------------------------------ December 31,
1997 1998 1999 1999
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Grant and license
revenues................. $ -- 149,983 10,965 160,948
----------- ---------- ----------- -----------
Operating expenses
incurred during the
development stage:
Research and
development............. 3,699,720 7,074,011 7,178,468 23,857,942
General and
administrative.......... 1,584,872 2,276,450 3,367,484 8,277,483
----------- ---------- ----------- -----------
Total operating
expenses............... 5,284,592 9,350,461 10,545,952 32,135,425
----------- ---------- ----------- -----------
Other income (expense):
Interest income.......... 531,487 412,975 424,667 1,708,579
Interest expense......... (45,930) (28,028) (21,142) (187,791)
----------- ---------- ----------- -----------
485,557 384,947 403,525 1,520,788
----------- ---------- ----------- -----------
Net loss allocable to
common stockholders.... $(4,799,035) (8,815,531) (10,131,462) (30,453,689)
=========== ========== =========== ===========
Basic and diluted net loss
per share allocable to
common stockholders (note
2)....................... $ (4.74) (7.99) (8.73)
=========== ========== ===========
Shares used in computing
basic and diluted net
loss per share allocable
to common stockholders
(note 2)................. 1,012,984 1,103,230 1,160,634
=========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
STATEMENT OF STOCKHOLDERS' DEFICIT
For the period from August 9, 1993 (inception) to December 31, 1993
and for the years ended December 31, 1994, 1995, 1996, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Deficit
Common stock accumulated
---------------- Additional during the Total
Number of paid-in Deferred development stockholders'
shares Amount capital compensation stage deficit
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Inception, August 9,
1993................... -- $ -- -- -- -- --
Net income (loss)...... -- -- -- -- -- --
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1993................... -- -- -- -- -- --
Issuance of common
stock to founder...... 111,111 11 12,489 (12,400) -- 100
Issuance of restricted
stock to an officer
and consultant........ 606,012 61 68,151 (66,767) -- 1,445
Amortization of
deferred
compensation.......... -- -- -- 15,182 -- 15,182
Net loss............... -- -- -- -- (243,423) (243,423)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1994................... 717,123 72 80,640 (63,985) (243,423) (226,696)
Issuance of common
stock for technology
license agreements.... 55,556 5 6,245 -- -- 6,250
Value attributed to
issuance of warrants.. -- -- 60,000 -- -- 60,000
Amortization of
deferred
compensation.......... -- -- -- 16,692 -- 16,692
Exercise of common
stock options......... 5,460 1 615 -- -- 616
Net loss............... -- -- -- -- (2,392,480) (2,392,480)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1995................... 778,139 78 147,500 (47,293) (2,635,903) (2,535,618)
Issuance of restricted
stock to director..... 22,222 2 4,198 -- -- 4,200
Deferred compensation
resulting from grant
of options............ -- -- 3,168 (3,168) -- --
Amortization of
deferred
compensation.......... -- -- -- 17,669 -- 17,669
Exercise of common
stock options......... 115,801 12 18,570 -- -- 18,582
Net loss............... -- -- -- -- (4,071,758) (4,071,758)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1996................... 916,162 92 173,436 (32,792) (6,707,661) (6,566,925)
Deferred compensation
resulting from grant
of options............ -- -- 270,720 (270,720) -- --
Amortization of
deferred
compensation.......... -- -- -- 82,249 -- 82,249
Exercise of common
stock options......... 113,066 11 19,427 -- -- 19,438
Net loss............... -- -- -- -- (4,799,035) (4,799,035)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1997................... 1,029,228 103 463,583 (221,263) (11,506,696) (11,264,273)
Deferred compensation
resulting from grant
of options............ -- -- 217,121 (217,121) -- --
Amortization of
deferred
compensation.......... -- -- -- 145,227 -- 145,227
Exercise of common
stock options......... 111,014 11 21,779 -- -- 21,790
Net loss............... -- -- -- -- (8,815,531) (8,815,531)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1998................... 1,140,242 114 702,483 (293,157) (20,322,227) (19,912,787)
Issuance of common
stock for services.... 3,967 -- 13,339 -- -- 13,339
Deferred compensation
resulting from grant
of options............ -- -- 1,101,433 (1,101,433) -- --
Amortization of
deferred
compensation.......... -- -- -- 432,708 -- 432,708
Exercise of common
stock options......... 28,027 3 7,990 -- -- 7,993
Net loss............... -- -- -- -- (10,131,462) (10,131,462)
--------- ---- --------- ---------- ----------- -----------
Balance, December 31,
1999................... 1,172,236 $117 1,825,245 (961,882) (30,453,689) (29,590,209)
========= ==== ========= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999, and for the
period from August 9, 1993 (inception) to December 31, 1999
<TABLE>
<CAPTION>
Period from
August 9 1993
Year ended December 31, (inception) to
------------------------------------ December 31,
1997 1998 1999 1999
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Net cash flows from
operating activities:
Net loss.................. $(4,799,035) (8,815,531) (10,131,462) (30,453,689)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Non-cash compensation
expense................. 82,249 145,227 446,047 723,066
Non-cash warrant value... -- -- -- 60,000
Depreciation and
amortization expense.... 143,898 202,346 254,283 701,775
Issuance of common stock
for technology license
agreements.............. -- -- -- 6,250
Changes in assets and
liabilities:
Prepaid expenses and
other current assets... 40,934 60,590 (68,184) (190,893)
Other assets............ (4,562) -- (5,378) (38,298)
Accounts payable........ 225,541 378,608 (359,496) 564,742
Accrued expenses........ 120,494 579,302 597,877 1,729,119
Deferred licensing
fees................... -- -- 489,035 489,035
----------- ---------- ----------- -----------
Net cash used in
operating activities.... (4,190,481) (7,449,458) (8,777,278) (26,408,893)
----------- ---------- ----------- -----------
Net cash flows from
investing activities:
Purchases of equipment
and leasehold
improvements............ (312,417) (191,357) (448,309) (1,467,279)
Purchases of short-term
investments............. (10,338,476) (3,045,281) (2,221,062) (22,535,287)
Maturities of short-term
investments............. 8,887,795 5,892,160 2,502,853 20,743,756
----------- ---------- ----------- -----------
Net cash provided by
(used in) investing
activities............. (1,763,098) 2,655,522 (166,518) (3,258,810)
----------- ---------- ----------- -----------
Net cash flows from
financing activities:
Proceeds from issuance of
mandatorily redeemable
convertible preferred
stock................... 9,670,000 9,100,000 2,525,000 31,400,000
Proceeds from Series D
mandatorily redeemable
convertible preferred
stock subscription...... 600,000 -- -- 600,000
Proceeds from issuance of
restricted common stock
and exercise of common
stock options........... 19,438 21,790 7,993 74,164
Proceeds from notes
payable--related
parties................. -- -- -- 1,000,000
Proceeds from notes
payable................. -- -- -- 444,985
Payment of notes
payable................. (135,062) (144,464) (89,764) (379,282)
Obligation under capital
lease................... (13,017) -- -- --
----------- ---------- ----------- -----------
Net cash provided by
financing activities... 10,141,359 8,977,326 2,443,229 33,139,867
----------- ---------- ----------- -----------
Net increase (decrease) in
cash and cash
equivalents.............. 4,187,780 4,183,390 (6,500,567) 3,472,164
Cash and cash equivalents
at beginning of period... 1,601,561 5,789,341 9,972,731 --
----------- ---------- ----------- -----------
Cash and cash equivalents
at end of period......... $ 5,789,341 9,972,731 3,472,164 3,472,164
=========== ========== =========== ===========
Supplemental disclosure of
cash flow information:
Cash paid for interest... $ 45,930 28,028 21,142 97,916
=========== ========== =========== ===========
Supplemental disclosure of
noncash financing
activities:
Deferred compensation
from issuance of common
stock, restricted common
stock and common stock
options................. $ 270,720 217,121 1,101,433 1,671,609
Issuance of common stock
for technology license
agreements or for
services................ -- -- 13,339 19,589
Conversion of stock
subscription to Series D
mandatorily redeemable
preferred stock......... -- 600,000 -- 600,000
Conversion of bridge
financing, including
accrued interest, to
Series B mandatorily
redeemable preferred
stock................... -- -- -- 1,019,787
=========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. ORGANIZATION AND BUSINESS ACTIVITIES
Adolor Corporation (the Company) was incorporated in the State of Delaware
on August 9, 1993 (inception). The Company is a development stage
pharmaceutical company engaged in the development of peripheral and central
analgesics based on opiate receptors and opiate-like receptors. The Company
commenced operations on November 7, 1994. The Company is currently devoting
substantially all of its efforts toward conducting pharmaceutical discovery
and development, licensing technology, obtaining regulatory approval for
products under development, negotiating strategic corporate relationships,
recruiting personnel and raising capital.
The accompanying financial statements include the results of operations of
the Company for the period from August 9, 1993 (inception) to December 31,
1999.
The Company has licensed its core technology from certain universities and
research institutions in exchange for present and future cash payments and, in
certain instances, common stock. The cost of obtaining such technology has
been charged as incurred, to research and development expense in the
accompanying statements of operations.
The Company has not generated any product sales revenues and has not yet
achieved profitable operations. There is no assurance that profitable
operations, if ever achieved, could be sustained on a continuing basis. In
addition, development activities and clinical and pre-clinical testing and
commercialization of the Company's proprietary technology will require
significant additional financing. The Company's deficit accumulated during the
development stage through December 31, 1999, aggregated $30,453,689, and the
Company's management expects to incur substantial and increasing losses in
future periods. Further, the Company's future operations are dependent on the
success of the Company's research, development and licensing efforts and,
ultimately, upon regulatory approval and market acceptance of the Company's
proposed future products.
The Company plans to finance its future operations with a combination of
license payments and payments from strategic research and development and
marketing arrangements, private placements of equity, the initial public
offering contemplated herein (Offering), follow-on public offerings and
revenues from future product sales, if any. The Company has not generated
positive cash flows from operations, and there are no assurances that the
Company will be successful in obtaining an adequate level of financing for the
long-term development and commercialization of its planned products. As
described in note 12, in January 2000, the Company received approximately
$12,306,000 in net proceeds from the sale of its Series G mandatorily
redeemable convertible preferred stock (Series G). The Company believes that
its current financial resources and sources of liquidity are adequate to fund
operations for the next year based on a level of research and development and
administrative activities necessary to achieve its short-term objectives.
2. BASIS OF ACCOUNTING AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are held in United States financial institutions or
obligations of the United States Treasury. The carrying amount of cash and
cash equivalents approximates its fair value due to its short-term nature.
F-7
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
Short-Term Investments
Short-term investments consist primarily of debt securities backed by the
U.S. government with original maturities greater than three months but less
than one year. The Company's entire short-term investment portfolio is
currently classified as available for sale and is recorded at the fair value
as determined by quoted market values, which approximates cost.
Concentration of Credit Risk
The Company invests its excess cash and short-term investments in
accordance with a policy objective that seeks to ensure both liquidity and
safety of principal. The policy limits investments to certain types of
instruments issued by the U.S. government and institutions with strong
investment grade credit ratings and places restrictions on their terms and
concentrations by type and issuer.
Equipment and Leasehold Improvements
Equipment, consisting of computer, office and laboratory equipment,
furniture and fixtures and leasehold improvements, are recorded at cost.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the assets or lease term, whichever is shorter,
generally three to seven years. Expenditures for repairs and maintenance are
expensed as incurred.
Revenue Recognition
Contract revenues are earned and recognized according to the provisions of
each agreement. Contract milestone payments are recognized as revenues upon
the completion of the milestone event or requirement and when the Company's
significant performance obligations have been satisfactorily completed.
Payments, if any, received in advance of performance under a contract are
deferred and recognized as revenue when earned. Up-front licensing fees are
deferred and amortized over the estimated performance period.
Research and Development
Research and product development costs are expensed as incurred. Costs
incurred under research agreements with third parties are expensed as incurred
and in accordance with the specific contractual performance terms of such
research agreements.
Accounting for Income Taxes
Deferred income tax assets and liabilities are determined based on
differences between the financial statement reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The
measurement of deferred income tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be
realized. The effect on deferred income tax assets and liabilities of a change
in tax rates is recognized in the period that such tax rate changes are
enacted.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
Stock-Based Compensation
The Company accounts for share option issuances to employees and members of
the Board of Directors in accordance with the provisions of APB No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. As
such, deferred compensation is recorded to the extent that the current
estimated fair value of the underlying stock exceeds the exercise price of the
options on the date of grant. Such deferred compensation is amortized over the
respective vesting periods of such option grants. The Company has adopted the
disclosure requirements of SFAS No. 123 "Accounting for Stock-Based
Compensation" which allows entities to continue to apply the provisions of APB
No. 25 for financial reporting purposes and provide pro forma net loss and net
loss per share footnote disclosures for employee stock option grants as if the
minimum value method defined in SFAS No. 123 has been applied. Transactions
with nonemployees, in which goods or services are the consideration received
for the issuance of equity instruments, are accounted for on a fair- value
basis in accordance with SFAS No. 123.
Segment Information
The Company is managed and operated as one business. The entire business is
managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or separate
business entities with respect to any of its product candidates. Accordingly,
the Company does not prepare discrete financial information with respect to
separate product areas or by location and does not have separately reportable
segments as defined by SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
Net Loss per Share
Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share", by dividing the net loss allocable to common stockholders by the
weighted average number of shares of common stock outstanding. As of December
31, 1999, the Company has certain options, warrants and mandatorily redeemable
convertible preferred stock (see notes 6 and 7), which have not been used in
the calculation of diluted net loss per share because to do so would be anti-
dilutive. As such, the numerator and the denominator used in computing both
basic and diluted net loss per share allocable to common stockholders are
equal.
Pro Forma Net Loss per Share (Unaudited)
The following pro forma basic and diluted net loss per share allocable to
common stockholders and shares used in computing pro forma basic and diluted
net loss per share allocable to common stockholders have been presented
reflecting the assumed exercise of warrants for Series B and F mandatorily
redeemable convertible preferred stock (Series B and F) which will expire upon
the closing of the Offering and the automatic conversion into shares of common
stock of the mandatorily redeemable convertible preferred stock upon
completion of the Offering (see notes 6 and 12), using the if converted method
from their respective dates of issuance:
<TABLE>
<CAPTION>
Year ended
December 31,
1999
------------
<S> <C>
Pro forma basic and diluted net loss per share allocable to
common stockholders............................................ $ (.74)
Shares used in computing pro forma basic and diluted net loss
per share allocable to common stockholders..................... 13,621,994
</TABLE>
F-9
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
Pro Forma Balance Sheet (Unaudited)
Upon the closing of the Offering, all of the outstanding shares of
mandatorily redeemable convertible preferred stock, including 12,306,000
shares of Series G issued in January 2000, automatically convert into
15,514,667 shares of common stock (see notes 6 and 12). If warrants for Series
B and F are exercised, at an exercise price totalling $225,000, those shares
would automatically convert into 80,688 shares of common stock. The December
31, 1999 unaudited pro forma balance sheet has been prepared assuming the
exercise of warrants for Series B and F which will expire upon the closing of
the Offering, the sale of the Series G for approximately $12,306,000 in
January 2000 and the conversion of the mandatorily redeemable convertible
preferred stock, including the Series B and F assumed to be issued on exercise
of the warrants and Series G, into common stock as of December 31, 1999.
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
--------- ---------
<S> <C> <C>
Laboratory, computer and office equipment................... $ 821,175 1,244,665
Furniture, fixtures and leasehold improvements.............. 197,795 222,614
--------- ---------
1,018,970 1,467,279
Less accumulated depreciation and amortization.............. 447,492 701,775
--------- ---------
$ 571,478 765,504
========= =========
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1998 1999
---------- ---------
<S> <C> <C>
Consulting and contracted research......................... $ 875,814 1,443,774
Professional fees.......................................... 35,615 270,727
Payroll and related costs.................................. 56,020 31,475
Other...................................................... 163,793 23,351
---------- ---------
$1,131,242 1,769,327
========== =========
</TABLE>
5. NOTES PAYABLE
In 1995, the Company entered into an "emerging company" funding agreement
with the Ben Franklin Technology Center of Southeastern Pennsylvania (the
Center) to provide the Company with up to $50,000 in funding for research and
development through November 30, 1996. At December 31, 1997 outstanding
borrowings under the facility aggregated $45,000; this balance was repaid in
1998.
In October 1996, the Company executed a secured equipment loan agreement to
finance the purchase of computers, software, laboratory and office equipment,
and furniture. At December 31, 1998 and 1999, the Company had loan draws
totaling $155,467 and $65,703 outstanding under this agreement, respectively.
The loans are secured by the equipment financed at interest rates ranging from
13.55% to 19.13%. The remaining balance of $65,703 at December 31, 1999 is due
in 2000.
F-10
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company issued 6,000,000 shares of its Series A mandatorily redeemable
convertible preferred stock (Series A) in November 1994 at a price of $.25 per
share. Total proceeds to the Company were $1,500,000.
In October 1995, the Company issued convertible promissory notes in the
principal amount of $1,000,000 to the Series A stockholders (Bridge Note).
These notes accrued interest at 5.75% per annum. Principal plus accrued
interest on the Bridge Note totaling $1,019,787 were converted into 2,428,063
shares of Series B at a price of $.42 per share in March 1996.
In conjunction with the Bridge Note, the Company issued warrants to
purchase 238,096 shares of Series B at the fair value of the Series B at the
date of issuance ($.42 per share). These warrants are exercisable until the
earlier of the closing of an initial public offering or October 2000. The
deemed fair value for financial reporting purposes of such warrants at their
issuance date aggregated $60,000, which amount was charged to interest expense
in 1995.
In March 1996, the Company issued 20,440,986 shares of its Series B at a
price of $.42 per share. Series B purchasers included the holders of the
Series A, certain officers of the Company and other investors.
In May 1997, the Company sold 13,814,286 shares of its Series C mandatorily
redeemable preferred stock (Series C) at a price of $.70 per share. The total
proceeds received by the Company was $9,670,000.
In November 1997, the Company entered into a certain license agreement (see
note 8) and a stock purchase agreement with Kwang Dong Pharmaceutical Co.
(Kwang Dong). Pursuant to the stock purchase agreement, the Company agreed to
issue to Kwang Dong 960,000 shares of the Company's Series D mandatorily
redeemable convertible preferred stock (Series D) for $1,200,000. As of
December 31, 1997, the Company had received $600,000. In February 1998, the
Company received the additional $600,000 from Kwang Dong and issued the
960,000 shares of Series D.
In December 1998, the Company sold 11,333,334 shares of its Series E
mandatorily redeemable convertible preferred stock (Series E) at a price of
$.75 per share. The total proceeds received by the Company was $8,500,000. An
additional 33,333 shares of Series E was sold in January 1999 for $25,000.
In July 1999, the Company entered into a license agreement (see note 8) and
a stock purchase agreement with an affiliate of SmithKline Beecham (SB).
Pursuant to the stock purchase agreement, the Company sold 2,500,000 shares of
its Series F at a price of $1.00 per share to SB. The total proceeds received
by the Company was $2,500,000. In connection with Series F, the Company
granted a warrant to purchase 125,000 shares of Series F at $1.00 per share at
any time prior to the earlier of the closing of an initial public offering or
August 2004. Upon the achievement of a defined regulatory event, SB will
purchase an additional $500,000 of either common stock or preferred stock at a
price per share as described in the agreement.
The holders of Series A, B, C, D, E and F vote together with all other
classes and series of stock of the Company as a single class on all actions to
be taken by the stockholders of the Company. Each share of preferred stock
entitles the holder to an equal number of votes as the number of common shares
into which each share of preferred stock is convertible.
F-11
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
The holders of Series A, B, C, D, E and F are entitled to a liquidation
preference over all other types of capital stock, of $.25 per share, $.42 per
share, $.70 per share, $1.25 per share, $.75 per share, and $1.00 per share,
respectively, plus for the Series A, B, C, E and F, an amount equal to all
cumulative accrued and unpaid dividends thereon, whether or not declared, and
in the case of the Series A, B, C, D, E and F, plus an amount equal to all
dividends declared but unpaid. Such cumulative dividends totaled $6,443,518
for the Series A, B, C, E and F at December 31, 1999. Each share of Series A,
B, C, D, E and F is convertible into common stock at a conversion ratio of
4.5-for-1 (subsequent to the reverse split--see note 12), subject to certain
anti-dilutive adjustments, as defined. Further, such conversion becomes
mandatory effective upon to the closing of an initial public offering for the
sale of the Company's common stock with aggregate gross proceeds of at least
$7,000,000 for the Series D and with aggregate gross proceeds of at least
$25,000,000 and a public offering price per share of at least $1.50 for the
Series A, B, C, E and F.
Commencing March 1, 2001, the holders of 60% of the Series A, B, C and E
then outstanding, taken as a whole, commencing March 1, 2005, the holders of
60% of the Series D then outstanding and commencing on August 1, 2002, the
holders of 60% of the Series F then outstanding, may require the Company to
redeem all or any part of the then outstanding Series A, B, C, D, E and F of
these respective holders at a redemption price equal to $.25 per share, $.42
per share, $.70 per share, $1.25 per share, $.75 per share and $1.00 per
share, respectively, plus an amount equal to all declared but unpaid
dividends.
The holders of Series A, B, C, E and F are entitled to cumulative dividends
at an annual rate of 8% of the original purchase price per share on the date
of issuance, if and when declared. The Series D are entitled to cumulative
dividends at the same rate and at the same time as dividends are declared and
paid on the common stock. No dividends or other distributions can be declared
or paid on other types of capital stock until all dividends on the Series A,
B, C, E and F have been paid. As of December 31, 1999 no such dividends have
been declared.
7. COMMON STOCK AND COMMON STOCK OPTIONS
In November 1994 (commencement of operations), the Company issued 111,111
shares of common stock to an investor at a price of $.001 per share. The
difference between the deemed fair value for financial reporting purposes of
such stock and the price paid at the issuance date aggregated $12,400, which
amount was charged to operations in 1994.
In November 1994, the Company issued 503,644 shares of restricted common
stock to an executive officer of the Company at a price of $.003 per share and
102,368 shares of restricted common stock to a scientific consultant at a
price of $.003 per share. These shares vested ratably over 48 months. The
difference between the deemed fair value for financial reporting purposes of
such stock and the per share price paid at the issuance date aggregated
$66,767 which amount was recorded as deferred compensation and was amortized
to operations over the vesting period. Compensation expense related to these
shares aggregated $16,692 in 1997, $13,910 in 1998 and none in 1999. In
addition, in May 1996, the Company issued 22,222 shares of restricted common
stock to a director for cash at a price of $.189 per share (the deemed fair
value at date of grant as determined by the Board of Directors). These shares
vest ratably over 48 months, and are subject to the Company's right of
repurchase of unvested shares in certain circumstances.
The Company's 1994 Equity Compensation Plan, as amended, (the 1994 Plan)
allows the granting of incentive and nonqualified stock options to employees,
directors, consultants and contractors to purchase an aggregate of 1,722,222
shares of the Company's common stock. The stock options are to be granted with
exercise prices at not less than fair value of the Company's common stock at
the time of grant, as determined by the
F-12
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
Board of Directors. The options are exercisable generally for a period of 6-7
years from the date of grant and vest over terms ranging from immediately to 4
years.
A summary of activity under the 1994 Plan from January 1, 1997 to December
31, 1999 is as follows:
<TABLE>
<CAPTION>
Exercise
Number price
of options per share
---------- ----------
<S> <C> <C>
Balance, January 1, 1997................................ 607,832 $.113-.189
Granted................................................ 268,975 .189-.45
Exercised.............................................. (113,065) .113-.315
Cancelled.............................................. (4,026) .113-.189
---------
Balance, December 31, 1997.............................. 759,716 .113-.45
Granted................................................ 232,929 .315-.315
Exercised.............................................. (111,014) .113-.315
Cancelled.............................................. (72,238) .113-.315
---------
Balance, December 31, 1998.............................. 809,393 .113-.45
Granted................................................ 555,271 .338-1.35
Exercised.............................................. (28,027) .113-.338
Cancelled.............................................. (55,847) .189-.338
---------
Balance, December 31, 1999.............................. 1,280,790 .113-1.35
=========
</TABLE>
At December 31, 1999, the Plan had the following options outstanding and
exercisable by price range, as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- ------------------------
Weighted Weighted Weighted
Range of average average average
exercise Number of remaining exercise price Number exercise price
prices shares contractual life (per share) of shares per share
-------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$0.113-
.189 404,957 2.6 years $0.14 404,557 $0.14
$ .315-
.338 789,329 5.7 years 0.32 297,197 0.32
$ .45-
.585 44,821 6.5 years 0.58 34,929 0.58
$ .675-
1.35 31,683 6.5 years 1.21 5,388 1.33
--------- -------
1,280,790 $0.30 742,071 $0.24
========= =======
</TABLE>
The Company applies APB No. 25 in accounting for its stock option plan. In
1997, 1998 and 1999, certain employees of the Company were granted options to
acquire 262,976, 223,596 and 500,641 shares of the Company's common stock,
respectively. The differences between the deemed fair value for financial
reporting purposes and the respective exercise prices at the grant dates has
been recorded as deferred compensation ($263,694, $205,651 and $771,524 for
1997, 1998 and 1999, respectively) which is being amortized to expense over
the vesting period of the options.
Had the Company determined compensation cost for options granted during
1997, 1998 and 1999 based on the minimum value method at the grant date under
SFAS No. 123, the Company's net loss and net loss per share would have been
increased to the pro forma amounts indicated below:
F-13
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Net loss: As reported................... $(4,799,035) (8,815,531) (10,131,462)
Pro forma under SFAS No. 123............ $(4,806,114) (8,823,446) (10,145,518)
Basic and diluted net loss per share
allocable to common stockholders: As
reported............................... $ (4.74) (7.99) (8.73)
Pro forma under SFAS No. 123............ $ (4.75) (8.00) (8.74)
</TABLE>
Pro forma net loss reflects only options granted since 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net loss amounts presented above because
compensation expense is recorded under SFAS 123 over the respective vesting
period of such options, and options granted by the Company prior to January 1,
1995 are not reflected in the pro forma net loss figures above.
In April 1995 and December 1995, the Company issued 19,444 shares and
36,111 shares of common stock to a research institution and a researcher,
respectively, as compensation for certain technology license agreements.
Research and development expense of $6,250 was recognized in 1995 related to
the issuance of these shares. In 1997, 1998 and 1999, the Company issued
6,000, 9,333 and 54,630 stock options, respectively, to non-employees. Such
options vest over future service periods. The Company recorded deferred
compensation of $7,026, $11,470 and $329,909 in 1997, 1998 and 1999,
respectively, based on the fair value as determined using a Black-Scholes
pricing model. Such deferred compensation is being amortized to expense over
the vesting period. The amount of amortization for the 1998 and 1999 grants is
subject to change each reporting period based upon changes in the deemed fair
value of the Company's common stock, estimated volatility and the risk free
interest rate until the non-employee completes his or her performance under
the option agreement.
All options were granted with exercise prices less than the deemed fair
value for financial reporting purposes of the Company's common stock. The per
share weighted-average minimum value of the stock options granted to employees
during 1997, 1998 and 1999 was $1.04, $1.30 and $1.70 per share, respectively,
on the date of grant. The per share weighted-average fair value of stock
options granted to non-employees during 1997, 1998 and 1999 was $1.13, $1.23
and $6.10 per share, respectively, on the date of grant. Such values were
determined using the minimum value method for employees and a Black Scholes
option-pricing model for non-employees with the following weighted average
assumptions: expected dividend yield 0%; risk free interest rate of 6.10% for
1997, 4.465% for 1998 and 5.49% for 1999; volatility of 0% for employees and
60% for non-employees; an expected option life of 4 years for employees and 10
years for non-employees.
8. LICENSE AND RESEARCH AGREEMENTS
On June 22, 1995, the Company and the University of California at San Diego
(UCSD) entered into an exclusive, worldwide license for certain technology
rights covered under UCSD patents. The Company paid a $10,000 license fee, and
committed to a $10,000 annual license maintenance fee. The Company also agreed
to bear UCSD's prosecution costs for patents covering the licensed technology.
Payments of $50,000 and $150,000 are payable upon commencement of Phase III
clinical trials and NDA filing, respectively, and the agreement provides for
royalties at various rates on sales proceeds of products resulting from the
licensed technology, if any.
In November 1997, the Company entered into a license agreement with Kwang
Dong which granted them the rights in Korea to develop and market one of the
Company's compounds for certain indications. Under the terms of the agreement,
the Company will receive payments upon the achievement of defined clinical and
regulatory milestones of up to an aggregate of $800,000, and royalties on any
future sales proceeds in Korea, if any, resulting from the licensed
technology. The Company will supply formulated bulk drug, including certain
F-14
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
free amounts during the first year of sales, and Kwang Dong will be
responsible for clinical development and regulatory approvals in Korea. Kwang
Dong also made an equity investment in the Company (see note 6).
On June 10, 1998, the Company entered into an exclusive, world-wide license
agreement with Roberts Laboratories Inc. (Roberts) for certain technology.
Upon signing the agreement the Company made a $300,000 nonrefundable payment
to Roberts which was recorded as research and development expense, and will be
required to make payments totalling up to $2,200,000 upon the occurrence of
future events. In addition, royalties are payable from the sale proceeds of
products resulting from the licensed technology, if any. In 1999, the Company
paid $300,000 to Roberts to exercise certain licensing rights as defined in
the agreement, which was recorded as research and development expense.
On July 26, 1999, the Company entered into a license agreement with SB
granting SB an exclusive license to certain of the Company's compounds for
certain indications in most of the world. SB may develop, at their own cost,
manufacture, market and sell any resulting products. Under the terms of the
agreement, the Company will receive milestone payments upon the achievement of
defined clinical and regulatory milestones, and royalties on any future sales
proceeds, if any, resulting from the licensed technology. The Company must
maintain the underlying patents and provide certain other information to SB.
Upon signing the agreement, the Company received a licensing fee of $500,000.
This licensing fee has been deferred and is being recognized over the
remaining life of the patents which is nineteen years. SB also made an equity
investment in the Company (see note 6).
The Company has entered into various licensing, research and other
agreements. Under these agreements, the Company is working in collaboration
with various other parties. Should any discoveries be made under such
arrangements, the Company would be required to negotiate the licensing of the
technology for the development of respective discoveries, and possible
royalties on future product sales, if any. Under these agreements, the Company
would be obligated to make payments aggregating up to approximately $3,900,000
upon the achievement of certain milestones and to make future royalty payments
on sales proceeds of products, if any, a portion of which could be offset by
previously made milestone payments.
9. INCOME TAXES
No Federal or state taxes are payable as of December 31, 1998 and 1999. As
of December 31, 1999, the Company has approximately $11,200,000 of Federal and
$8,300,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss carryforwards
will begin expiring in 2009 and 2005, respectively, if not utilized. In
addition, the utilization of the state net operating loss carryforwards is
subject to a $2 million annual limitation. At December 31, 1999, the Company
also has approximately $403,000 of Federal and $130,000 of state research and
development tax credit carryforwards, which begin expiring in 2011, and are
available to reduce Federal and state income taxes.
The Tax Reform Act of 1986 (the Act) provides for a limitation on the
annual use of net operating loss and research and development tax credit
carryforwards (following certain ownership changes, as defined by the Act)
that could significantly limit the Company's ability to utilize these
carryforwards. The Company may have experienced various ownership changes, as
defined by the Act, as a result of past financings. Accordingly, the Company's
ability to utilize the aforementioned carryforwards may be limited.
Additionally, because U.S. tax laws limit the time during which these
carryforwards may be applied against future taxes, the Company may not be able
to take full advantage of these attributes for Federal income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
are shown below. At December 31, 1999, a valuation allowance of $12,755,000
has been recognized to fully offset the deferred tax assets as
F-15
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
realization of such assets is uncertain. The change in the valuation allowance
in 1998 and 1999 were increases of $4,337,065 and $3,394,401, respectively,
related primarily to additional net operating losses and capitalized research
and development costs incurred by the Company.
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards..................... $ 3,570,672 4,368,000
Capitalized research and development costs........... 5,320,051 7,329,000
Tax credit carryforwards............................. 391,900 533,000
Accrued expenses and other........................... 139,171 586,000
----------- -----------
Total deferred tax assets........................... 9,421,794 12,816,000
Less valuation allowance............................. (9,360,599) (12,755,000)
----------- -----------
Net deferred tax assets............................. 61,195 61,000
Deferred tax liability................................ (61,195) (61,000)
----------- -----------
Net deferred tax.................................... $ -- --
=========== ===========
</TABLE>
10. COMMITMENTS
Future minimum lease payments under non-cancellable operating leases for
office and laboratory space are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
- ------------------------
<S> <C>
2000.................................................................. $224,290
2001.................................................................. 250,964
--------
$475,254
========
</TABLE>
Rent expense was $160,232, $237,351 and $258,805 for 1997, 1998 and 1999,
respectively.
The Company has an agreement with an officer to provide for certain
payments upon certain forms of termination of employment.
11. 401(k) PROFIT SHARING PLAN
In 1995, the Company adopted a 401(k) Profit Sharing Plan (the 401(k) Plan)
available to all employees meeting certain eligibility criteria. The 401(k)
Plan permits participants to contribute up to 15% of their salary, not to
exceed the limits established by the Internal Revenue Code. All contributions
made by participants vest immediately into the participant's account. The
Company is not required to make and did not make any contributions to the
401(k) Plan in 1997, 1998 or 1999.
12. SUBSEQUENT EVENTS
Sale of Preferred Stock and Increase in Authorized Shares
In January 2000, the Company authorized and sold 12,306,000 shares of its
Series G mandatorily redeemable convertible preferred stock at a price of
$1.00 per share. The total net proceeds received by the Company was
approximately $12,306,000. The issuance of these securities will result in a
significant beneficial conversion feature which will increase net loss per
share in the first quarter of 2000. The Series G has the same
F-16
<PAGE>
Adolor Corporation
NOTES TO FINANCIAL STATEMENTS (Continued)
rights and privileges as the Series E but with the redemption date being on or
after March 1, 2003. The Company also increased the number of authorized
common shares to 21,338,849 and the number of shares authorized to be granted
under the 1994 Equity Compensation Plan to 3,277,778. The Company also granted
592,164 stock options at exercise prices of $2.03 for which a substantial
compensation charge will be recorded over the respective vesting periods of
the options.
Reverse Stock Split
On February 4, 2000, the Board of Directors approved a reverse stock split
of its common stock on a 1-for-4.5 basis to be effective immediately prior to
the effectiveness of the Company's registration statement in connection with
this initial public offering. All common share, options, and per share amounts
in the accompanying financial statements have been retroactively adjusted to
reflect the reverse stock split for all periods presented.
Initial Public Offering
On February 4, 2000, the Board of Directors authorized the filing of a
registration statement for the Offering with the SEC for the sale of shares of
common stock. If the Offering is consummated under the terms presently
anticipated, all shares of Series A, B, C, D, E, F and G outstanding as of the
closing date of the Offering will convert into shares of common stock on a
4.5-for-one basis, as adjusted for the reverse split of the common stock, and
no dividends will be payable on any of the mandatorily redeemable convertible
preferred stock.
Authorized Shares
On February 4, 2000, the Company approved a Restated Certificate of
Incorporation which is to be filed immediately prior to the closing of this
offering which will increase the number of authorized shares of common stock
to 99,000,000 and authorize 1,000,000 shares of undesignated preferred stock.
Equity Compensation Plan
On February 4, 2000, the Board of Directors approved an Amended and
Restated 1994 Equity Compensation Plan with terms similar to those described
in note 7.
F-17
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy shares of Adolor Corporation common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus
is accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or of any sale of the Adolor common stock.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 6
Forward Looking Information and Market Data............................... 17
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Dilution.................................................................. 18
Capitalization............................................................ 19
Selected Financial Data................................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 25
Management................................................................ 42
Certain Transactions...................................................... 50
Principal Stockholders.................................................... 51
Description of Capital Stock.............................................. 53
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 60
Experts................................................................... 60
Where You Can Find More Information....................................... 60
Index to Financial Statements............................................. F-1
</TABLE>
Through and including , 2000 (the 25th day after commencement of this
offering), all dealers effecting transactions in the common stock offered by
this prospectus, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
PRELIMINARY PROSPECTUS
6,000,000 Shares
Adolor Corporation
[LOGO]
Common Stock
Warburg Dillon Read LLC
Robertson Stephens
Pacific Growth Equities, Inc.
<PAGE>
PART II
Information not required in prospectus
- -------------------------------------------------------------------------------
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by Adolor Corporation in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
Amount
-------
<S> <C>
Securities and Exchange Commission Registration Fee.................... $25,502
NASD Filing Fee........................................................ 10,160
Nasdaq National Market Listing Fee..................................... 95,000
Accounting Fees and Expenses........................................... *
Blue Sky Fees and Expenses............................................. *
Legal Fees and Expenses................................................ *
Transfer Agent and Registrar Fees and Expenses......................... *
Printing and Engraving Expenses........................................ *
Director and Officer Liability Insurance............................... *
Miscellaneous Fees and Expenses........................................ *
-------
Total................................................................ $ *
=======
</TABLE>
- ---------------------
*To be filed by amendment.
All amounts are estimated except for the SEC fee, the Nasdaq National Market
fee and the NASD fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate Law of the State of Delaware,
Adolor Corporation has broad powers to indemnify its directors and officers
against liabilities they may incur in such capacities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). Adolor
Corporation's bylaws also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.
Adolor Corporation's certificate of incorporation provides that the
liability of its directors for monetary damages shall be eliminated to the
fullest extent permissible under Delaware law. Pursuant to Delaware law, this
includes elimination of liability for monetary damages for breach of the
directors' fiduciary duty of care to Adolor Corporation and its stockholders.
These provisions do not eliminate the directors' duty of care and, in
appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to Adolor Corporation, for acts or omissions
not in good faith or involving intentional misconduct, for knowing violations
of law, for any transaction from which the director derived an improper
personal benefit, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
also does not affect a director's responsibilities under any other laws, such
as the federal securities laws or state or federal environmental laws.
Adolor Corporation has obtained a policy of directors' and officers'
liability insurance that insures its directors and officers against the cost
of defense, settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of Adolor
Corporation and its officers and directors for certain liabilities arising
under the Securities Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the preceding three years, the Registrant has issued the following
securities that were not registered under the Act:
In May 1997, the Registrant sold an aggregate of 13,814,286 shares of its
series C mandatorily redeemable convertible preferred stock to investors at a
purchase price per share of $.70 for a total of $9,670,000. The shares of
series C mandatorily redeemable convertible preferred stock are convertible
into 3,069,841 shares of common stock.
On November 5, 1997, the Registrant sold 960,000 shares of its series D
mandatorily redeemable convertible preferred stock to Kwang Dong
Pharmaceuticals Company at a price per share of $1.25 for a total of
$1,200,000. The shares of series D mandatorily redeemable convertible
preferred stock are convertible into 213,333 shares of common stock.
In December 1998 and January 1999, the Registrant sold 11,366,667 shares of
its series E mandatorily redeemable convertible preferred stock to investors
at a purchase price per share of $.75 for a total of $8,525,000. The shares of
series E mandatorily redeemable convertible preferred stock are convertible
into 2,525,926 shares of common stock.
On July 26, 1999 the Registrant sold 2,500,000 shares of its series F
mandatorily redeemable convertible preferred stock and issued a warrant to
purchase 125,000 shares of series F mandatorily redeemable convertible
preferred stock to S.R. One, Limited at a purchase price per share of $1.00
for a total of $2,500,000. The shares of series F mandatorily redeemable
convertible preferred stock and the shares underlying the warrant are
convertible into 555,556 shares of common stock.
In January 2000, the Registrant sold 12,306,000 shares of its series G
mandatorily redeemable convertible preferred stock to investors at a purchase
price per share of $1.00 for a total of $12,306,000. The shares of series G
mandatorily redeemable convertible preferred stock are convertible into
2,734,667 shares of common stock.
The sale and issuance of securities in the transactions described above
were exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act or Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering, where the
purchasers were sophisticated investors who represented their intention to
acquire securities for investment only and not with a view to distribution and
received or had access to adequate information about the Registrant.
Appropriate restrictive legends were affixed to the stock certificates
issued in the above transactions. Similar legends were imposed in connection
with any subsequent sales of any such securities. No underwriters were
employed in any of the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation of Adolor.**
3.2 Form of Amended and Restated Bylaws of Adolor.*
4.1 Series A Convertible Preferred Stock Purchase Agreement among Opian
Pharmaceuticals, Inc. and the parties set forth therein, dated
November 7, 1994.***
4.2 Series B Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated March 1, 1996.***
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.3 Series C Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated May 1, 1997.***
4.4 Stock Purchase Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.***
4.5 Series E Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated December 8, 1998.***
4.6 Series F Convertible Preferred Stock Purchase Agreement between Adolor
and S.R. One, Limited dated July 26, 1999.***
4.7 Series G Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein dated January 10, 2000.***
4.8 Registration Rights Agreement among Opian Pharmaceuticals, Inc. and
the parties set forth therein dated November 7, 1994.***
4.9 Amendment No. 1 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated February 27, 1996.***
4.10 Amendment No. 2 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated May 1, 1997.***
4.11 Amendment No. 3 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated December 8, 1998.***
4.12 Amendment No. 4 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated July 26, 1999.***
4.13 Amendment No. 5 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated January 10, 2000.***
5.1 Opinion of Dechert Price & Rhoads.*
10.1 Form of Amended and Restated 1994 Incentive Compensation Plan.**
10.2 Option and License Agreement between Adolor and Roberts Laboratories,
Inc., dated June 10, 1998.**@
10.3 License Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.**@
10.4 License Agreement between Adolor and SB Pharmaco Puerto Rico Inc.,
dated July 26, 1999.**@
23.1 Consent of KPMG LLP.**
23.2 Consent of Dechert Price & Rhoads (included in Exhibit 5.1).*
24.1 Powers of Attorney.****
27.1 Financial Data Schedule.***
</TABLE>
- ---------------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
**** Included on signature page to Registrant's Registration Statement on Form
S-1 previously filed with the Securities and Exchange Commission on
February 7, 2000.
@ Confidential Treatment Requested.
(b) Financial Statement Schedules
None.
Schedules other than those listed above have been omitted since they are
not required or are not applicable or the required information is shown in the
financial statements or related notes. Columns omitted from schedules filed
have been omitted since the information is not applicable.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide 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 foregoing provisions, 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 Securities Act and will be governed
by the final adjudication of such issue.
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.
(2) For purposes 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 therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania on the 18th day of February, 2000.
ADOLOR CORPORATION
/s/ Peter J. Schied
By: _________________________________
Peter J. Schied
Vice President, Chief Financial
Officer and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
* President, Chief Executive February 18, 2000
______________________________________ Officer and Director
John J. Farrar (Principal Executive
Officer)
/s/ Peter J. Schied Vice President, Chief February 18, 2000
______________________________________ Financial Officer and
Peter J. Schied Secretary (Principal
Financial and Accounting
Officer)
* Director February 18, 2000
______________________________________
Frank Baldino, Jr.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
* Director February 18, 2000
______________________________________
Ellen M. Feeney
* Director February 18, 2000
______________________________________
David M. Madden
* Director February 18, 2000
______________________________________
C. Christopher Moller
* Director February 18, 2000
______________________________________
Robert T. Nelsen
* Director February 18, 2000
______________________________________
Claude H. Nash
</TABLE>
* Peter J. Schied, pursuant to a Power of Attorney executed by each of the
directors and officers noted above and included in the signature page of the
initial filing of this Registration Statement, by signing his name hereto,
does hereby sign and execute this Amendment No. 1 to the Registration
Statement on behalf of each of the persons noted above, in the capacities
indicated, and does hereby sign and execute this Amendment No. 1 to the
Registration Statement on his own behalf, in the capacities indicated.
/s/ Peter J. Schied
_________________________________
Peter J. Schied
II-6
<PAGE>
Exhibit index
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Form of Amended and Restated Certificate of Incorporation of Adolor.**
3.2 Form of Amended and Restated Bylaws of Adolor.*
4.1 Series A Convertible Preferred Stock Purchase Agreement among Opian
Pharmaceuticals, Inc. and the parties set forth therein, dated
November 7, 1994.***
4.2 Series B Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated March 1, 1996.***
4.3 Series C Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated May 1, 1997.***
4.4 Stock Purchase Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.***
4.5 Series E Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein, dated December 8, 1998.***
4.6 Series F Convertible Preferred Stock Purchase Agreement between Adolor
and S.R. One, Limited dated July 26, 1999.***
4.7 Series G Convertible Preferred Stock Purchase Agreement among Adolor
and the parties set forth therein dated January 10, 2000.***
4.8 Registration Rights Agreement among Opian Pharmaceuticals, Inc. and
the parties set forth therein dated November 7, 1994.***
4.9 Amendment No. 1 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated February 27, 1996.***
4.10 Amendment No. 2 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated May 1, 1997.***
4.11 Amendment No. 3 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated December 8, 1998.***
4.12 Amendment No. 4 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated July 26, 1999.***
4.13 Amendment No. 5 to Registration Rights Agreement among Adolor and the
parties set forth therein, dated January 10, 2000.***
5.1 Opinion of Dechert Price & Rhoads.*
10.1 Form of Amended and Restated 1994 Incentive Compensation Plan.**
10.2 Option and License Agreement between Adolor and Roberts Laboratories,
Inc., dated June 10, 1998.**@
10.3 License Agreement between Adolor and Kwang Dong Pharmaceutical
Company, dated November 5, 1997.**@
10.4 License Agreement between Adolor and SB Pharmaco Puerto Rico Inc.,
dated July 26, 1999.**@
23.1 Consent of KPMG LLP.**
23.2 Consent of Dechert Price & Rhoads (including Exhibit 5.1).*
24.1 Power of Attorney.****
27.1 Financial Data Schedule.***
</TABLE>
- ---------------------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
**** Included on signature page to Registrant's Registration Statement on
Form S-1 previously filed with the Securities and Exchange Commission on
February 7, 2000.
@ Confidential Treatment Requested.
<PAGE>
Exhibit 3.1
-----------
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ADOLOR CORPORATION
FIRST: The name of the corporation is Adolor Corporation.
SECOND: The registered office of the corporation in the State of
Delaware is to be located at 1013 Centre Road, City of Wilmington, County of New
Castle, Delaware, 19805. The name of the registered agent of the corporation at
such address is The Prentice Hall Corporation System, Inc.
THIRD: The purpose of the corporation is to engage in any lawful
act or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware, as amended from time to time.
FOURTH: The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 166,203,919 shares,
consisting of 96,024,821 shares of Common Stock with a par value of $.0001 per
share (the "Common Stock") and 70,179,098 shares of Preferred Stock with a par
value of $.01 per share (the "Preferred Stock").
Each four and one-half (4 1/2) shares of the Corporation's Common
Stock issued and outstanding as of the date this Amended and Restated
Certificate of Incorporation is filed shall be converted and reclassified into
one (1) share of the Corporation's Common Stock, so that each share of the
Corporation's Common Stock issued and outstanding is hereby converted and
reclassified. No fractional interests resulting from such conversion shall be
issued.
A description of the respective classes of stock and a statement of
designations, powers, preferences and rights, and the qualifications,
limitations and restrictions of the Preferred Stock and Common Stock are as
follows:
A. COMMON STOCK
------------
1. General. All shares of Common Stock will be identical and will
-------
entitle the holders thereof to the same rights, powers and privileges. The
rights, powers and privileges of the holders of the Common Stock are subject to
and qualified by the rights of holders of the Preferred Stock.
<PAGE>
2. Dividends. Dividends may be declared and paid on the Common
---------
Stock from funds lawfully available therefor as and when determined by the Board
of Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
3. Dissolution, Liquidation or Winding Up. In the event of any
--------------------------------------
dissolution, liquidation or winding up of the affairs of the Corporation,
whether voluntary or involuntary, each issued and outstanding share of Common
Stock shall entitle the holder thereof to receive an equal portion of the net
assets of the Corporation available for distribution to the holders of Common
Stock, subject to any preferential rights of any then outstanding Preferred
Stock.
4. Voting Rights. Except as otherwise required by law or this
-------------
Amended and Restated Certificate of Incorporation, each holder of Common Stock
shall have one vote in respect of each share of stock held of record by such
holder on the books of the Corporation for the election of directors and on all
matters submitted to a vote of stockholders of the Corporation. Except as
otherwise required by law or provided herein, holders of Common Stock shall vote
together with holders of the Preferred Stock as a single class, subject to any
special or preferential voting rights of any then outstanding Preferred Stock.
There shall be no cumulative voting.
B. PREFERRED STOCK
---------------
The Preferred Stock may be issued in one or more series at such time
or times and for such consideration or considerations as the Board of Directors
of the Corporation may determine. Each series shall be so designated as to
distinguish the shares thereof from the shares of all other series and classes.
Except as otherwise provided in this Amended and Restated Certificate of
Incorporation or under applicable law, different series of Preferred Stock shall
not be construed to constitute different classes of shares for the purpose of
voting by classes.
The Board of Directors is expressly authorized to provide for the
issuance of all or any shares of the undesignated Preferred Stock in one or more
series, each with such designations, preferences, voting powers (or special,
preferential or no voting powers), relative participating, optional or other
special rights and privileges and such qualifications, limitations or
restrictions thereof as shall be stated in the resolution or resolutions adopted
by the Board of Directors to create such series, and a certificate of said
resolution or resolutions (a "Certificate of Designation") shall be filed in
accordance with the General Corporation Law of the State of Delaware. The
authority of the Board of Directors with respect to each such series shall
include, without limitation of the foregoing, the right to provide that the
shares of each such series may be: (i) subject to redemption at such time or
times and at such price or prices; (ii) entitled to receive dividends (which may
be cumulative or non-cumulative) at such rates, on such conditions, and at such
times, and payable in preference to, or in such relation to, the dividends
payable on any other class or classes or any other series; (iii) entitled to
such rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; (iv) convertible into, or exchangeable for, shares of any other
class or classes of stock, or of any other series of the same or any other class
or classes of stock of the Corporation at such price or prices or at such rates
of exchange and with such adjustments, if any; (v) entitled to the benefit of
such limitations, if any,
-2-
<PAGE>
on the issuance of additional shares of such series or shares of any other
series of Preferred Stock; or (vi) entitled to such other preferences, powers,
qualifications, rights and privileges, all as the Board of Directors may deem
advisable and as are not inconsistent with law and the provisions of this
Amended and Restated Certificate of Incorporation.
C. CONVERTIBLE PREFERRED STOCK
---------------------------
1. Number of Shares. The series of Preferred Stock designated and
----------------
known as "Series A Convertible Preferred Stock" shall consist of 1,200,000
shares. The Series of Preferred Stock designated and known as "Series B
Convertible Preferred Stock" shall consist of 4,621,429 shares. The series of
Preferred Stock designated and known as "Series C Convertible Preferred Stock"
shall consist of 2,762,857.2 shares. The series of Preferred Stock designated
and known as "Series D Convertible Preferred Stock" shall consist of 192,000
shares. The series of Preferred Stock designated and known as "Series E
Convertible Preferred Stock" shall consist of 2,273,333.4 shares. The series of
Preferred Stock designated and known as "Series F Convertible Preferred Stock"
shall consist of 525,000 shares. The series of Preferred Stock designated and
known as "Series G Convertible Preferred Stock" shall consist of 2,461,200
shares. Except as the context otherwise requires, the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series D Convertible Preferred Stock, Series E Convertible
Preferred Stock, Series F Convertible Preferred Stock and Series G Convertible
Preferred Stock are sometimes hereinafter referred to collectively as the
"Convertible Preferred Stock."
2. Voting.
------
2A. General. Except as may be otherwise provided in the terms
-------
of the Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock, Series D Convertible Preferred
Stock, Series E Convertible Preferred Stock, Series F Convertible Preferred
Stock and Series G Convertible Preferred Stock or by law, the Convertible
Preferred Stock shall vote together with all other classes and series of stock
of the Corporation as a single class on all actions to be taken by the
stockholders of the Corporation. Each share of Convertible Preferred Stock
shall entitle the holder thereof to such number of votes per share on each such
action as shall equal the number of shares of Common Stock (including fractions
of a share) into which each share of Convertible Preferred Stock is then
convertible.
2B. Board Size. The Corporation shall not, without the written
----------
consent or affirmative vote of the holders of at least two-thirds of the then
outstanding shares of Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series E Convertible
Preferred Stock and Series G Convertible Preferred Stock, each voting as a
separate series, given in writing or by vote at a meeting, consenting or voting
(as the case may be) separately as a series, increase the maximum number of
directors constituting the Board of Directors to a number in excess of seven
(7).
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<PAGE>
2C. Board Seats. The holders of the Series A Convertible
-----------
Preferred Stock, voting as a separate series, shall be entitled to elect three
(3) directors of the Corporation. A vacancy in any directorship elected by the
holders of the Series A Convertible Preferred Stock shall be filled only by vote
or written consent of the holders of the Series A Convertible Preferred Stock.
Notwithstanding the foregoing, so long as ARCH Venture Fund, II, L.P. (or any
successor thereto) ("ARCH") continues to hold 10% of the outstanding Series A
Convertible Preferred Stock, ARCH shall be entitled to appoint a representative
to the Corporation's Board of Directors and so long as Weiss, Peck & Greer
Venture Associates III, L.P. and WPG Enterprise Fund II, L.P., (together,
"WP&G") together continue to hold 10% of the outstanding Series A Convertible
Preferred Stock, WP&G shall be entitled to appoint a representative to the
Corporation's Board of Directors. The holders of Series B Convertible Preferred
Stock, voting as a separate series, shall be entitled to elect one (1) director
of the Corporation. A vacancy in the directorship elected by the holders of the
Series B Convertible Preferred Stock shall be filled only by vote or written
consent of the holders of the Series B Convertible Preferred Stock.
Notwithstanding the foregoing, so long as Technology Leaders, II L.P. (or any
successor thereto) ("Tech Leaders") continues to hold (together with any
affiliate of Tech Leaders) in the aggregate 10% of the outstanding Series B
Convertible Preferred Stock, Tech Leaders shall be entitled to appoint a
representative to the Corporation's Board of Directors. Notwithstanding the
foregoing or anything else to the contrary provided in the Certificate of
Incorporation, if the Corporation fails or refuses, for any reason or for no
reason, to redeem on the Redemption Date (as defined in paragraph 7) all of the
then outstanding shares of the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, Series E
Convertible Preferred Stock and Series G Convertible Preferred Stock in
accordance with the terms and provisions of paragraph 7, the holders of the
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series E Convertible Preferred Stock and
Series G Convertible Preferred Stock, voting as a separate class shall be
entitled to elect all of the directors of the Corporation. At any meeting (or
in a written consent in lieu thereof) held for the purpose of electing
directors, the presence in person or by proxy (or the written consent) of the
holders of sixty percent (60%) of the shares of Series A Convertible Preferred
Stock or Series B Convertible Preferred Stock then outstanding, as the case may
be, shall constitute a quorum of the Series A Convertible Preferred Stock or
Series B Convertible Preferred Stock, as the case may be, for the election of
directors to be elected solely by the holders of the Series A Convertible
Preferred Stock or Series B Convertible Preferred Stock, and the presence in
person or by proxy (or written consent) of the holders of sixty percent (60%) of
the shares of Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series E Convertible
Preferred Stock and Series G Convertible Preferred Stock then outstanding shall
constitute a quorum of the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, Series E
Convertible Preferred Stock and Series G Convertible Preferred Stock for the
election of directors to be elected solely by the holders of the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series E Convertible Preferred Stock and Series G
Convertible Preferred Stock.
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<PAGE>
3. Dividends. The holders of Convertible Preferred Stock shall be
---------
entitled to receive, out of funds legally available therefor, when and if
declared by the Board of Directors, quarterly dividends at the rate per annum of
$.02 per share, with respect to the Series A Convertible Preferred Stock, $.0336
per share, with respect to the Series B Convertible Preferred Stock, $.056 per
share, with respect to the Series C Convertible Preferred Stock, $.06 per share,
with respect to the Series E Convertible Preferred Stock, $.08 per share, with
respect to the Series F Convertible Preferred Stock, and $.08 per share, with
respect to the Series G Convertible Preferred Stock, and, at the same rate and
at the same time as dividends are declared and paid on the Common Stock, with
respect to the Series D Convertible Preferred Stock (the "Accruing Dividends").
Accruing Dividends shall accrue from day to day, whether or not earned or
declared, and shall be cumulative.
4. Liquidation. Upon any liquidation, dissolution or winding up of
-----------
the Corporation, whether voluntary or involuntary, the holders of the shares of
Convertible Preferred Stock shall be entitled, before any distribution or
payment is made upon any stock ranking on liquidation junior to the Convertible
Preferred Stock, to be paid an amount equal to the greater of (i) $.25 per
share, with respect to the Series A Convertible Preferred Stock, $.42 per share
with respect to the Series B Convertible Preferred Stock, $.70 per share with
respect to the Series C Convertible Preferred Stock, $1.25 per share with
respect to the Series D Convertible Preferred Stock, $.75 per share with respect
to the Series E Convertible Preferred Stock, $1.00 per share with respect to the
Series F Convertible Preferred Stock and $1.00 per share with respect to the
Series G Convertible Preferred Stock, plus, (a) in the case of each share of
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series E Convertible Preferred Stock,
Series F Convertible Preferred Stock and Series G Convertible Preferred Stock,
an amount equal to all Accruing Dividends unpaid thereon (whether or not
declared) and any other dividends declared but unpaid thereon, computed to the
date payment thereof is made available, and (b) in the case of each share of
Series D Convertible Preferred Stock, an amount equal to all dividends declared
but unpaid thereon, computed to the date payment thereof is made available, or
(ii) such amount per share as would have been payable had each such share been
converted to Common Stock pursuant to paragraph 6 immediately prior to such
liquidation, dissolution or winding up, and the holders of Convertible Preferred
Stock shall not be entitled to any further payment, such amount payable with
respect to one share of Convertible Preferred Stock being sometimes referred to
as the "Liquidation Payment" and with respect to all shares of Convertible
Preferred Stock being sometimes referred to as the "Liquidation Payments." If
upon such liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Convertible Preferred Stock shall be insufficient to permit payment to the
holders of Convertible Preferred Stock of the amount distributable as aforesaid,
then the entire assets of the Corporation to be so distributed shall be
distributed ratably among the holders of Convertible Preferred Stock. Upon any
such liquidation, dissolution or winding up of the Corporation, after the
holders of Convertible Preferred Stock shall have been paid in full the amounts
to which they shall be entitled, the remaining net assets of the Corporation may
be distributed to the holders of stock ranking on liquidation junior to the
Convertible Preferred Stock.
-5-
<PAGE>
Written notice of such liquidation, dissolution or winding up, stating
a payment date, the amount of the Liquidation Payments and the place where said
Liquidation Payments shall be payable, shall be delivered in person, mailed by
certified or registered mail, return receipt requested, or sent by telecopier or
telex, not less than 20 days prior to the payment date stated therein, to the
holders of record of Convertible Preferred Stock, such notice to be addressed to
each such holder at its address as shown by the records of the Corporation. The
consolidation or merger of the Corporation with or into another entity or
entities which results in the exchange of outstanding shares of the Corporation
for securities or other consideration issued or paid or caused to be issued or
paid by any such entity or affiliate thereof (other than a merger to
reincorporate the Corporation in a different jurisdiction), and the sale, lease,
abandonment, transfer or other disposition by the Corporation of all or
substantially all its assets, shall be deemed to be a liquidation, dissolution
or winding up of the Corporation within the meaning of the provisions of this
paragraph 4.
5. Restrictions. At any time when shares of Series A Convertible
------------
Preferred Stock, Series B Convertible Preferred Stock, the Series C Convertible
Preferred Stock, the Series E Convertible Preferred Stock, the Series F
Convertible Preferred Stock or the Series G Convertible Preferred Stock are
outstanding, except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law or by the
Certificate of Incorporation, and in addition to any other vote required by law
or the Certificate of Incorporation, without approval of the holders of at least
sixty percent (60%) of the then outstanding shares of each of the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series E Convertible Preferred Stock, Series F
Convertible Preferred Stock and/or Series G Convertible Preferred Stock, as the
case may be, given in writing or by vote at a meeting, each consenting or voting
(as the case may be) separately as a series, the Corporation will not:
5A. Create or authorize the creation of any additional class or
series of shares of stock unless the same ranks junior to the Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series E Convertible Preferred Stock, Series F
Convertible Preferred Stock or Series G Convertible Preferred Stock, as the case
may be, or increase the authorized amount of any additional class or series of
shares of stock unless the same ranks junior to the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series E Convertible Preferred Stock, Series F Convertible
Preferred Stock or Series G Convertible Preferred Stock, as the case may be, as
to the distribution of assets on the liquidation, dissolution or winding up of
the Corporation, or increase the authorized amount of the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series E Convertible Preferred Stock, Series F Convertible
Preferred Stock or Series G Convertible Preferred Stock, as the case may be, as
to the distribution of assets on the liquidation, dissolution or winding up of
the Corporation, or create or authorize any obligation or security convertible
into shares of Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series E Convertible
Preferred Stock, Series F Convertible Preferred Stock or Series G Convertible
Preferred Stock, as the case may be, or into shares of any other class or
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<PAGE>
series of stock unless the same ranks junior to the Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, Series E Convertible Preferred Stock, Series F Convertible
Preferred Stock or Series G Convertible Preferred Stock, as the case may be, as
to the distribution of assets on the liquidation, dissolution or winding up of
the Corporation, whether any such creation, authorization or increase shall be
by means of amendment to the Certificate of Incorporation or by merger,
consolidation or otherwise;
5B. Consent to any liquidation, dissolution or winding up of the
Corporation or consolidate or merge into or with any other entity or entities or
sell, lease, abandon, transfer or otherwise dispose of all or substantially all
its assets;
5C. Amend, alter or repeal its Certificate of Incorporation or
amend, alter or repeal its By-laws if such amendment, alteration or repeal,
directly or indirectly, impacts any rights and preferences of the holders of the
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series E Convertible Preferred Stock,
Series F Convertible Preferred Stock or Series G Convertible Preferred Stock, as
the case may be;
5D. Purchase or set aside any sums for the purchase of, or pay
any dividend or make any distribution on, any shares of stock other than the
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series E Convertible Preferred Stock,
Series F Convertible Preferred Stock or Series G Convertible Preferred Stock, as
the case may be, except for (i) dividends or other distributions described in
this Section C of Article Fourth, (ii) dividends payable on the Common Stock
solely in the form of additional shares of Common Stock and (iii) the purchase
of shares of Common Stock from former employees of the Corporation who acquired
such shares directly from the Corporation, if each such purchase is made
pursuant to contractual rights held by the Corporation relating to the
termination of employment of such former employee and the purchase price does
not exceed the original issue price paid by such former employee to the
Corporation for such shares; or
5E. Redeem or otherwise acquire any shares of Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, Series E Convertible Preferred Stock, Series F
Convertible Preferred Stock or Series G Convertible Preferred Stock, as the case
may be, except pursuant to a purchase offer made pro rata to all holders of the
shares of Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock, Series E Convertible Preferred
Stock, Series F Convertible Preferred Stock or Series G Convertible Preferred
Stock, as the case may be, on the basis of the aggregate number of outstanding
shares of Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock, Series C Convertible Preferred Stock, Series E Convertible Preferred
Stock, Series F Convertible Preferred Stock or Series G Convertible Preferred
Stock, as the case may be, then held by each such holder.
6. Conversions. The holders of shares of Convertible Preferred
-----------
Stock shall have the following conversion rights:
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<PAGE>
6A. Right to Convert. Subject to the terms and conditions of
----------------
this paragraph 6, the holder of any share or shares of Convertible Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Convertible Preferred Stock (except that upon any liquidation of the
Corporation the right of conversion shall terminate at the close of business on
the business day fixed for payment of the amount distributable on the
convertible Preferred Stock) into such number of fully paid and nonassessable
shares of Common Stock as is obtained by (a) with respect to the Series A
Convertible Preferred Stock, (i) multiplying the number of shares of Series A
Convertible Preferred Stock to be converted by $0.25 and (ii) dividing the
result by the conversion price of $0.25 per share or, in case an adjustment of
such price has taken place pursuant to the further provisions of this paragraph
6, then by the conversion price as last adjusted and in effect at the date any
share or shares of Series A Convertible Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred to as the
"Series A Conversion Price"), (b) with respect to the Series B Convertible
Preferred Stock, (i) multiplying the number of shares of Series B Convertible
Preferred Stock to be converted by $.42 and (ii) dividing the result by the
conversion price of $.42 per share, or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6, then by the
conversion price as last adjusted and in effect at the date any share or shares
of Series B Convertible Preferred Stock are surrendered for conversion (such
price, or such price as adjusted, being referred to as the "Series B Conversion
Price"), (c) with respect to the Series C Convertible Preferred Stock, (i)
multiplying the number of shares of Series C Convertible Preferred Stock to be
converted by $.70 and (ii) dividing the result by the conversion price of $.70
per share or, in case an adjustment of such price has taken place pursuant to
the further provisions of this paragraph 6, then by the conversion price as last
adjusted and in effect at the date any share or shares of Series C Convertible
Preferred Stock are surrendered for conversion (such price, or such price as
last adjusted, being referred to as the "Series C Conversion Price"), (d) with
respect to the Series D Convertible Preferred Stock, (i) multiplying the number
of shares of Series D Convertible Preferred Stock to be converted by $1.25 and
(ii) dividing the result by the conversion price of $1.25 per share or, in case
an adjustment of such price has taken place pursuant to the further provisions
of subparagraph 6F, then by the conversion price as last adjusted and in effect
at the date any share or shares of Series D Convertible Preferred Stock are
surrendered for conversion (such price, or such price as last adjusted, being
referred to as the "Series D Conversion Price"), (e) with respect to the Series
E Convertible Preferred Stock, (i) multiplying the number of shares of Series E
Convertible Preferred Stock to be converted by $.75 and (ii) dividing the result
by the conversion price of $.75 per share or, in case an adjustment of such
price has taken place pursuant to the further provisions of this paragraph 6,
then by the conversion price as last adjusted and in effect at the date any
share or shares of Series E Convertible Preferred Stock are surrendered for
conversion (such price, or such price as last adjusted, being referred to as the
"Series E Conversion Price"), (f) with respect to the Series F Convertible
Preferred Stock, (i) multiplying the number of shares of Series F Convertible
Preferred Stock to be converted by $1.00 and (ii) dividing the result by the
conversion price of $1.00 per share or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6, then by the
conversion price as last adjusted and in effect at the date any share or shares
of Series F Convertible Preferred Stock are surrendered for conversion (such
price, or such price as last adjusted, being referred to as the
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<PAGE>
"Series F Conversion Price") and (g) with respect to the Series G Convertible
Preferred Stock, (i) multiplying the number of shares of Series G Convertible
Preferred Stock to be converted by $1.00 and (ii) dividing the result by the
conversion price of $1.00 per share or, in case an adjustment of such price has
taken place pursuant to the further provisions of this paragraph 6, then by the
conversion price as last adjusted and in effect at the date any share or shares
of Series G Convertible Preferred Stock are surrendered for conversion (such
price, or such price as last adjusted, being referred to as the "Series G
Conversion Price"). Such rights of conversion shall be exercised by the holder
thereof by giving written notice that the holder elects to convert a stated
number of shares of Convertible Preferred Stock into Common Stock and by
surrender of a certificate or certificates for the shares so to be converted to
the Corporation at its principal office (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the holders
of the Convertible Preferred Stock) at any time during its usual business hours
on the date set forth in such notice, together with a statement of the name or
names (with address) in which the certificate or certificates for shares of
Common Stock shall be issued.
6B. Issuance of Certificates: Time Conversion Effected.
--------------------------------------------------
Promptly after the receipt of the written notice referred to in subparagraph 6A
and surrender of the certificate or certificates for the share or shares of
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series D Convertible Preferred Stock,
Series E Convertible Preferred Stock, Series F Convertible Preferred Stock or
Series G Convertible Preferred Stock to be converted, the Corporation shall
issue and deliver, or cause to be issued and delivered, to the holder,
registered in such name or names as such holder may direct, a certificate or
certificates for the number of whole shares of Common Stock issuable upon the
conversion of such share or shares of Convertible Preferred Stock. To the
extent permitted by law, such conversion shall be deemed to have been effected
and the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price or Series G Conversion Price, as the case may be, shall be
determined as of the close of business on the date on which such written notice
shall have been received by the Corporation and the certificate or certificates
for such share or shares shall have been surrendered as aforesaid, and at such
time the rights of the holder of such share or shares of Convertible Preferred
Stock shall cease, and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby.
6C. Fractional Shares; Dividends: Partial Conversion. No
------------------------------------------------
fractional shares shall be issued upon conversion of Convertible Preferred Stock
into Common Stock and no payment or adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the Corporation shall pay in cash
an amount equal to all dividends, excluding Accruing Dividends, accrued and
unpaid on the shares of Convertible Preferred Stock surrendered for conversion
to the date upon which such conversion is deemed to take place as provided in
subparagraph 6B. In case the number of shares of Convertible Preferred Stock
represented by the certificate or
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<PAGE>
certificates surrendered pursuant to subparagraph 6A exceeds the number of
shares converted, the Corporation shall, upon such conversion, execute and
deliver to the holder, at the expense of the Corporation, a new certificate or
certificates for the number of shares of Convertible Preferred Stock represented
by the certificate or certificates surrendered which are not to be converted. If
any fractional share of Common Stock would, except for the provisions of the
first sentence of this subparagraph 6C, be delivered upon such conversion, the
Corporation, in lieu of delivering such fractional share, shall pay to the
holder surrendering the Convertible Preferred Stock for conversion an amount in
cash equal to the current market price of such fractional share as determined in
good faith by the Board of Directors of the Corporation.
6D. Adjustment of Price Upon Issuance of Common Stock. So long
-------------------------------------------------
as the Company has not consummated a Qualified Public Offering (as defined in
paragraph 6O), except as provided in subparagraph 6E, if and whenever the
Corporation shall issue or sell, or is, in accordance with subparagraphs 6D(1)
through 6D(7), deemed to have issued or sold, any shares of Common Stock for a
consideration per share less than the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series E Conversion Price, Series F
Conversion Price and/or Series G Conversion Price in effect immediately prior to
the time of such issue or sale, then, forthwith upon such issue or sale, the
Series A Conversion Price, Series B Conversion Price, Series C Conversion Price,
Series E Conversion Price, Series F Conversion Price and/or Series G Conversion
Price, as the case may be, shall be reduced to the price determined by dividing
(i) an amount equal to the sum of (a) the number of shares of Common Stock
outstanding immediately prior to such issue or sale multiplied by the then
existing Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series E Conversion Price, Series F Conversion Price and/or
Series G Conversion Price, as the case may be, and (b) the consideration, if
any, received by the Corporation upon such issue or sale, by (ii) the total
number of shares of Common Stock outstanding immediately after such issue or
sale.
For purposes of this subparagraph 6D, the following subparagraphs 6D(1) to
6D(7) shall also be applicable:
6D(1) Issuance of Rights or Options. In case at any time the
-----------------------------
Corporation shall in any manner grant (whether directly or by assumption in a
merger or otherwise) any warrants or other rights to subscribe for or to
purchase, or any options for the purchase of, Common Stock or any stock or
security convertible into or exchangeable for Common Stock (such warrants,
rights or options being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not such
Options or the right to convert or exchange any such Convertible Securities are
immediately exerciseable, and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon the conversion or exchange of
such Convertible Securities (determined by dividing (i) the total amount, if
any, received or receivable by the Corporation as consideration for the granting
of such Options, plus the minimum aggregate amount of additional consideration
payable to the Corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the issue or
sale of such Convertible Securities and upon the conversion or
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<PAGE>
exchange thereof, by (ii) the total maximum number of shares or Common Stock
issuable upon the exercise of such Options or upon the conversion or exchange of
all such Convertible Securities issuable upon the exercise of such Options)
shall be less than the Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price, Series E Conversion Price, Series F Conversion Price
and/or Series G Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon the
exercise of such Options shall be deemed to have been issued for such price per
share as of the date of granting of such Options or the issuance of such
Convertible Securities and thereafter shall be deemed to be outstanding. Except
as otherwise provided in subparagraph 6D(3), no adjustment of the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series E
Conversion Price, Series F Conversion Price and/or Series G Conversion Price, as
the case may be, shall be made upon the actual issue of such Common Stock or of
such Convertible Securities upon exercise of such Options or upon the actual
issue of such Common Stock upon conversion or exchange of such Convertible
Securities.
6D(2) Issuance of Convertible Securities. In case the
----------------------------------
Corporation shall in any manner issue (whether directly or by assumption in a
merger or otherwise) or sell any Convertible Securities, whether or not the
rights to exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable upon
such conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (ii) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities)
shall be less than the Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price, Series E Conversion Price, Series F Conversion Price
and/or Series G Conversion Price in effect immediately prior to the time of such
issue or sale, as the case may be, then the total maximum number of shares of
Common Stock issuable upon conversion or exchange of all such Convertible
Securities shall be deemed to have been issued for such price per share as of
the date of the issue or sale of such Convertible Securities and thereafter
shall be deemed to be outstanding, provided that (a) except as otherwise
provided in subparagraph 6D(3), no adjustment of the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series E Conversion Price,
Series F Conversion Price and/or Series G Conversion Price, as the case may be,
shall be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities and (b) if any such issue or sale of
such Convertible Securities is made upon exercise of any Options to purchase any
such Convertible Securities for which adjustments of the Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price, Series E Conversion
Price, Series F Conversion Price and/or Series G Conversion Price have been or
are to be made pursuant to other provisions of this subparagraph 6D, no further
adjustment of the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series E Conversion Price, Series F Conversion Price and/or
Series G Conversion Price, as the case may be, shall be made by reason of such
issue or sale.
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<PAGE>
6D(3) Change in Option Price or Conversion Rate. Upon the
-----------------------------------------
happening of any of the following events, namely, if the purchase price provided
for in any Option referred to in subparagraph 6D(1), the additional
consideration, if any, payable upon the conversion or exchange of any
Convertible Securities referred to in subparagraph 6D(1) or 6D(2), or the rate
at which Convertible Securities referred to in subparagraph 6D(1) or 6D(2) are
convertible into or exchangeable for Common Stock shall change at any time
(including, but not limited to, changes under or by reason of provisions
designed to protect against dilution), the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series E Conversion Price, Series F
Conversion Price and/or Series G Conversion Price, as the case may be, in effect
at the time of such event shall forthwith be readjusted to the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series E
Conversion Price, Series F Conversion Price and/or Series G Conversion Price, as
the case may be, which would have been in effect at such time had such Options
or Convertible Securities still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold, but only if as a result of such
adjustment the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series E Conversion Price, Series F Conversion Price and/or
Series G Conversion Price, as the case may be, then in effect hereunder is
thereby reduced; and on the termination of any such Option or any such right to
convert or exchange such Convertible Securities, the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series E Conversion Price,
Series F Conversion Price and/or Series G Conversion Price, as the case may be,
then in effect hereunder shall forthwith be increased to the Series A Conversion
Price, Series B Conversion Price, Series C Conversion Price, Series E Conversion
Price, Series F Conversion Price and/or Series G Conversion Price, as the case
may be, which would have been in effect at the time of such termination had such
Option or Convertible Securities, to the extent outstanding immediately prior to
such termination, never been issued.
6D(4) Stock Dividends. In case the Corporation shall declare a
---------------
dividend or make any other distribution upon any stock of the Corporation
payable in Common Stock (except for dividends or distributions upon the Common
Stock), Options or Convertible Securities, any Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such dividend
or distribution shall be deemed to have been issued or sold.
6D(5) Consideration for Stock. In case any shares of Common Stock,
-----------------------
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received by the
Corporation therefor, without deduction therefrom of any expenses incurred or
any underwriting commissions or concessions paid or allowed by the Corporation
in connection therewith. In case any shares of Common Stock, Options or
Convertible Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Corporation shall be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the Corporation, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In case
any Options shall be issued in connection with the issue and sale of other
securities of the
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<PAGE>
Corporation, together comprising one integral transaction in which no specific
consideration is allocated to such Options by the parties thereto, such Options
shall be deemed to have been issued for such consideration as determined in good
faith by the Board of Directors of the Corporation.
6D(6) Record Date. In case the Corporation shall take a record of
-----------
the holders of its Common Stock for the purpose of entitling them (i) to receive
a dividend or other distribution payable in Common Stock, Options or Convertible
Securities or (ii) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date shall be deemed to be the date of
the issue or sale of the shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
6D(7) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purpose of this subparagraph
6D.
6E. Certain Issues of Common Stock Excepted. Anything herein to
---------------------------------------
the contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series E Conversion Price, Series F Conversion Price and/or
Series G Conversion Price in the case of (a) the issuance of up to any aggregate
of 14,750,000 shares (appropriately adjusted to reflect the occurrence of any
event described in subparagraph 6F) of Common Stock to directors, officers,
employees or consultants of the Corporation in connection with their service as
directors of the Corporation, their employment by the Corporation or their
retention as consultants by the Corporation, or to licensors or transferors of
technology to the Corporation, in each case pursuant to such arrangements,
contracts or plans as are approved by the Board of Directors, plus such number
of shares of Common Stock which are repurchased by the Corporation from such
persons after such date pursuant to contractual rights held by the Corporation
and at repurchase prices not exceeding the respective original purchase prices
paid by such persons to the Corporation therefor, (b) the issuance of Common
Stock in connection with a Qualified Public Offering (as defined in paragraph 6O
hereof) or (c) upon the issuance of Common Stock upon conversion of any
Convertible Preferred Stock.
6F. Subdivision or Combination of Common Stock. In case the
------------------------------------------
Corporation shall at any time subdivide (by any stock split, stock dividend or
otherwise) its outstanding shares of Common Stock into a greater number of
shares, the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price and Series G Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced, and, conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number of
shares, the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price, Series E Conversion Price, Series F
Conversion Price and Series G
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<PAGE>
Conversion Price in effect immediately prior to such combination shall be
proportionately increased. In the case of any such subdivision, no further
adjustment shall be made pursuant to subparagraph 6D(4) by reason thereof.
6G. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, then, as a condition of such reorganization or reclassification, lawful
and adequate provisions shall be made whereby each holder of share or shares of
Convertible Preferred Stock shall thereupon have the right to receive, upon the
basis and upon the terms and conditions specified herein and in lieu of the
shares of Common Stock immediately theretofore receivable upon the conversion of
such share or shares Convertible Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Common Stock equal to the number of
shares of such Common Stock immediately theretofore receivable upon such
conversion had such reorganization or reclassification not taken place, and in
any such case appropriate provisions shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof (including
without limitation provisions for adjustments of the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series D Conversion Price,
Series E Conversion Price, Series F Conversion Price and Series G Conversion
Price) shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
of such conversion rights.
6H. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the Corporation shall give written notice
thereof, by delivery in person, certified or registered mail, return receipt
requested, telecopier or telex, addressed to each holder of shares of
Convertible Preferred Stock at the address of such holder as shown on the books
of the Corporation, which notice shall state the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series D Conversion Price,
Series E Conversion Price, Series F Conversion Price and/or Series G Conversion
Price resulting from such adjustment, setting forth in reasonable detail the
method upon which such calculation is based.
6I. Other Notices. In case at any time:
-------------
(1) the Corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the holders of
its Common Stock;
(2) the Corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or other
rights;
(3) there shall be any capital reorganization or reclassification
of the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into another entity or entities, or a sale, lease,
abandonment, transfer or other disposition of all or substantially all its
assets; or
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<PAGE>
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by delivery
in person, certified or registered mail, return receipt requested, telecopier or
telex, addressed to each holder of any shares of Convertible Preferred Stock at
the address of such holder as shown the books of the Corporation, (a) at least
20 days' prior written notice of the date on which the books of the Corporation
shall close or a record shall be taken for such dividend, distribution or
subscription rights or for determining rights to vote in respect of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up and (b) in the case of any such
reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, at least 20 days' prior written notice
of the date when at the same shall take place. Such notice in accordance with
the foregoing clause (a) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto and such notice in accordance with the foregoing
clause (b) shall also specify the date on which the holders of Common Stock
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding up, as the case may be.
6J. Stock to be Reserved. The Corporation will at all times
--------------------
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon the conversion of Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Convertible Preferred Stock. The
Corporation covenants that all shares of Common Stock which shall be so issued
shall be duly and validly issued and fully paid and nonassessable and free from
all taxes, liens and charges with respect to the issue thereof, and, without
limiting the generality of the foregoing, the Corporation covenants that it will
from time to time take all such action as may be requisite to assure that the
par value per share of the Common Stock is at all times equal to or less than
the Series A Conversion Price, Series B Conversion Price, Series C Conversion
Price, Series D Conversion Price, Series E Conversion Price, Series F Conversion
Price and Series G Conversion Price in effect at the time. The Corporation will
take all such action as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any applicable law or
regulation, or of any requirement of any national securities exchange upon which
the Common Stock may be listed. The Corporation will not take any action which
results in any adjustment of the Series A Conversion Price, Series B Conversion
Price, Series C Conversion Price, Series D Conversion Price, Series E Conversion
Price, Series F Conversion Price or Series G Conversion Price if the total
number of shares of Common Stock issued and issuable after such action upon
conversion of the Convertible Preferred Stock would exceed the total number of
shares of Common Stock then authorized by the Certificate of Incorporation.
6K. No Reissuance of Convertible Preferred Stock. Shares of
--------------------------------------------
Convertible Preferred Stock which are converted into shares of Common Stock as
provided herein shall not be reissued.
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<PAGE>
6L. Issue Tax. The issuance of certificates for shares of Common
---------
Stock upon conversion of Convertible Preferred Stock shall be made without
charge to the holders thereof for any issuance tax in respect thereof, provided
that the Corporation shall not be required to pay any tax which may be payable
in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Convertible Preferred
Stock which is being converted.
6M. Closing of Books. The Corporation will at no time close its
----------------
transfer books against the transfer of any Convertible Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Convertible Preferred Stock in any manner which interferes with the timely
conversion of such Convertible Preferred Stock, except as may otherwise be
required to comply with applicable securities laws.
6N. Definition of Common Stock. As used in this paragraph 6,
--------------------------
the term "Common Stock" shall mean and include the Corporation's authorized
Common Stock, par value $.0001 per share, as constituted on the date of filing
of these terms of the Convertible Preferred Stock, and shall also include any
capital stock of any class of the Corporation thereafter authorized which shall
not be limited to a fixed sum or percentage in respect of the rights of the
holders thereof to participate in dividends or in the distribution of assets
upon the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Convertible Preferred Stock shall include only shares
designated as Common Stock of the Corporation on the date of filing of this
instrument, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subparagraph 6G.
6O. Mandatory Conversion. If at any time the Corporation shall
--------------------
effect a firm commitment underwritten public offering of shares of Common Stock
in which the aggregate price paid for such shares by the public shall be at
least $7,000,000, then effective upon the closing of the sale of such shares by
the Corporation pursuant to such public offering, all outstanding shares of
Series D Convertible Preferred Stock shall automatically convert to shares of
Common Stock on the basis set forth in this paragraph 6. If at any time the
Corporation shall effect a firm commitment underwritten public offering of
shares of Common Stock in which the aggregate price paid for such shares by the
public shall be at least $25,000,000 and the public offering price per share
shall be at least $1.50 per share (as adjusted for any combination, division
subdivision, stock split, reverse stock splits or similar event relating to the
Common Stock) (a "Qualified Public Offering"), then effective upon the closing
of the sale of such shares by the Corporation pursuant to such public offering,
all outstanding shares of Convertible Preferred Stock shall automatically
convert to shares of Common Stock on the basis set forth in this paragraph 6.
Holders of shares of Series D Convertible Preferred Stock or any other
Convertible Preferred Stock so converted may deliver to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to such holders) during its usual
business hours, the certificate or certificates for the shares so converted. As
promptly as practicable thereafter, the Corporation shall issue and deliver to
such holder a certificate or certificates for the number of whole shares of
Common
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<PAGE>
Stock to which such holder is entitled, together with any cash dividends and
payment in lieu of fractional shares to which such holder may be entitled
pursuant to subparagraph 6C. Until such time as a holder of shares of Series D
Convertible Preferred Stock or any other Convertible Preferred Stock shall
surrender his or its certificates therefor as provided above, such certificates
shall be deemed to represent the shares of Common Stock to which such holder
shall be entitled upon the surrender thereof.
7. Redemption. The shares of Convertible Preferred Stock shall be
----------
redeemed as follows:
7A. Optional Redemption. On or after March 1, 2001, the holders
-------------------
of sixty percent (60%) of the Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock then
outstanding, taken as a whole, may require the Corporation to redeem from each
such holder of shares of Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and/or Series C Convertible Preferred Stock, all or
any portion of the shares of Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock and/or Series C Convertible Preferred Stock then
held by such holders by delivering a notice to the Company thereof. The
Corporation shall give prompt written notice of any such election to all other
holders of Series A Convertible Preferred Stock, Series B Convertible Preferred
Stock and Series C Convertible Preferred Stock who are entitled to require
redemption hereunder at the time of such notice within five (5) business days
after receipt of notice thereof, and each such holder shall have until ten (10)
business days after receipt of such second notice, to request redemption (by
giving written notice to the Corporation) of all or any portion of such Series A
Convertible Preferred Stock, Series B Convertible Preferred Stock and/or Series
C Convertible Preferred Stock owned by such holder.
On or after March 1, 2005, the holders of sixty percent (60%) of
the Series D Convertible Preferred Stock then outstanding may require the
Corporation to redeem from each such holder of shares of Series D Convertible
Preferred Stock, all or any portion of the shares of Series D Convertible
Preferred Stock then held by such holders by delivering a notice to the Company
thereof. The Corporation shall give prompt written notice of any such election
to all other holders of Series D Convertible Preferred Stock who are entitled to
require redemption hereunder at the time of such notice within five (5) business
days after receipt of notice thereof, and each such holder shall have until ten
(10) business days after receipt of such second notice, to request redemption
(by giving written notice to the Corporation) of all or any portion of such
Series D Convertible Preferred Stock owned by such holder.
On or after March 1, 2001, the holders of sixty percent (60%) of
the Series E Convertible Preferred Stock then outstanding may require the
Corporation to redeem from each such holder of shares of Series E Convertible
Preferred Stock, all or any portion of the shares of Series E Convertible
Preferred Stock then held by such holders by delivering a notice to the Company
thereof. The Corporation shall give prompt written notice of any such election
to all other holders of Series E Convertible Preferred Stock who are entitled to
require redemption hereunder at the time of such notice within five (5) business
days after receipt of
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<PAGE>
notice thereof, and each such holder shall have until ten (10) business days
after receipt of such second notice, to request redemption (by giving written
notice to the Corporation) of all or any portion of such Series E Convertible
Preferred Stock owned by such holder.
On or after August 1, 2002, the holders of sixty percent (60%) of
the Series F Convertible Preferred Stock then outstanding may require the
Corporation to redeem from each such holder of shares of Series F Convertible
Preferred Stock, all or any portion of the shares of Series F Convertible
Preferred Stock then held by such holders by delivering a notice to the Company
thereof. The Corporation shall give prompt written notice of any such election
to all other holders of Series F Convertible Preferred Stock who are entitled to
require redemption hereunder at the time of such notice within five (5) business
days after receipt of notice thereof, and each such holder shall have until ten
(10) business days after receipt of such second notice, to request redemption
(by giving written notice to the Corporation) of all or any portion of such
Series F Convertible Preferred Stock owned by such holder.
On or after March 1, 2003, the holders of sixty percent (60%) of
the Series G Convertible Preferred Stock then outstanding may require the
Corporation to redeem from each such holder of shares of Series G Convertible
Preferred Stock, all or any portion of the shares of Series G Convertible
Preferred Stock then held by such holders by delivering a notice to the Company
thereof. The Corporation shall give prompt written notice of any such election
to all other holders of Series G Convertible Preferred Stock who are entitled to
require redemption hereunder at the time of such notice thereof, and each such
holder shall have until ten (10) business days after receipt of such second
notice, to request redemption (by giving written notice to the Corporation) of
all or any portion of such Series G Convertible Preferred Stock owned by such
holder.
Upon receipt of such election(s), the Corporation shall be
obligated to redeem the aggregate number of shares specified therein within 30
days after the Corporation's receipt of such election(s) (the "Redemption Date")
and according to the Redemption Mechanics specified in paragraph 7C below.
7B. Redemption Price and Payment. The Convertible Preferred
----------------------------
Stock to be redeemed on the Redemption Date shall be redeemed by paying for each
share in cash an amount equal to, with respect to a share of Series A
Convertible Preferred Stock, $.25 per share, with respect to a share of Series B
Convertible Preferred Stock, $.42 per share, with respect to a share of Series C
Convertible Preferred Stock, $.70 per share, with respect to a share of Series D
Convertible Preferred Stock, $1.25 per share, with respect to a share of Series
E Convertible Preferred Stock, $.75 per share, with respect to a share of Series
F Convertible Preferred Stock, $1.00 per share and with respect to a share of
Series G Convertible Preferred Stock, $1.00 per share, plus in the case of each
share, an amount equal to all dividends, excluding Accruing Dividends, declared
but unpaid thereon, computed to the Redemption Date, such amount being referred
to as the "Redemption Price." Such payment shall be made in full on the
Redemption Date to the holders entitled thereto.
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<PAGE>
7C. Redemption Mechanics. At least 20 but not more than 30 days
--------------------
prior to the Redemption Date, written notice (the "Redemption Notice") shall be
given by the Corporation by delivery in person, certified or registered mail,
return receipt requested, telecopier or telex, to each holder (at the close of
business on the business day next preceding the day on which the Redemption
Notice is given) of shares of Convertible Preferred Stock requesting redemption,
notifying such holder of the Redemption and specifying the Redemption Price, the
Redemption Date and the place where said Redemption Price shall be payable. The
Redemption Notice shall be addressed to each redeeming holder at his address as
shown by the records of the Corporation. From and after the close of business
on the Redemption Date, unless there shall have been a default in the payment of
the Redemption Price, all rights of redeeming holders of shares of Convertible
Preferred Stock (except the right to receive the Redemption Price) shall cease
with respect to such shares, and such shares shall not thereafter be transferred
on the books of the Corporation or be deemed to be outstanding for any purpose
whatsoever. If the funds of the Corporation legally available for redemption of
shares of Convertible Preferred Stock on the Redemption Date are insufficient to
redeem the total number of all of the shares of Convertible Preferred Stock to
be redeemed, the holders of such shares of Convertible Preferred Stock shall
share ratably in any funds legally available for redemption of such shares
according to the respective amounts which would be payable with respect to the
full number of shares owned by them if all such outstanding shares were redeemed
in full. The shares of Convertible Preferred Stock not redeemed shall remain
outstanding and entitled to all rights and preferences provided herein. At any
time thereafter when additional funds of the Corporation are legally available
for the redemption of such shares of Convertible Preferred Stock, such funds
will be used, at the end of the next succeeding fiscal quarter, to redeem the
balance of such shares, or such portion thereof for which funds are then legally
available, on the basis set forth above.
7D. Redeemed or Otherwise Acquired Shares to be Retired. Any
---------------------------------------------------
shares of Convertible Preferred Stock redeemed pursuant to this paragraph 7 or
otherwise acquired by the Corporation in any manner whatsoever shall be canceled
and shall not under any circumstances be reissued; and the Corporation may from
time to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Convertible Preferred
Stock.
8. Amendments. No provision of the terms of a series of
----------
Convertible Preferred Stock (other than the Series E Convertible Preferred
Stock) may be amended, modified or waived without the written consent or
affirmative vote of the holders of at least two-thirds of the then outstanding
shares of such series of Convertible Preferred Stock. No provision of the terms
of the Series E Convertible Preferred Stock may be amended, modified or waived
without the written consent or affirmative vote of the holders of at least
seventy percent (70%) of the then outstanding shares of Series E Convertible
Preferred Stock.
D. QUALIFIED PUBLIC OFFERING
-------------------------
In the event of a Qualified Public Offering, then, effective upon the
closing of the sales of shares of Common Stock of the Corporation pursuant to
such Qualified Public Offering,
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<PAGE>
(i) the first paragraph of this FOURTH Article of this Amended and Restated
Certificate of Incorporation of Adolor Corporation shall be replaced in its
entirety with the following:
FOURTH: The total number of shares of all classes of capital stock
which the Corporation shall have authority to issue is 100,000,000
shares, consisting of 99,000,000 shares of Common Stock with a par
value of $.0001 per share (the "Common Stock") and 1,000,000 shares of
Preferred Stock with a par value of $.01 per share (the "Preferred
Stock").
and (ii) Sections B and C of this FOURTH Article of this Amended and Restated
Certificate of Incorporation of Adolor Corporation shall be replaced in their
entirety with the following:
B. PREFERRED STOCK
---------------
1. Issue in Series. Preferred Stock may be issued from time to time
---------------
in one or more series, each such series to have the terms stated herein and in
the resolution of the board of directors of the Corporation providing for its
issue. All shares of any one series of Preferred Stock will be identical, but
shares of different series of Preferred Stock need not be identical or rank
equally except insofar as provided by law or herein.
2. Creation of Series. The board of directors will have authority
------------------
by resolution to cause to be created one or more series of Preferred Stock, and
to determine and fix with respect to each series prior to the issuance of any
shares of the series to which such resolution relates:
2A. The distinctive designation of the series and the number of
shares which will constitute the series, which number may be increased or
decreased (but not below the number of shares then outstanding) from time to
time by action of the board of directors;
2B. The dividend rate and the times of payment of dividends on
the shares of the series, whether dividends will be cumulative, and if so, from
what date or dates;
2C. The price or prices at which, and the terms and conditions
on which, the shares of the series may be redeemed at the option of the
Corporation;
2D. Whether or not the shares of the series will be entitled to
the benefit of a retirement or sinking fund to be applied to the purchase or
redemption of such shares and, if so entitled, the amount of such fund and the
terms and provisions relative to the operation thereof;
2E. Whether or not the shares of the series will be convertible
into, or exchangeable for, any other shares of stock of the Corporation or other
securities, and if so convertible or exchangeable, the conversion price or
prices, or the rates of exchange, and any adjustments thereof, at which such
conversion or exchange may be made, and any other terms and conditions of such
conversion or exchange;
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<PAGE>
2F. The rights of the shares of the series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation;
2G. Whether or not the shares of the series will have priority
over or be on a parity with or be junior to the shares of any other series or
class in any respect or will be entitled to the benefit of limitations
restricting the issuance of shares of any other series or class having priority
over or being on a parity with the shares of such series in any respect, or
restricting the payment of dividends on or the making of other distributions in
respect of shares of any other series or class ranking junior to the shares of
the series as to dividends or assets, or restricting the purchase or redemption
of the shares of any such junior series or class, and the terms of any such
restriction;
2H. Whether the series will have voting rights, in addition to
any voting rights provided by law, and, if so, the terms of such voting rights;
and
2I. Any other preferences, qualifications, privileges, options
and other relative or special rights and limitations of that series.
3. Dividends. Holders of Preferred Stock shall be entitled to
---------
receive, when and as declared by the board of directors, out of funds legally
available for the payment thereof, dividends at the rates fixed by the board of
directors for the respective series, and no more, before any dividends shall be
declared and paid, or set apart for payment, on Common Stock with respect to the
same dividend period.
4. Preference on Liquidation. In the event of the voluntary or
-------------------------
involuntary liquidation, dissolution or winding up of the Corporation, holders
of each series of Preferred Stock will be entitled to receive the amount fixed
for such series plus, in the case of any series on which dividends will have
been determined by the board of directors to be cumulative, an amount equal to
all dividends accumulated and unpaid thereon to the date of final distribution
whether or not earned or declared before any distribution shall be paid, or set
aside for payment, to holders of Common Stock. If the assets of the Corporation
are not sufficient to pay such amounts in full, holders of all shares of
Preferred Stock will participate in the distribution of assets ratably in
proportion to the full amounts to which they are entitled or in such order or
priority, if any, as will have been fixed in the resolution or resolutions
providing for the issue of the series of Preferred Stock. Neither the merger
nor consolidation of the Corporation into or with any other corporation, nor a
sale, transfer or lease of all or part of its assets, will be deemed a
liquidation, dissolution or winding up of the corporation within the meaning of
this paragraph except to the extent specifically provided for herein.
5. Redemption. The Corporation, at the option of the board of
----------
directors, may redeem all or part of the shares of any series of Preferred Stock
on the terms and conditions fixed for such series.
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<PAGE>
6. Voting Rights. Except as otherwise required by law, or as
-------------
otherwise determined by the board of directors as to the shares of any series of
Preferred Stock prior to the issuance of any such shares, the holders of
Preferred Stock shall have no voting rights and shall not be entitled to any
notice of any meeting of stockholders.
FIFTH: The corporation shall have perpetual existence.
SIXTH: The number of directors of the corporation shall be such as
from time to time shall be fixed by, or in the manner provided, in the by-laws
of the corporation. No election of directors need be ballot unless the by-laws
so provide.
SEVENTH: To the fullest extent that the general corporate law of the
State of Delaware, as it exists on the date hereof or as it may hereafter be
amended, permits the limitation or elimination of the liability of the
directors, no director of the corporation shall be liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director. No amendment to or repeal of this Article shall apply to or have any
effect on liability or alleged liability of any director of the corporation for
or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
EIGHTH: The corporation shall, to the fullest extent permitted by
subsection 145 of the General Corporation Law of the State of Delaware, as the
same may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any and all of
the expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any by-law, agreement, vote of stockholders, or disinterested directors or
otherwise, both as to action in their official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
NINTH: The Board of Directors shall have power without the assent
or vote of the stockholders to make, alter, amend, change, add to or repeal the
by-laws of the corporation.
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EXHIBIT 10.1
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ADOLOR CORPORATION
Amended and Restated 1994 Equity Compensation Plan
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Adolor Corporation, a Delaware corporation, wishes to attract
employees and consultants to the Company, to induce employees, Directors and
consultants to remain with the Company, to encourage them to increase their
efforts to make the Company's business more successful and to enhance
stockholder value. In furtherance thereof, the Adolor Amended and Restated 1994
Equity Compensation Plan is designed to provide incentive and non-qualified
stock options to employees, Directors and consultants of the Company.
1. DEFINITIONS.
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Whenever used herein and unless otherwise provided in the Optionee's
Grant Letter, the following terms shall have the meanings set forth below:
"Administrator" means the Board, or a committee, the members of which
shall be appointed by the Board as described in Section 3.
"Approved Sale" means the approval, prior to the consummation of a
Public Offering, by the holders of at least 50% of the Common Stock (including
voting and nonvoting shares voting as a single class) of (i) the merger or
consolidation of the Company, (ii) the sale of all or substantially all of its
assets or (iii) the sale of all or a majority of the outstanding capital stock
or my other similar transaction.
"Board" means the Board of Directors of the Company.
"Cause" means the Optionee's (i) conviction for committing a felony
under federal law or of the state in which such action occurred, (ii) dishonesty
in the course of fulfilling his or her employment duties or (iii) willful and
deliberate failure to perform his or her employment duties in any material
respect, or such other events as shall be determined by the Administrator. The
Administrator shall have the sole discretion to determine whether "Cause"
exists, and its determination shall be final.
"Change of Control" means the happening of any of the following after
the consummation of a Public Offering:
(i) any Person, other than (a) the Company or any of its
Subsidiaries, (b) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Subsidiaries, (c) an
underwriter temporarily holding securities pursuant to an offering of such
securities, (d) a corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportion as their ownership of stock
of the Company, or (e) an Optionee or any "group" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) which includes the Optionee),
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired directly
from the Company or its Subsidiaries) representing more than 25% of either the
then outstanding shares of
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Stock of the Company or the combined voting power of the Company's then
outstanding securities;
(ii) the individuals who serve on the Board as of the effective
date hereof (the "Incumbent Directors") cease for any reason to constitute at
least a majority of the Board; provided, however, any person who becomes a
director subsequent to the effective date hereof, whose election or nomination
for election was approved by a vote of at least a majority of the directors then
constituting the Incumbent Board, shall for purposes of this clause (ii) be
considered an Incumbent Director;
(iii) the consummation of a merger or consolidation of the
Company in which the stockholders of the Company immediately prior to such
merger or consolidation, would not, immediately after the merger or
consolidation, beneficially own (as such term is defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, shares representing in the aggregate 50%
or more of the combined voting power of the securities of the corporation
issuing cash or securities in the merger or consolidation (or of its ultimate
parent corporation, if any); or
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company, or there is consummated an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets, other than a sale or disposition by the Company of all or
substantially all of the Company's assets to an entity, at least 50% of the
combined voting power of the voting securities of which are owned by Persons in
substantially the same proportion as their ownership of the Company immediately
prior to such sale.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the Common Stock of the Company, par value $.01
per share, either currently existing or authorized hereafter.
"Company" means Adolor Corporation, a Delaware corporation.
"Director" means a member of the Board who is not an employee of the
Company or its Subsidiaries.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the exercise price per Share of an Option.
"Fair Market Value" per Share as of a particular date means (i) if
Shares are then listed on a national stock exchange, the closing sales price per
Share on the exchange for the last preceding date on which there was a sale of
Shares on such exchange, as determined by the Administrator, (ii) if Shares are
not then listed on a national stock exchange but are then traded on an over-the-
counter market, the average of the closing bid and asked prices for the Shares
in such over-the-counter market for the last preceding date on which there was a
sale of such Shares in such market, as determined by the Administrator, or (iii)
if Shares are not then listed on a national stock exchange or traded on an over-
the-counter market, or if the Administrator determines that the that the value
as determined pursuant to Section (i) or (ii) above does not
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reflect fair market value, the Administrator shall determine fair market value
after taking into account such factors that it deems appropriate.
"Grant Letter" means a written agreement in a form approved by the
Administrator to be entered into by the Company and the Optionee as provided in
Section 3.
"Incentive Stock Option" means "incentive stock option" within the
meaning of Section 422(b) of the Code.
"Non-Qualified Option" means an Option which is not intended to be an
"incentive stock option" within the meaning of Section 422(b) of the Code.
"Option" means the right to purchase, at the price and for the term
fixed by the Administrator in accordance with the Plan, and subject to such
other limitations and restrictions in the Plan and the applicable Grant Letter,
a number of Shares determined by the Administrator.
"Optionee" means an employee or Director of or consultant to, the
Company to whom an Option is granted, or the Successors of the Optionee, as the
context so requires.
"Person" means any individual, partnership, corporation, company,
limited liability company, association, trust, joint venture, unincorporated
organization, entity or division, or any government, governmental department or
agency or political subdivision thereof.
"Plan" means this Adolor Corporation Amended and Restated 1994 Equity
Compensation Plan as amended from time to time.
"Public Offering" means a successfully completed firm-commitment
underwritten public offering (other than a Unit Offering, as hereinafter
defined) pursuant to an effective registration statement under the Securities
Act in respect to the offer and sale of shares of Common Stock for the account
of the Company resulting in aggregate net proceeds to the Company and any
stockholder selling shares of Common Stock in such offering of not less than $25
million.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of Common Stock of the Company.
"Subsidiary" means any corporation (other than the Company) that is a
"subsidiary corporation" with respect to the Company under Section 424(f) of the
Code. In the event the Company becomes a subsidiary of another company, the
provisions hereof applicable to subsidiaries shall, unless otherwise determined
by the Administrator, also be applicable to any company that is a "parent
corporation" with respect to the Company under Section 424(e) of the Code.
"Successor of the Optionee" means: (i) the legal representative of
the estate of a deceased Optionee or the person, (ii) persons who shall acquire
the right to exercise an Option by bequest or inheritance or other transfer or
by reason of the death of the Optionee, (iii) if permitted by the Administrator
in its sole discretion, any person who shall acquire the right to
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exercise an Option pursuant to any other transfer of the Option either pursuant
to Section 12 hereof or pursuant to Court Order or (iv) persons who shall
acquire the right to exercise an Option on behalf of the Optionee as the result
of a determination by a court or other governmental agency of the incapacity of
the Optionee.
"Termination of Service" means an Optionee's termination of
employment or other service, as applicable, with the Company and its
Subsidiaries. Cessation of service as an officer, employee, director or
consultant shall not be treated as a Termination of Service if the Optionee
continues without interruption to serve thereafter in a material manner in
another one (or more) of such other capacities, as determined by the
Administrator in its sole discretion.
"Unit Offering" means an underwritten public offering of a
combination of debt securities and Common Stock (or warrants or exchange rights
to purchase Common Stock) of the Company in which not more than 15% of the gross
proceeds received for the sale of such securities is attributed to Common Stock.
2. EFFECTIVE DATE AND TERMINATION OF PLAN.
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The effective date of the Plan is February___, 2000. The Plan shall
terminate on, and no Option shall be granted hereunder on or after, the 10-year
anniversary of the earlier of the approval of the Plan by (i) the Board or (ii)
the stockholders of the Company; provided, however, that the Board may at any
time prior to that date terminate the Plan.
3. ADMINISTRATION OF PLAN.
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(a) The Plan shall be administered by the Administrator, which shall
be either the Board, or a Committee appointed by the Board, who shall, on behalf
of the Board, have full responsibility and authority to administer the Plan. The
Administrator shall, at such times as the Common Stock, or shares of such other
stock that may be the subject of Options hereunder, are registered pursuant to
Section 12 of the Exchange Act, consist of at least two individuals each of whom
shall be a "nonemployee director" as defined in Rule 16b-3 as promulgated by the
Securities and Exchange Commission under the Exchange Act and shall, at such
times as the Company is subject to Section 162(m) of the Code (to the extent
relief from the limitation of Section 162(m) of the Code is sought), qualify as
"outside directors" for purposes of Section 162(m) of the Code and related
Treasury regulations. The acts of a majority of the members present at any
meeting of the Administrator at which a quorum is present, or acts approved in
writing by a majority of the entire Administrator, shall be the acts of the
Administrator for purposes of the Plan. If and to the extent applicable, no
member of the Administrator may act as to matters under the Plan specifically
relating to such member.
(b) Subject to the provisions of the Plan, the Administrator shall in
its discretion as reflected by the terms of the Grant Letters (i) authorize the
granting of Incentive Stock Options and Non-Qualified Options to employees,
Directors and consultants of the Company and its Subsidiaries; and (ii)
determine the eligibility of an employee, Director or consultant to receive an
Option subject to Section 4 hereof, (iii) specify whether such Option is an
Incentive Stock Option or Non-Qualified Option and (iv) determine the number of
Shares to be covered under any Grant Letter, considering the position an
responsibilities of the employee,
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Director or consultant, the nature and value to the Company of the employee's,
Director's or consultant's present and potential contribution to the success of
the Company whether directly or through a Subsidiaries and such other factors as
the Administrator may deem relevant.
(c) The Grant Letter shall contain such other terms, provisions and
conditions not inconsistent herewith as determined by the Administrator. The
Optionee shall take whatever additional actions and execute whatever additional
documents the Administrator may in its reasonable judgment deem necessary or
advisable in order to carry out or effect one or more of the obligations or
restrictions imposed on the Optionee pursuant to the express provisions of the
Plan and the Grant Letter.
4. ELIGIBILITY.
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Any employee, Director or consultant of the Company or a Subsidiary
who is designated by the Administrator as eligible to participate in the Plan
shall be eligible to receive an Option under the Plan.
5. SHARES AND UNITS SUBJECT TO THE PLAN.
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(a) Subject to adjustments as provided in Section 16, the total
number of Shares subject to Options granted under the Plan, in the aggregate,
may not exceed 14,750,000 Shares distributed under the Plan may be treasury
Shares or authorized but unissued Shares. Any Shares that have been reserved for
distribution in payment for Options but are later forfeited or for any other
reason are not payable under the Plan may again be made the subject of Options
under the Plan.
(b) The certificates for Shares issued hereunder may include any
legend which the Administrator deems appropriate to reflect any restrictions on
transfer hereunder or under the Grant Letter , or as the Administrator may
otherwise deem appropriate.
(c) In no event may any Optionee receive Options for more than
1,000,000 shares in any calendar year. The aggregate fair market value of the
shares on the date of the grant with respect to which Incentive Stock Options
are exercisable for the first time by an Optionee during any calendar year under
the Plan and under any other stock option plan of the Company shall not exceed
$100,000.
6. GRANT OF OPTION.
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Subject to the other terms of the Plan, the Administrator shall, in
its discretion as reflected by the terms of the applicable Grant Letter: (i)
determine and designate from time to time those eligible employees, Directors
and consultants of the Company and its Subsidiaries to whom Options are to be
granted and the number of Shares to be optioned to each employee and consultant
(provided that Incentive Stock Options may only be granted to employees); (ii)
determine the time or times when and the manner and condition in which each
Option shall be exercisable and the duration of the exercise period; and (iii)
determine or impose other conditions to the grant or exercise of Options under
the Plan as it may deem appropriate.
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7. OPTION PRICE.
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Unless otherwise determined by the Administrator as reflected in the
Grant Letter, the Exercise Price shall not be less than 100% (or 110% for
Incentive Stock Options with respect to individuals described in Section
422(b)(6) of the Code (relating to 10% owners)) of the Fair Market Value of a
Share on the day the Option is granted.
8. TERM OF OPTIONS; VESTING AND EXERCISABILITY.
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(a) The Administrator shall establish the term of each Option, as set
forth in the Grant Letter; provided that in no event shall any Option have a
term greater than 10 years from the date of grant (except that, in the case of
an individual described in Section 422(b)(6) of the Code (relating to 10%
owners), the term of any Incentive Stock Option shall be no more than five years
from the date of grant). Unless earlier expired, forfeited or otherwise
terminated, each Option shall expire in its entirety upon the day after the last
day of its term. The Option shall also expire, be forfeited and terminate at
such times and in such circumstances as otherwise provided hereunder or under
the Grant Letter.
(b) Each Option, to the extent that the Optionee has not had a
Termination of Service and the Option has not otherwise lapsed, expired,
terminated or been forfeited, shall vest according to the vesting schedule which
shall be determined in the sole and absolute discretion of the Administrator as
set forth in the Grant Letter
(c) The Grant Letter may, but need not, include a provision whereby
the Optionee may elect at any time while still an employee of or a consultant to
the Company to exercise a Non-Qualified Option as to any part or all of the
Shares subject to the Option prior to the full vesting of the Option. Any Shares
so purchased (i) shall vest in accordance with the vesting schedule otherwise
applicable to the Option, (ii) shall be subject to a repurchase right in favor
of the Company as provided in Section 9 below, and (iii) shall be subject to any
other restriction the Company determines to be appropriate.
(d) Notwithstanding the foregoing provisions of this Section 8,
Options exercisable pursuant to the schedule set forth by the Administrator at
the time of grant may be fully or more rapidly exercisable or vested, and Shares
subject to such schedule may be fully or more rapidly vested, at any time in the
discretion of the Administrator. Upon and after the death of an Optionee, such
Optionee's Options, if and to the extent otherwise exercisable hereunder or
under the applicable Grant Letter after the Optionee's death, may be exercised
by the Successors of the Optionee.
9. EXERCISABILITY UPON AND AFTER TERMINATION OF OPTIONEE.
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9.1. Termination on Retirement, Disability, Death or without Cause.
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Unless otherwise provided in the applicable Grant Letter, if an
Optionee has a Termination of Service other than a Termination of Service due to
death or for cause, the unexercised and vested portion of such Optionee's Option
will remain exercisable by the Optionee, the Optionee's estate, the persons who
acquired the right to exercise the Option by bequest or inheritance, as
applicable, for a period of 90 days following such Termination of
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Service, but in no event later than the last day of the term of the Option. Such
portion of the Option shall terminate to the extent not exercised within such
period. Unless otherwise provided in the Grant Letter, upon such a Termination
of Service, any unvested portion of an Option will terminate and will be
forfeited, and any Shares purchased pursuant to Section 8(c) above which are
unvested at the time of such Termination of Service shall be subject to a
repurchase right in favor of the Company for a price equal to the lesser of (x)
the Exercise Price of the Shares or (y) the Fair Market Value of such Shares on
the date of repurchase, which right must be exercised by the Company within 90
days of such Termination of Service; provided that if the Company does not
exercise such right within such 90-day period, the Optionee shall become fully
and immediately vested in such Shares.
9.2. Termination for Cause.
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If an Optionee has a Termination of Service on account of a
termination for Cause, any Option held by the Optionee will immediately expire
on the date of such Termination of Service, and the Company has the right (but
not the obligation to) repurchase any unvested or vested Shares held by the
Optionee for a price equal to the lesser of (x) the Option Price of the Shares
or (y) the Fair Market Value of the Shares on the date of repurchase; provided
such right must be exercised within six months of the applicable Termination of
Service, and provided, further, that if the Company does not exercise such right
within such six-month period, the Optionee shall become fully and immediately
vested in such Shares.
9.3. Termination due to Optionee's Death.
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Unless otherwise provided in the applicable Grant Letter, if an
Optionee has a Termination of Service due to the Optionee's death or if the
Optionee dies within the 90-day period following any Termination of Service
other than a Termination for Cause, the unexercised and vested portion of such
Optionee's Option will remain exercisable by the Optionee's estate or the
persons who acquired the right to exercise the Option by bequest or inheritance,
as applicable, until one year from the date of death but in no event later than
the last day of the term of the Option. Such portion of the Option shall
terminate to the extent not exercised within such period. Unless otherwise
provided in the Grant Letter , upon such Termination of Service, any unvested
portion of an Option will terminate and will be forfeited, and any Shares
purchased pursuant to Section 8(c) above which are unvested at the time of such
Termination of Service shall be subject to a repurchase right in favor of the
Company for a price equal to the lesser of (x) the Exercise Price of the Shares
or (y) the Fair Market Value of such Shares on the date of repurchase, which
right must be exercised by the Company within 90 days of such Termination of
Service; provided that if the Company does not exercise such right within such
90-day period, the Optionee shall become fully and immediately vested in such
Shares.
9.4. In General.
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Except as may otherwise be expressly set forth in Section 8 or this
Section 9 or as may otherwise be expressly provided under the Grant Letter, no
provision of this Section 9 is intended to or shall permit the exercise of the
Option to the extent the Option was not exercisable upon the Termination of
Service.
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10. EXERCISE OF OPTIONS; PAYMENT.
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10.1. Notice of Exercise.
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(a) Subject to vesting and other restrictions provided for hereunder
or otherwise imposed in accordance herewith, an Option may be exercised, and
payment in full of the aggregate Exercise Price made, by an Optionee only by
written notice (in the form prescribed by the Administrator) to the Company
specifying the number of Shares to be purchased.
(b) Without limiting the scope of the Administrator's discretion
hereunder, the Administrator may impose such other restrictions on the exercise
of Incentive Stock Options (whether or not in the nature of the foregoing
restrictions) as it may deem necessary or appropriate.
(c) If Shares acquired upon the exercise of an Incentive Stock Option
are disposed of in a disqualifying disposition within the meaning of Section 422
of the Code by an Optionee prior to the expiration of either two years from the
date of grant of such Option or one year from the transfer of Shares to the
Optionee pursuant to the exercise of such Option, or in any other disqualifying
disposition within the meaning of Section 422 of the Code, such Optionee shall
notify the Company in writing as soon as practicable thereafter of the date and
terms of such disposition and, if the Company (or any affiliate thereof)
thereupon has a tax withholding obligation, shall pay to the company (or such
affiliate) an amount equal to any withholding tax the Company (or affiliate) is
required to pay as a result of the disqualifying disposition.
10.2. Form of Payment.
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(a) The aggregate Exercise Price shall be paid in full upon the
exercise of the Option. Payment must be made by one of the following methods:
(i) cash or a certified or bank cashier's check;
(ii) the proceeds of a Company loan program or third party sale
program or a note acceptable to the Administrator given as consideration under
such a program, in each case if permitted by the Administrator in its
discretion, if such a program has been established and the Optionee is eligible
to participate therein;
(iii) if approved by the Administrator in its discretion Shares
of previously owned Common Stock having an aggregate Fair Market Value on the
date of exercise equal to the aggregate Option Price;
(iv) if approved by the Administrator of its discretion, by
delivery of an assignment satisfactory in form and substance to the Company of a
sufficient amount of the proceeds from the sale of Shares to be acquired
pursuant to such exercise and an instruction to the broker or selling agent to
pay that amount to the Company; or
(v) by a combination of such methods of payment or any other
method acceptable to the Administrator in its discretion.
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(b) Except in the case of Options exercised by certified or bank
cashier's check, the Administrator may impose limitations and prohibitions on
the exercise of Options as it deems appropriate, including, without limitation,
any limitation or prohibition designed to avoid accounting consequences which
may result from the use of Common Stock as payment upon exercise of an Option.
Any fractional Shares resulting from an Optionee's election that is accepted by
the Company shall be paid in cash.
11. EXERCISE BY SUCCESSORS.
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An Option may be exercised, and payment in full of the aggregate
Exercise Price made, by the Successors of the Optionee only by written notice
(in the form prescribed by the Administrator) to the Company specifying the
number of Shares to be purchased. Such notice shall state that the aggregate
Option Price will be paid in full, or that the Option will be exercised as
otherwise provided hereunder, in the discretion of the Company or the
Administrator, if and as applicable.
12. NONTRANSFERABILITY OF OPTION.
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Each Option granted under the Plan shall by its terms be
nontransferable by the Optionee except by will or the laws of descent and
distribution of the state wherein the Optionee is domiciled at the time of his
death; provided, however, that the Administrator may (but need not) permit other
transfers of Non-Qualified Options where the Administrator concludes that such
transferability does not result in accelerated U.S. federal income taxation and
is otherwise appropriate and desirable.
13. TAX WITHHOLDING.
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13.1. In General.
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The Company shall be entitled to withhold from any payments or deemed
payments any amount of tax withholding determined by the Administrator to be
required by law. Without limiting the generality of the foregoing, the
Administrator may, in its discretion, require an Optionee to pay to the Company
at such time as the Administrator determines the amount that the Administrator
deems necessary to satisfy the Company's obligation to withhold federal, state
or local income or other taxes incurred by reason of the exercise of any Option.
13.2. Share Withholding.
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Upon the exercise of an Option, the Optionee may, if approved by the
Administrator in its discretion, make a written election to have Shares then
issued withheld by the Company from the Shares otherwise to be received, or to
deliver previously owned Shares, in order to satisfy the liability for such
withholding taxes. In the event that the Optionee makes, and the Administrator
permits, such an election, the number of Shares so withheld or delivered shall
have an aggregate Fair Market Value on the date of exercise sufficient to
satisfy the applicable withholding taxes.
13.3. Withholding Required.
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Notwithstanding anything contained in the Plan to the contrary, the
Optionee's satisfaction of any tax-withholding requirements imposed by the
Administrator shall be a condition precedent to the Company's obligation as may
otherwise be provided hereunder to provide Shares to the Optionee and to the
release of any restrictions as may otherwise be provided hereunder, as
applicable; and the applicable Option shall be forfeited upon the failure of the
Optionee to satisfy such requirements with respect to the exercise of the
Option.
14. REGULATIONS AND APPROVALS
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(a) The obligation of the Company to sell Shares with respect to an
Option granted under the Plan shall be subject to all applicable laws, rules and
regulations, including all applicable federal and state securities laws, and the
obtaining of all such approvals by governmental agencies as may be deemed
necessary or appropriate by the Administrator.
(b) The Administrator may make such changes to the Plan as may be
necessary or appropriate to comply with the rules and regulations of any
government authority or to obtain tax benefits applicable to an Option.
(c) Each grant of Options is subject to the requirement that, if at
any time the Administrator determines, in its discretion, that the listing,
registration or qualification of Shares issuable pursuant to the Plan is
required by any securities exchange or under any state or federal law, or the
consent or approval of any governmental regulatory body is necessary or
desirable as a condition of, or in connection with, the issuance of Options no
payment shall be made in whole or in part, unless listing, registration,
qualification, consent or approval has been effected or obtained free of any
conditions in a manner acceptable to the Administrator.
(d) In the event that the disposition of stock acquired pursuant to
the Plan is not covered by a then current registration statement under the
Securities Act, and is not otherwise exempt from such registration, such Shares
shall be restricted against transfer to the extent required under the Securities
Act, and the Administrator may require any individual receiving Shares pursuant
to the Plan, as a condition precedent to receipt of such Shares, to represent to
the Company in writing that such Shares will be disposed of only if registered
for sale under the Securities Act or if there is an available exemption for such
disposition.
15. INTERPRETATION AND AMENDMENTS, OTHER RULES.
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15.1. The Administrator may make such rules and regulations and establish
such procedures for the administration of the Plan as it deems appropriate.
Without limiting the generality of the foregoing, the Administrator may (i)
determine the extent, if any, to which Options shall be forfeited (whether or
not such forfeiture is expressly contemplated hereunder); (ii) interpret the
Plan and the Grant Letters hereunder, with such interpretations to be conclusive
and binding on all persons and otherwise accorded the maximum deference
permitted by law, provided that the Administrator's interpretation shall not be
entitled to deference on and after a Change of Control except to the extent that
such interpretations are made exclusively by members of the Administrator who
are individuals who served as Administrator members before the Change of
Control; and (iii) take any other actions and make any other determinations or
decisions that it deems necessary or appropriate in connection with the Plan or
the administration
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or interpretation thereof. Unless otherwise expressly provided hereunder, the
Administrator, with respect to any grant, may exercise its discretion hereunder
at the time of the grant or thereafter. In the event of any dispute or
disagreement as to the interpretation of the Plan or of any rule, regulation or
procedure, or as to any question, right or obligation arising from or related to
the Plan, the decision of the Administrator, except as provided in clause (ii)
of the foregoing sentence, shall be final and binding upon all persons. The
Board may amend the Plan as it shall deem advisable, except that no amendment
may adversely affect an Optionee with respect to an Option previously granted
unless such amendments are required in order to comply with applicable laws;
provided that the Board may not make any amendment in the Plan that would, if
such amendment were not approved by the holders of the Common Stock, cause the
Plan to fail to comply with any requirement of applicable law or regulation,
unless and until the approval of the holders of such Common Stock is obtained.
15.2. Right of Repurchase. Without limiting the Company's right of
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repurchase upon (i) a Termination of Service, (ii) upon a Change in Control, or
(iii) prior to an Approved Sale (or upon the consummation of an Approved Sale)
or a Public Offering, the Company reserves the right (but not the obligation) to
repurchase any vested Shares for a price equal to the Fair Market Value of the
Shares on the date of such repurchase.
16. CHANGES IN CAPITAL STRUCTURE; CHANGE OF CONTROL.
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16.1. Changes in Capital Structure.
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(a) If (i) the Company shall at any time be involved in a merger,
consolidation, dissolution, liquidation, reorganization, exchange of shares,
sale of all or substantially all of the assets or stock of the Company or a
transaction similar thereto, (ii) any stock dividend, stock split, reverse stock
split, stock combination, reclassification, recapitalization or other similar
change in the capital structure of the Company or any distribution to holders of
Common Stock other than cash dividends, shall occur or (iii) any other event
shall occur which in the judgment of the Administrator necessitates action by
way of adjusting the terms of the outstanding Options, then (x) the maximum
aggregate number of Shares which may be made subject to Options under the Plan
shall be appropriately adjusted by the Administrator; and (y) the Administrator
shall take any such action as in its judgment shall be necessary to preserve the
Optionees' rights in their respective Options substantially proportionate to the
rights existing in such Options prior to such event, including, without
limitation, adjustments in (A) the number of Options granted, (B) the number and
kind of shares or other property to be distributed in respect of Options, and
(C) the Exercise Price.
16.2. Change of Control or Approved Sale.
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(a) Upon a Change of Control or an Approved Sale unless otherwise
provided in an Optionee's Grant Letter, the vesting and exercisability of all
Options that are outstanding and unexercised as of such Change of Control, to
the extent unvested, and any unvested shares held by the Optionee shall be
accelerated such that all outstanding Options are fully vested and exercisable
and all Shares held by the Optionee are fully vested, and, if the Company does
not survive such Change of Control or an Approved Sale, the Company shall, if
the Company does not cash-out all outstanding options, require the successor
corporation to the Company to assume
-11-
<PAGE>
all outstanding Options and to substitute such Options with awards involving the
common stock of such successor corporation on terms and conditions necessary to
preserve the rights of Optionees with respect to such Options. Upon a Change of
Control or an Approved Sale, the Administrator, in its sole discretion, may
require the Company to cancel all outstanding vested Options (including those
Options vested upon a Change of Control or an Approved Sale) in exchange for a
cash payment in an amount equal to the excess, if any, of the Fair Market Value
of the Common Stock underlying the unexercised portion of the Option as of the
date of the Change of Control or Approved Sale over the Option Price of such
portion. Notwithstanding anything in the Plan to the contrary, in the event of
an Approved Sale or a Change of Control, the Administrator shall not have the
right to take any actions described in the Plan (including without limitation
actions described in this Section 16.2) that would make the Approved Sale or
Change of Control ineligible for pooling of interests accounting treatment or
that would make the Approved Sale or Change of Control ineligible for desired
tax treatment if, in the absence of such right, the transaction would qualify
for such treatment and the Company intends to use such treatment with respect to
the transaction, in which case the Administrator and the Company shall be
required to take the action described in the first sentence of this Section
16.2.
16.3. Administrator Authority. The judgment of the Administrator with
-----------------------
respect to any matter referred to in this Section 16 shall be conclusive and
binding upon each Optionee without the need for any amendment to the Plan.
17. MISCELLANEOUS.
-------------
17.1. No Rights to Employment or Other Service.
----------------------------------------
Nothing in the Plan or in any grant made pursuant to the Plan shall
confer on any individual any right to continue in the employ or other service of
the Company or its Subsidiaries or interfere in any way with the right of the
Company or its Subsidiaries and its stockholders to terminate the individual's
employment or other service at any time.
17.2. No Fiduciary Relationship.
-------------------------
Nothing contained in the Plan, and no action taken pursuant to the
provisions of the Plan, shall create or shall be construed to create a trust of
any kind, or a fiduciary relationship between the Company or its Subsidiaries,
or their officers or the Administrator, on the one hand, and the Optionee, the
Company, its Subsidiaries or any other person or entity, on the other.
17.3. Notices.
-------
All notices under the Plan shall be in writing, and if to the
Company, shall be delivered to the Board or mailed to its principal office,
addressed to the attention of the Board; and if to the Optionee, shall be
delivered personally, sent by facsimile transmission or mailed to the Optionee
at the address appearing in the records of the Company. Such addresses may be
changed at any time by written notice to the other party given in accordance
with this Section 17.3.
-12-
<PAGE>
17.4. Exculpation and Indemnification.
-------------------------------
The Company shall indemnify and hold harmless the members of the
Board and the members of the Administrator, from and against any and all
liabilities, costs and expenses incurred by such persons as a result of any act
or omission to act in connection with the performance of such person's duties,
responsibilities and obligations under the Plan, to the maximum extent permitted
by law, other than such liabilities, costs and expenses as may result from the
gross negligence, bad faith, willful misconduct or criminal acts of such
persons.
17.5. Captions.
--------
The use of captions in this Plan is for convenience. The captions are
not intended to provide substantive rights.
17.6. Governing Law.
-------------
THE PLAN SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE
WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAWS.
IN WITNESS WHEREOF, on behalf of Adolor Corporation and pursuant to
the direction of the Board, the undersigned hereby adopts the Plan as set forth
herein.
Adolor Corporation
------------------
By: _______________________________
Title: ____________________________
-13-
<PAGE>
EXHIBIT 10.2
------------
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as **. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
OPTION AND LICENSE AGREEMENT
----------------------------
THIS AGREEMENT (the "Agreement") is made and is effective the 10th day of June,
1998 (the "Effective Date") by and between:
Adolor Corporation, a Delaware corporation having its principal place
of business at 371 Phoenixville Pike, Malvern, Pennsylvania 19355
("ADOLOR")
and
Roberts Laboratories Inc., a New Jersey corporation, having its
principal place of business at 4 Industrial Way West, Eatontown, New
Jersey 07724 ("ROBERTS").
RECITALS
--------
1. ADOLOR is engaged in the development and marketing of therapeutic products
utilizing opiate receptor-mediated pathways.
2. ROBERTS has acquired from Eli Lilly and Company ("Lilly"), in an agreement
dated November 5, 1996 (the "Lilly License"), an exclusive, world-wide
license to make, have made, use or sell (+)-[2(S)-[4(R)-(3-hydroxyphenyl)-
3(R),4-dimethyl-1-piperidinyl]methyl]-1-oxo-3-phenylpropyl]amino]-acetic
acid and all pharmaceutically acceptable salts and solvates thereof (the
"Compound"), with the right to sublicense, which Lilly License and its
Appendices A and B are appended hereto as Exhibit A.
3. An Investigational new Drug Application ("IND"), made to the United States
Food and Drug Administration ("FDA"), was initiated for the Compound, but
currently there is no activity pursuant to this Application.
4. As ADOLOR believes the Compound may provide the basis for a therapeutic
product utilizing opiate receptor-mediated pathways, ADOLOR desires to
obtain and ROBERTS desires to provide an exclusive, world-wide license
including (a) a "Phase A" during which ADOLOR will seek to establish the
therapeutic index of the Compound, and (b), provided the therapeutic index
is satisfactory to ADOLOR at its sole discretion, a "Phase B" during which
ADOLOR will pursue development and commercialization of the Compound.
5. Assuming ADOLOR proceeds to Phase B, ADOLOR further desires to seek to
convert the license to an assignment of the Lilly License to ADOLOR subject
to the same duties as between ADOLOR and ROBERTS as are set forth below,
and ROBERTS desires to deliver such assignment to ADOLOR and to exert best
efforts to obtain for ADOLOR the required permission from Lilly, though in
the absence of such an assignment the license provided herein shall be
maintained.
NOW THEREFORE, in consideration of the mutual covenants and obligations
hereinafter set forth the parties agree to be legally bound as follows:
<PAGE>
ARTICLE I - DEFINITIONS
- ----------------------------
Section 1.1. "Affiliate," "Compound," "End User," "Lilly Intellectual
------------
Property Rights," "Net Sales" and "Product" shall have the meanings,
respectively, set forth in the Lilly License.
Section 1.2. "First Commercial Sale" shall mean the first time sales are
------------
made of Product by ADOLOR to an unrelated third party on a country by country
basis.
Section 1.3. "Lilly Know-How" shall have the meaning set forth for "Know-
------------
How" in the Lilly License.
Section 1.4. "NDA" shall mean an application filed with the FDA for the
------------
approval of the manufacturing, marketing or importation of a therapeutic product
for use in humans. The references below to "similar filing" shall encompass, for
example, Product License Applications ("PLAs") and Pre-Marketing Applications
("PMAs").
Section 1.5. "Technical Information" shall mean Technology which is
------------
owned, discovered or developed by or licensed to ROBERTS which is embodied or
employed in the composition, manufacture or use of the Compound or Product, or
components, reagents, parts or elements thereof. "ADOLOR Technical Information"
shall mean Technology which is owned, discovered or developed by ADOLOR which is
embodied or employed in the composition, manufacture or use of the Compound or
Product, or components, reagents, parts or elements thereof.
Section 1.6. "Technology" shall mean know-how, protocols, processes,
------------
instruments, machines, materials, compositions, tests procedures, manufacturing
procedures, techniques, formulations, methodologies and data, inventions,
observations and information, related to the Compound or the Product.
ARTICLE II LICENSE
- ----------------------
Pursuant to the Lilly Intellectual Property Rights or any ROBERTS Technical
Information, ROBERTS grants ADOLOR an exclusive, world-wide license to make,
have made, use, sell or import Product pursuant to the Lilly Intellectual
Property Rights or any other ROBERTS Technical Information. The term of the
license shall be either the term of Phase A or, if ADOLOR elects to proceed with
Phase B, the sum of the terms of Phase A and Phase B.
The rights acquired hereunder shall include all rights licensed to ROBERTS
pursuant to the Lilly License.
<PAGE>
ARTICLE III - PHASE A
- ------------------------
Section 3.1. - Phase A Consideration
--------------------------------------
In consideration for Phase A, ADOLOR shall deliver to ROBERTS a non-
refundable payment of $300,000 on the Effective Date.
Section 3.2. - Phase A Term
-----------------------------
The term of Phase A shall be from the Effective date until the earlier of (a)
the date on which ADOLOR delivers to ROBERTS notice of ADOLOR's completing
studies sufficient to establish the therapeutic index of the Compound and of
whether ADOLOR intends to initiate Phase B and (b) July 31, 1999. The parties
acknowledge that there are areas of risk to ADOLOR's ability to meet this
timetable including:
. the risk that the pharmaceutical composition of the Compound or
Product provided by ROBERTS be insufficient in quality or quantity to
conduct the studies necessary to establish the therapeutic index; and
. the risk that the FDA will suspend or place on hold any activity
pursuant to the IND for the Compound.
The parties further acknowledge that the above exemplified risks, should they
become realities, would provide cause for the July 31, 1999 term expiration date
to be extended. Should an event outside of ADOLOR's control give rise to a
reasonable basis to extend the July 31, 1999 term expiration date, meaning that
it is reasonable to expect that ADOLOR acting with commercially reasonable
diligence shall not have completed studies to establish the therapeutic index of
the Compound by July 31, 1999, an extension of time will be provided to enable
ADOLOR to complete the studies and the parties shall negotiate in good faith and
arrive at a reasonable period of extension.
Section 3.3. - ADOLOR's Phase A Duties
----------------------------------------
In addition to any other duties imposed by this Agreement, during the term
of Phase A, ADOLOR shall use commercially reasonable efforts to conduct studies,
including Phase I clinical studies, to establish the therapeutic index of the
Compound. All costs associated therewith shall be borne by ADOLOR. While the
Phase A is in effect, ADOLOR agrees to undertake the obligations incumbent on
ROBERTS under the Lilly License, with the exception of the milestone payments
set forth in Section 3.01 of the Lilly License and the costs associated with
prosecuting or maintaining patents under the Lilly Intellectual Property Rights,
which shall continue to be borne by ROBERTS.
<PAGE>
Section 3.4. - ROBERTS' Phase A Duties
----------------------------------------
In addition to any other duties imposed by this Agreement, ROBERTS shall:
(a) provide ADOLOR its stocks of the Compound, in the amount ROBERTS
possesses in whatever condition that such Compound may be as of the
Effective Date; and
(b) during the term of Phase A, refrain from discussing, negotiating or
agreeing to, with a third party, a license or assignment of rights in
the Compound, or its use, manufacture, sale or import.
ARTICLE IV - PHASE B
- ------------------------
Section 4.1. - Term and Contingency
-------------------------------------
The term of Phase B begins on the last day of Phase A through to the end of
the term defined in Section 8.01 of the Lilly License. Entrance into Phase B is
contingent on ADOLOR delivering to ROBERTS during the term of Phase A notice of
ADOLOR's intent to proceed with Phase B.
Section 4.2. - Phase B Consideration
--------------------------------------
Subject to the foregoing, in consideration for Phase B, ADOLOR shall pay
ROBERTS:
. $300,000 payable within five (5) business days of the expiration of
Phase A;
. $** payable within five (5) business days of the filing of a first
application for a NDA or similar filing in the United States, Canada,
Japan or the European Community that seeks permission to market a
Product;
. $** payable within five (5) business days of receiving notice of
acceptance of a first NDA or similar filing in the United States,
Canada, Japan or the European Community that seeks permission to
market a Product; and
. a royalty equal to **% of Net Sales.
ADOLOR shall pay Lilly, on behalf of ROBERTS, $** upon acceptance of a first NDA
or similar filing in the United States, Canada, Japan or the European Community
that seeks permission to market a Product, in accordance with Section 3.01(v)
the Lilly License. ADOLOR agrees to pay Lilly, on behalf of ROBERTS, a royalty
equal to ** % of Net Sales in accordance with the Lilly License. For any payment
made on behalf of ROBERTS, ADOLOR shall deliver proof of such payment to
ROBERTS.
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
<PAGE>
Section 4.3. - ADOLOR's Phase B Duties
----------------------------------------
While Phase B is in effect, ADOLOR agrees to undertake the obligations incumbent
on ROBERTS under the Lilly License and accruing during Phase B, with the
exception of the execution milestone payment set forth in Section 3.01(a)(i) of
the Lilly License. Except for costs associated with Robert's duties under this
Agreement, all costs associated with developing and commercializing the Compound
or Product shall be borne by ADOLOR.
ARTICLE V - SUBLICENSES OF THIS AGREEMENT
- ----------------------------------------------
(a) ADOLOR shall have the right to grant sublicenses hereunder consistent
with the terms of the Lilly License, provided, however, that should
-----------------
ADOLOR grant a sublicense hereunder within seventy-five (75) days of
the Effective Date, ROBERTS shall receive 25% of any payments made to
ADOLOR in consideration of such sublicense.
(b) Should ADOLOR decide to actively seek to sublicense marketing rights
in the Compound or seriously consider a good faith offer by a third
party to sublicense such marketing rights, ADOLOR shall notify
ROBERTS of its intention to seriously seek to sublicense the
marketing rights and shall provide ROBERTS with an opportunity to
negotiate in good faith for a sublicense to the marketing rights.
However, nothing herein shall imply that ROBERTS has a right of
priority or preference in such negotiations, or imply any restraints
whatsoever on ADOLOR's business judgment as to partners in marketing
the Compound.
ARTICLE VI - TECHNOLOGY TRANSFER
- ------------------------------------
Section 6.1. - From ROBERTS to ADOLOR
---------------------------------------
Following execution and payment under Section 3.1 ROBERTS shall deliver to
ADOLOR copies of the Lilly Know-how, ROBERTS Technical Information, and its
inventory of Compound and intermediates for the production of Compound.
Section 6.2. - From ADOLOR to ROBERTS
---------------------------------------
(a) Should ADOLOR establish the therapeutic index of the Compound but
nonetheless decline to initiate Phase B, ADOLOR shall deliver to
ROBERTS copies of ADOLOR data on the therapeutic index of the
Compound and any other ADOLOR data on the therapeutic efficacy of the
Compound as well as any dosage forms containing the Compound.
<PAGE>
(b) Should ADOLOR fail to establish the therapeutic index and should
ADOLOR not dispute that the term of Phase A, taking into
consideration any extensions thereto under Section 3.2, has expired,
then ADOLOR shall deliver to ROBERTS copies of ADOLOR data on the
therapeutic index of the Compound and any other ADOLOR data on the
therapeutic efficacy of the Compound as well as any dosage forms
containing the Compound.
(c) All such materials delivered to ROBERTS pursuant to this Section 6.2
shall thus become the sole and exclusive property of ROBERTS.
ARTICLE VII - REPORTS, RECORDS, PAYMENTS
- -------------------------------------------
Section 7.1. - Quarterly Reports
----------------------------------
(a) ADOLOR shall give ROBERTS prompt written notice of-the first
acceptance of a NDA or similar filing in the United States, Canada,
Japan or the European Community that seeks permission to market a
Product.
(b) Within forty five (45) days after the end of each calendar quarter
following the First Commercial Sale in any country, whether or not a
royalty payment is due for that period, ADOLOR shall provide ROBERTS
with a written statement with respect to such period, specifying the
gross sales, the calculation of Net Sales and Net Sales of Product
during the period, and the amount of royalty due, if any, together
with the payment of royalties due.
Section 7.2. - Records
------------------------
(a) ADOLOR shall keep complete and accurate records pertaining to the
manufacture, use and sale of Product appropriate to determine
royalties payable under Section 4.2 of this Agreement.
(b) At the request and expense of ROBERTS, an independent certified
public accountant, selected by ROBERTS and reasonably approved by
ADOLOR, shall have access limited to once per calendar year, at
ADOLOR's principal place of business during ordinary business hours,
to such records maintained by ADOLOR as may be necessary to:
(i) determine, with respect to any of the two (2) preceding years
the correctness of any report or payment made under this Agreement, or
(ii) obtain information with respect to any of the two (2) preceding
years as to the royalty payable in the case of ADOLOR's failure to report
or pay such royalty pursuant to this Agreement.
<PAGE>
(c) If deemed necessary or desirable in the sole opinion of the
accountant, the accountant shall at ROBERTS' expense be permitted to
consult with and obtain the assistance of consultants selected by the
accountant and reasonably acceptable to ADOLOR. Neither the
accountant nor the selected consultants shall disclose to ROBERTS or
any third pasties any information relating to the business of ADOLOR
other than information relating solely to the accuracy of the reports
and payments under this Agreement.
Section 7.3. - Payment of Royalty
-----------------------------------
(a) ADOLOR shall pay the royalty due under Section 4.2 for sales of
Product in each calendar quarter within forty five (45) days after
the end of such calendar quarter.
(b) All royalty due hereunder shall be paid in same day United States
funds.
(c) Any sum required under the laws of any governmental authority to be
withheld by ADOLOR from payment of royalties for the account of
ROBERTS under Section 4.2 shall be promptly paid by ADOLOR for and on
behalf of ROBERTS to the appropriate tax or other governmental
authorities and ADOLOR shall furnish ROBERTS with copies of official
tax receipts or other appropriate evidence issued by the appropriate
tax or other governmental authorities.
(d) Should an audit under Section 7.2(b) identify a delinquency in
royalties due. ADOLOR shall pay, in addition to such delinquent
amount, liquidated damages of 1 1/2% of the delinquency per month of
the delinquency. Should such delinquency in any year exceed five
percent (5%), ADOLOR shall pay for the audit fees and expenses
incurred by ROBERTS.
ARTICLE VIII - CONFIDENTIALITY
- --------------------------------
Section 8.1. - Nondisclosure and Nonuse
-----------------------------------------
(a) ROBERTS and ADOLOR shall each retain in confidence information
obtained from the other under this Agreement and shall not disclose
such information to any third party except:
(i) consultants and Affiliates who are obligated to maintain it in
confidence pursuant to written agreements which incorporate the terms of
this Article VIII.
(ii) as necessary to obtain approval from a governmental agency in
order to market the Product; or
(iii) as otherwise may be required by law, regulation or judicial
order, and shall not use such information for any purposes other than those
contemplated by this Agreement. Each party shall take all reasonable
precautions to safeguard the confidentially of the information.
<PAGE>
Section 8.2. - Exceptions
---------------------------
The obligations of nondisclosure and nonuse of this Article VIII shall not apply
to information which:
(a) is known to the receiving party, as evidenced by written records
maintained by the receiving party, or to the public, or is in the
public domain, prior to its disclosure under this Agreement;
(b) is hereafter lawfully disclosed to the receiving party by a third
party not- under an obligation of confidence to the other party;
(c) subsequently enters the public domain or becomes known to the public
by some means other than a breach of this Agreement;
(d) is required by law to be disclosed; or
(e) becomes the property of the property of the disclosing party pursuant
to this Agreement.
Section 8.3. - Purpose of Article
-----------------------------------
Each party acknowledges that the restrictions contained in this Article VIII are
necessary and reasonable to protect the legitimate interests of the parties and
a violation of this Article by a party may result in irreparable harm to the
other party.
Section 8.4. - Term
---------------------
The provisions of this Article VIII shall survive the expiration or termination
of this Agreement and continue for five (5) years thereafter.
Section 8.5. - Merger
-----------------------
Upon execution, all confidential information relating to the Compound disclosed
under any previous confidentially agreements between ROBERTS and ADOLOR shall be
governed by this Agreement instead of such prior agreement.
ARTICLE IX - INVENTIONS AND PATENTS
- ---------------------------------------
(a) While licensed under Phase B, ADOLOR shall make the payments for
prosecuting and maintaining patent applications set forth in Section
4.03 of the Lilly License.
<PAGE>
(b) While ADOLOR is licensed under Phase B, should Lilly elect, in any
country, to not prosecute or maintain an application or not to
maintain or defend an issued patent, ADOLOR shall be given timely
notice and shall have the right to direct that such prosecution,
maintenance or defense be conducted at ADOLOR's expense. If (1)
ADOLOR declines to undertake such expense, (2) the application or
patent at issue is the only Lilly patent or Application covering the
Compound, its synthesis, use or formulation in the given country, and
(3) such prosecution, maintenance or defense is conducted at ROBERTS'
expense, the license granted by this Agreement shall no longer apply
with respect to such county.
(c) While ADOLOR is licensed under Phase B, Lilly may, pursuant to
Section 4.03 of the Lilly License, send notice to ROBERTS of a cost
associated with prosecuting, maintaining or defending an application
or patent in a given country, a copy of which notice shall be timely
forwarded to ADOLOR. If ADOLOR elects not to pay such costs, ROBERTS
may on its own account, without compensation from ADOLOR, undertake
the costs payable to Lilly. If (1) ADOLOR elects not to pay such
costs, (2) the application or patent at issue is the only Lilly
patent or application covering the Compound, its synthesis, use or
formulation in the country, and (3) the costs payable to Lilly for
such prosecution, maintenance or defense are undertaken by ROBERTS,
the license granted by this Agreement shall no longer apply with
respect to such county.
(d) An official of ADOLOR designated by ADOLOR shall receive copies from
ROBERTS of all significant correspondence to and from the U.S. Patent
and Trademark Office or other, foreign patent administrative body
relating to Licensed Patents.
(e) ROBERTS shall consult with ADOLOR on any matters arising under
Section 4.06 of the Lilly License (regarding reexamination, reissue
other proceedings relating to granted patents), and ROBERTS shall
provide no Consent under that Section 4.06 without the prior consent
of ADOLOR.
Section 9.2. - Third-Party Infringement
-----------------------------------------
(a) If either ADOLOR or ROBERTS learns of an infringement or threatened
infringement of Lilly Intellectual Property Rights or ADOLOR or
ROBERTS Technical Information wherein the infringement or threatened
infringement involves a third party's manufacture, or sale of
Compound or Product, the party who so learns shall notify the other
party within a reasonable time.
<PAGE>
(b) While ADOLOR is licensed under Phase B, ADOLOR shall have the rights
allocated to ROBERTS in Section 4.05 of the Lilly License to
participate in actions to terminate an infringement of Lilly
Intellectual Property Rights. ROBERTS will execute (and cause its
Affiliates to execute) all documents necessary to effect this
provision. While ADOLOR is licensed under Phase B, ADOLOR shall have
the same rights to participate in actions to terminate an
infringement of ROBERTS Technical Information as ROBERTS has with
respect to Lilly Intellectual Property Rights under the Lilly
License.
(c) With respect to an action involving Lilly, the parties shall endeavor
to have recoveries allocated in proportion to reasonable costs
incurred by the parties. With respect to actions not involving Lilly,
recoveries shall be so allocated.
ARTICLE X - EXPIRATION AND TERMINATION
- -------------------------------------------
Section 10.1. - Expiration
---------------------------
Unless terminated earlier under other provisions of this Agreement will expire
at the end of the term set forth Section 8.01 of the Lilly License.
Section 10.2. - Surviving Rights
---------------------------------
The provisions of 10.3 (Termination) and 12.5 (Governing Law) and Article VIII
(CONFIDENTIALITY) of this Agreement shall survive the expiration or termination
of this Agreement.
Section 10.3. - Termination
----------------------------
(a) ADOLOR may terminate this agreement with respect to Phase A by
delivering notice of such termination to ROBERTS at least thirty (30)
days prior to the effective date of such termination.
(b) Either party may terminate this Agreement upon (60) days prior
written notice in the event of the other party's breach of any other
material provision of this Agreement, if such default or breath is
not remedied within sixty (60) days from the date of such notice.
(c) Any failure to terminate shall not be construed as a waiver by the
aggrieved party of its right to terminate for future defaults or
breaches.
(d) Upon termination of this Agreement, each party shall upon the request
of the other party return all books, records, documents and data
which it shall have received from the other party pursuant to this
Agreement.
<PAGE>
(e) Termination of this Agreement by either party shall not prejudice the
right of ROBERTS to recover any royalty or other payments due at the
time of termination or which become due after termination based upon
rights vested prior to termination and shall not prejudice any cause
of action or claim of ROBERTS or ADOLOR accruing under this
Agreement.
(f) ADOLOR shall not make, have made, use or sell the Compound or Product
following termination of this Agreement, except that if termination
occurs during Phase B ADOLOR may sell such stocks of the Compound or
Product as it shall have on hand at the time of termination. This
provision shall not exempt ADOLOR from the duty to pay royalty at the
rates and times provided under this Agreement.
(g) ROBERTS shall not terminate this Agreement during Phase A and any
term extensions pursuant to Section 3.2, provided that ADOLOR is
proceeding in good faith to seek to establish the therapeutic index
of the Compound.
ARTICLE XI - REPRESENTATIONS, WARRANTIES, COVENANTS
- -------------------------------------------------------
(a) ROBERTS represents and warrants that it is not in breach of the Lilly
License and that it has the right to grant the licenses provided this
Agreement
(b) ROBERTS represents and warrants that it shall not take any action or
refrain from any action so as to give Lilly cause to terminate the
Lilly License.
(c) ROBERTS represents and warrants that it has undertaken no action, and
that it knows of no action or other change of circumstances, that has
diminished the value of the Lilly Intellectual Property Rights
relative to the Lilly Intellectual Property Rights as they existed,
or as ROBERTS understood them, on the fifth (5th) day of November,
1996, when the Lilly License was executed.
(d) ROBERTS shall use best efforts to obtain from Lilly permission to
assign the Lilly License to ADOLOR, and, on obtaining such permission
and receiving notice from ADOLOR of ADOLOR's intent to initiate Phase
B, shall assign the Lilly License to ADOLOR subject to the same
duties as between ROBERTS and ADOLOR as set forth in this Agreement.
Accordingly, this Agreement shall be, with respect to Phase B,
converted to an agreement to assign.
(e) ROBERTS shall make available to ADOLOR personnel reasonably
appropriate to help ADOLOR understand and implement the Lilly Know-
how and the ROBERTS Technical Information. Such personnel shall
include Phil Lange and shall be made available on ADOLOR's request
for a period not to exceed five (5) working days.
<PAGE>
ARTICLE XII - MISCELLANEOUS PROVISIONS
- -----------------------------------------
Section 12.1. - Entire Understanding
-------------------------------------
This Agreement sets forth the entire understanding between ROBERTS and ADOLOR
pertaining to its subject mailer and supersedes and replaces all prior oral or
written agreements between ROBERTS and ADOLOR pertaining to such subject matter.
Section 12.2. - Amendment
--------------------------
This Agreement may not be amended, supplemented or otherwise modified except by
an instrument in writing signed by both parties.
Section 12.3. - Assignment
---------------------------
Neither party may assign this Agreement without the prior written approval of
the other party except in connection with the sale or merger of the entire
business or in connection with an assignment to an Affiliate. Such approval
shall not unreasonably be withheld. Notwithstanding such approval, the assigning
party shall be responsible to the party jointly or severally, with the assignee
for any obligations under this Agreement.
Section 12.4. - Waiver
-----------------------
No provision of this Agreement shall be waived by any act, omission or knowledge
of a party or its agents or employees, except by an instrument in writing
expressly waving such provision and signed by the waiving party.
Section 12.5. - Governing Law
------------------------------
The Agreement shall be governed by and interpreted in accordance with the laws
of the Commonwealth of Pennsylvania, exclusive of its conflict of laws
provisions, and the parties consent to the jurisdiction and to venue at, a court
within the District of the United States Federal Courts in which the defendant
shall be found.
Section 12.6. - Restriction of Distribution of this Agreement
--------------------------------------------------------------
This Agreement shall not be distributed to persons other than those personnel of
ROBERTS and ADOLOR who shall have a need to know its contents and to those whose
knowledge of its contents will facilitate performance of the obligations of the
parties under this Agreement, except as may be required by law, regulation or
judicial order.
Section 12.7. - Publicity
--------------------------
Notwithstanding the provisions of Section 12.6, either party may publicly
announce the existence of this Agreement and the nonfinancial terms contained
herein, provided such announcement is consented to by Lilly. The parties shall
consult with each other prior to any press release or other public disclosure.
<PAGE>
Section 12.8. - Consents Not Unreasonably Withheld or Delayed
--------------------------------------------------------------
Whenever a provision is made in this Agreement for either party to secure the
consent, approval or acceptance of the other, such consent, approval or
acceptance shall not unreasonably be withheld or delayed.
Section 12.9. - Construction
-----------------------------
The captions appearing in this Agreement are for reference purposes only and
shall not be considered for the purpose of interpreting or construing this
Agreement. The plural shall be substituted for singular numbers in any place in
which the context may require such substitution.
Section 12.10. - Invalidity of Particular Provisions
----------------------------------------------------
If any provision of this Agreement is invalid or unenforceable by reason of any
rule of law, administrative order or judicial decision, all other provisions of
this Agreement shall remain in full force and effect.
Section 12.11. - Notices
------------------------
Any notice or report required or permitted hereunder shall be given in writing
by personal delivery or by registered or certified mail, return receipt
requested, postage prepaid, and, if sent by mail, shall be effective upon
delivery to the following addresses:
ROBERTS LABORATORIES INC.
4 Industrial Way West
Eatontown, New Jersey 07724
ATTN: A.A. Rascio, Vice President
ADOLOR CORPORATION
371 Phoenixville Pike
Malvern, Pennsylvania 19355
ATTN: President
or such other address as a party may designate by prior written notice to the
other party.
Section 12.12. - Payment Method
-------------------------------
All payments by ADOLOR to ROBERTS under this Agreement shall be by wire transfer
of same day funds to ROBERTS' bank account. ROBERTS shall supply ADOLOR with the
bank, routing and account information needed for such a wire transfer.
Section 12.13. - Late Payments
------------------------------
All payments due ROBERTS under this Agreement which are received later than the
due date, shall be subject to an additional payment of one and one-half percent
(1.5%) per month or portion thereof as liquidated damages for payments received
later than the due date.
<PAGE>
Section 12.14. - Currency
-------------------------
All references to currency and payments shall be in U.S. dollars.
Section 12.15. - Force Majeure
------------------------------
Each party hereto shall be relieved of its obligations hereunder to the extent
that fulfillment of such obligations shall be prevented by acts of war, labor
difficulties, riot, fire, flood, hurricane, wind storm, acts of defaults of
common carriers, governmental laws, act or regulations (including withdrawal or
suspension of governmental approval of sale of Product), shortages of materials
or any other occurrence beyond the control of the party affected thereby.
(Any Remainder of this page beyond this line is intentionally left blank.)
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in
duplicate by their duly authorized representatives.
ADOLOR CORPORATION
By: /s/ John J. Farrar
-----------------------------------
Title: President and Chief Executive
--------------------------------
Officer
-------
Date: June 8, 1998
--------------------------------
ROBERTS LABORATORIES INC.
By: /s/ Anthony A. Rascio
-----------------------------------
Title: VP
--------------------------------
Date: 6/10/98
--------------------------------
In order to induce Adolor Corporation to execute this Agreement, Robert
Pharmaceutical Corporation, the parent company of Robert Laboratories Inc.,
hereby unconditionally guarantees the due payment and performance of all
obligations of Roberts Laboratories Inc. contained in this Agreement.
ROBERTS PHARMACEUTICAL CORPORATION
By: /s/ Anthony A. Rascio
-----------------------------------
Title: VP
--------------------------------
Date: 6/10/98
--------------------------------
<PAGE>
EXHIBIT 10.3
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as **. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
LICENSE AGREEMENT
-----------------
THIS AGREEMENT is made and is effective this 5/th/ day of November
1997 (the "Effective Date") by and between:
ADOLOR CORPORATION, a Delaware corporation, having its principal place
of business at 371 Phoenixville Pike, Malvern, Pennsylvania ("ADOLOR") and
KWANG DONG PHARMACEUTICAL COMPANY, LTD., a Korean corporation, having
its principal office at 212-13, Kuro-dong, Kuro-ku, Seoul, South Korea ("K WANG
DONG").
RECITALS
--------
1. KWANG DONG is engaged, inter alia, in the development,
manufacture and sale of pharmaceuticals in the Republic of South Korea.
2. ADOLOR is engaged, inter alia, in the research, development, and
sale of pharmaceuticals directed to pain management.
3. ADOLOR has received an exclusive license for certain patents and
patent applications related to ADL 2-1294 from the Regents of the University of
California.
4. ADOLOR has certain intellectual property related to ADL 2-1294
and its topical use as an anti-hyperalgesic.
5. The parties wish to enter into this Agreement to provide license
of ADOLOR's topical anti-hyperalgesic ADL 2-1294 to KWANG DONG.
NOW THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth the parties agree to be legally bound as
follows:
ARTICLE I DEFINITIONS
-----------
Section 1.1. "FDA" shall mean the United States Food and Drug Administration
or such other agency or instrumentality of the United States to
which the responsibilities and authority of the FDA are given or
delegated from time to time, and the foreign equivalents thereof.
Section 1.2. "Field" shall mean topical use on skin in humans for anti-
hyperalgesia, alone or in combination with other topical
products. The Field shall not include the use for dental,
ophthalmic, mucosal, parental, injectable, vaginal, and oral
administration.
<PAGE>
Section 1.3. "Formulation" shall mean the topical formulation of ADL 2-1294
for use in the Field provided by ADOLOR which is the subject of
FDA submissions.
Section 1.4. "Know-How" shall mean Technology, patented or not, discovered or
developed by ADOLOR prior to or during the term of this
Agreement, which is pertinent to the manufacture, sale, or use of
the Licensed Product and anti-hyperalgesics.
Section 1.5. "Licensed Patent" shall mean International Patent Application
PCT/US96/14727, filed September 12, 1996, and corresponding
patent applications and patents in the Territory.
Section 1.6. "Licensed Product" shall mean a composition containing ADL 2-1294
adapted for use in the Field. Licensed Product shall be deemed to
embody Know-How.
Section 1.7. "Net Sales" shall mean total gross sales of Licensed Products
sold by KWANG DONG to unrelated third parties less, on a Licensed
Product by Licensed Product basis: quantity or cash discount
allowed or paid by KWANG DONG; credits or allowances given or
made on account of returns or rejections of previously delivered
Licensed Products; rebates; insurance premium on sales and sales
or excise taxes.
Section 1.8. "NDA shall mean a new drug application as filed with the FDA or
the foreign equivalent thereof.
Section 1.9. "Technology" shall mean ADOLOR's confidential know-how,
processes, instruments, machines, materials, compositions, test
procedures, manufacturing procedures, techniques, formulations,
methodologies, data and information.
Section 1.10. "Territory" shall mean Republic of South Korea, People's Republic
of North Korea, or any subsequent unification of those countries.
ARTICLE II LICENSES AND RIGHTS
-------------------
Section 2.1. Licenses and Rights.
-------------------
(a) ADOLOR grants to KWANG DONG an exclusive license under Licensed Patents to
use and sell Licensed Product in the Territory in the Field, without the
right to sublicense outside of the Territory.
(b) ADOLOR grants. to KWANG DONG an exclusive license under this Agreement for
Know-How and Licensed Patent for the manufacture of Licensed Product in the
Republic of South Korea for sale or use in the Territory. KWANG DONG shall
not manufacture Licensed Product in any country or territory other than the
Territory. KWANG DONG shall not directly or indirectly export, sell, or
offer for sale Licensed Product outside the Territory.
-2-
<PAGE>
(c) During the term of this Agreement, KWANG DONG shall not work with any party
other than ADOLOR on the development or use of topical anti-hyperalgesic
products or any composition which contains ADL 2-1294.
(d) KWANG DONG may sublicense the right to sell Licensed Product only in the
Territory, provided however, that Adolor shall have the right to approve
the sublicense, such approval shall not be unreasonably withheld or
delayed. Any sublicensee shall comply with all provisions of this
Agreement.
(e) Other routes of administration for Licensed Product in dental, ophthalmic,
mucosal, parenteral, injectable, vaginal and oral forms are presently not
available. Should ADOLOR develop new routes of administration, ADOLOR shall
offer KWANG DONG the right of first refusal to acquire a license under
ADOLOR's intellectual property for the new route of administration in the
Territory. If ADOLOR develops a new route of administration, ADOLOR will
notify KWANG DONG in writing and KWANG DONG shall have thirty (30) days
from the receipt of written notice to provide ADOLOR with written
notification of KWANG DONG's interest in obtaining the license for the new
field. ADOLOR and KWANG DONG shall negotiate in good faith for sixty (60)
days to reach an agreement on the terms of the license. If ADOLOR and KWANG
DONG are unable to reach an agreement, ADOLOR may enter into an agreement
with a third party, provided the terms offered by the third party are more
favorable to ADOLOR than the terms offered by KWANG DONG.
ARTICLE III INITIATION AND INFORMATION TRANSFER
-----------------------------------
Section 3.1. Technology Transfer
-------------------
(a) Following the Effective Date, the parties shall meet at ADOLOR's offices,
and ADOLOR shall provide detailed data and information related to the
Formulation including copies of ADOLOR's FDA filings. All data and
information shall be provided in English.
(b) ADOLOR shall supply copies of all its patents and patent applications which
are related to the Licensed Product.
(c) At KWANG DONG's request, ADOLOR shall make it's scientists and technical
personnel available at the offices of KWANG DONG not to exceed two times
each year of this Agreement not to exceed ten (10) man days in total at no
cost to KWANG DONG. If KWANG DONG requires additional assistance, ADOLOR
will use reasonable efforts to provide it provided that such request is
reasonable in ADOLOR's opinion.
ARTICLE IV PRODUCT DEVELOPMENT
-------------------
Section 4.1. Overview.
--------
During the term of this Agreement, KWANG DONG shall use its best efforts to
obtain regulatory approval and to commercialize the Licensed Product in the
Field in the Territory. KWANG DONG is solely responsible for the
expeditious development of the
-3-
<PAGE>
Licensed Product in the Territory. There will be quarterly meetings
alternating between ADOLOR's offices and KWANG DONG's offices to exchange
data. ADOLOR will review KWANG DONG's clinical development program
including any necessary clinical protocols and agree to recommend
modifications or improvements; however, KWANG DONG shall be solely
responsible for the design of its clinical development program.
Section 4.2. Communication.
-------------
From time to time, but at least within 45 days after the end of each
quarter, KWANG DONG shall provide ADOLOR with a detailed written report of
KWANG DONG's progress in commercially developing the Licensed Product.
Such reports shall include, among other information, details of KWANG DONG'
s Formulations of Licensed Product, all test results and clinical results,
and documentation of any adverse reactions. All adverse reactions which are
reportable to the FDA shall be provided to ADOLOR within 24 hours. Prior to
the approval of Licensed Product by the U.S. FDA, ADOLOR agrees to provide
quarterly progress reports to KWANG DONG on the progress of its clinical
development program for Licensed Product
Section 4.3. Filing Requirements
-------------------
KWANG DONG has the responsibility for and shall bear the expense of
obtaining all approvals of the relevant governmental agencies in the
Territory including the Republic of Koreas Ministry of Health and Welfare
("MOHW") in order to implement the provisions of this Agreement. Following
approval of an NDA for Licensed Product in United States or another major
market such as United Kingdom, Germany or Japan, KWANG DONG will use its
best efforts to file the Korean equivalent of an NDA with MOHW.
ARTICLE V MANUFACTURE AND SUPPLY
----------------------
Section 5.1. Formulation Supply
------------------
(a) During the development of the Licensed Product ADOLOR shall supply KWANG
DONG with reasonable amounts of Formulation within ADOLOR's ability to
produce at ADOLOR's fully allocated cost, but with no profit; provided,
---------
however, that KWANG DONG shall use such Formulation solely for obtaining
-------
regulatory approval and shall not sell the Formulation.
(b) ADOLOR agrees to provide three (3) percent of the quantity of bulk
Formulation sold by KWANG DONG in the Territory in the first year
immediately following the first commercial sale of Licensed Product at no
cost to KWANG DONG.
Section 5.2. ADL2-1294 Supply
----------------
During the term of this Agreement KWANG DONG shall purchase the bulk
Formulation of ADL2-1294 or Licensed Product from ADOLOR or ADOLOR's
designee provided that the price, quality and service are competitive. The
supply of ADL2-1294 shall be the
-4-
<PAGE>
subject of a separate agreement in accordance with this Section 5.2. In the
event KWANG DONG can demonstrate that Formulation from ADOLOR or ADOLOR's
designee is not competitive, then KWANG DONG shall under this Agreement
have the right to manufacture Licensed Product in the Republic of South
Korea for use in the Territory. However, the parties agree that ADOLOR or
ADOLOR's designee will manufacture the Licensed Product or a portion
thereof, and will negotiate in good faith a separate supply agreement.
Section 5.3. Non-transfer
------------
KWANG DONG shall not transfer or disclose to any third parties Know How or
Technology directed to or related to the manufacture or preparation of
Licensed Product including the Formulation.
ARTICLE VI SALES
-----
Section 6.1. Sales Efforts.
-------------
(a) KWANG DONG agrees to launch the marketing and sales of the Licensed Product
in the Territory within three (3) months of obtaining government regulatory
approval for the reimbursement pricing for Licensed Product.
(b) KWANG DONG shall use its best efforts to market and sell the Licensed
Product in the Territory.
Section 6.2. Termination of License.
----------------------
Notwithstanding any other provision of this Agreement, if KWANG DONG has
not made a commercial sale of a Licensed Product within three (3) years of
FDA approval, ADOLOR shall have the right to terminate this Agreement if
the cause of such delay is not directly attributable to ADOLOR'S failure to
perform its obligations under this Agreement.
ARTICLE VII PAYMENTS AND ROYALTIES; REPORTS; RECORDS
----------------------------------------
Section 7.1. Milestones and Payments.
-----------------------
As partial consideration for the license granted in this Agreement, certain
payments shall be made by KWANG DONG upon reaching identified milestones,
provided, that such payment shall be made after the execution of this
Agreement:
(i) within thirty (30) days following KWANG DONG's receipt of a written
notice that ADOLOR has successfully completed the Phase II clinical
trials in a major pharmaceutical market, KWANG DONG shall pay ADOLOR
U.S.$400,000; provided, however, that such milestone payment shall
-----------------
be reduced by five percent (5%) if Phase II completion occurs after
July 17th, 1999 and on or before October
-5-
<PAGE>
16th, 1999; or by 10% if Phase II completion occurs after October
16th, 1999 and on or before April 15, 2000; or by twenty percent
(20%) in the event Phase II completion occurs after April 15, 2000.
(ii) within thirty (30) days following receipt of a written notice that
the U.S. FDA or its counterpart in any other major pharmaceutical
market approved the sale of Licensed Product, KWANG DONG shall pay
ADOLOR U.S. $400,000; provided, however, that such milestone payment
-----------------
shall be reduced by ten percent (10%) in the event such NDA approval
is granted after September 30, 2001 and on or before December 31,
2001; or by twenty percent (20%) in the event such NDA approval is
granted after December 31, 2001 and on or before June 30, 2002; or
by forty percent (40%) in the event such NDA approval is granted
after June 30, 2002.
(iii) Notwithstanding the provision of Section 7.1(i), in the event an NDA
is approved in any major pharmaceutical market on or before June 30,
2001 and the milestone payment pursuant to Section 7.1 (i) above was
---
reduced, then, the amount of any such reduction or reductions shall
be paid to ADOLOR concurrent with the milestone payment due under
Section 7.1 (ii).
Section 7.2. Royalties.
---------
(a) KWANG DONG shall pay to ADOLOR a running royalty, in the Territory, with
respect to the sale of the Licensed Products whose composition, manufacture
or use is covered by a Licensed Patent, for a term that shall continue
until the expiration of the last to expire licensed patent covering ADL 2-
1294, equal to:
(i) ** percent (**) of the annual Net Sales of the
first ** Won except that such royalty rate shall be ** percent (**%) and **
percent (**%) in the first and second consecutive twelve month periods following
the first commercial sales of Licensed product by KWANG DONG respectively under
this Agreement;
(ii) ** percent (**%) of the annual Net Sales of greater than ** Won up
to ** Won; and
(iii) ** percent (**%) of the annual Net Sales greater than **
Won.
(b) ADOLOR's right to royalties accrues upon the sale of Licensed Products by
KWANG DONG. Licensed Products shall be deemed sold when invoiced or
shipped, whichever occurs earlier.
Section 7.3. Reports.
-------
Within forty-five (45) days after the end of each calendar quarter (whether
or not, a royalty payment is due for that period), KWANG DONG shall provide
ADOLOR with a written statement with respect to such period specifying the
gross sales of Licensed Product in the Territory, the calculation of Net
Sales, the Net Sales of Licensed Product
**=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.
-6-
<PAGE>
during the period; and the amount of any royalty due, if any. KWANG DONG.
shall provide the basis for its calculations of Net Sales.
Section 7.4. Records.
-------
(a) KWANG DONG shall keep complete and accurate records pertaining to the
formulation, manufacture, use and sale of Licensed Products appropriate to
determine royalties payable under Section 7.2 of this Agreement.
(b) At the request and expense of ADOLOR, upon KWANG DONG's prior written
approval, which shall not be unreasonably withheld or delayed, an
independent certified accountant selected by ADOLOR shall have access, at
KWANG DONG's principal place of business in Seoul, South Korea during
ordinary business hours, to such records maintained by KWANG DONG in
relation to the sale or sales of Licensed Products or Formulations pursuant
to this Agreement as may be necessary to:
(i) Determine with respect to any of the three (3) preceding years the
correctness of any report or payment made under this Agreement; or
(ii) Obtain information as to the royalty payable in the case of KWANG
DONG's failure to report or pay pursuant to this Agreement. The
accountant shall not disclose to ADOLOR or any third parties any
information relating to the business of KWANG DONG other than
information relating solely to the accuracy of the reports and
payments under this Agreement. If the accountant determines that
KWANG DONG has under-reported the royalties due ADOLOR, then the
additional royalties due shall within ten (10) days be paid by KWANG
DONG to ADOLOR along with liquidated damages of one and one-half
percent (1.5%) per month for the under-reported amount. In the event
the under-reported amount for any calendar year exceeds five percent
(5%), then KWANG DONG shall reimburse ADOLOR for the professional
fees and expenses of the accountant.
Section 7.5. Payment of Royalty.
------------------
(a) KWANG DONG shall make quarterly royalty payments due under Section 7.2 for
sales of the Licensed Product. Within forty-five (45) days following the
end of a fiscal quarter KWANG DONG shall submit the quarterly report due
under Section 7.3.
(b) Any royalty due hereunder shall be paid in United States funds collectible
at par in New York, New York, USA. For the purposes of computing the
royalty on Net Sales of Licensed Product hereunder, royalty shall first be
determined in the foreign funds in which sold (herein called "Selling
Funds") and then converted into its equivalent of the United States funds
at the selling rate as it appears in the "Currency Rates in New York"
section of the Asian Wall Street Journal for the last day of each calendar
month with report due to U.S. in under Section 7.3 with a Letter of Credit
for the amount of the royalty payment due. The Letter of Credit shall be
irrevocable, payable in 120 days from the end of the quarter on
demand/sight to ADOLOR.
-7-
<PAGE>
(c) Any sum required under the laws of any governmental authority to be
withheld by KWANG DONG from payment for the account of ADOLOR including
payments under Section 7.1 and royalties under Section 7.2 shall be
promptly paid by KWANG DONG for and on behalf of ADOLOR to the appropriate
tax or other governmental authorities and KWANG DONG. shall furnish ADOLOR
with copies of the official tax receipts or other appropriate evidence
issued by the appropriate tax or other government authorities to enable
ADOLOR to support a claim for tax or other credit or refund in respect of
any sum so withheld.
ARTICLE VIII TECHNICAL ASSISTANCE
--------------------
Section 8.1. Overview.
--------
ADOLOR shall give KWANG DONG, at KWANG DONG's request, such advice and
assistance as ADOLOR shall be aware of for the manufacture or use of the
Licensed Product.
Section 8.2. Additional Work.
---------------
During the term of this Agreement, ADOLOR shall endeavor from time to time
inform KWANG DONG of new information which may be useful to KWANG DONG in
the formulation, use and sale of Licensed Product.
ARTICLE IX PRODUCT LIABILITY
-----------------
Section 9.1. Product Liability.
-----------------
(a) KWANG DONG shall indemnify and hold ADOLOR harmless against all claims,
losses, expenses and damages awarded by a court of competent jurisdiction
and reimburse ADOLOR for all reasonable legal fees and costs incurred by
ADOLOR in defense of such claims, arising from the manufacture, use or sale
of Licensed Product by KWANG DONG. ADOLOR shall have no liability or
responsibility for the manufacture, product specifications or end-uses of
Licensed Product.
(b) ADOLOR shall give KWANG DONG prompt written notice of any. claim against
ADOLOR for which ADOLOR may or does seek indemnification under this
Section, and KWANG DONG shall be solely responsible for the defense and
financial settlement of such claim.
(c) ADOLOR shall use its commercial best efforts to cause any supplier of
Licensed Product to KWANG DONG arranged by ADOLOR to make KWANG DONG the
beneficiary of any warranty or indemnity provided by such supplier in
connection with the manufacture of the Licensed Product being so supplied
(or, in lieu thereof, to pass through without additional liability on the
part of ADOLOR any benefit of any such warranty or indemnity actually
received by ADOLOR from such supplier).
-8-
<PAGE>
ARTICLE X CONFIDENTIALITY
---------------
Section 10.1. Nondisclosure and Non-use.
-------------------------
KWANG DONG and ADOLOR shall each retain in confidence information obtained
from the other under this Agreement and shall not disclose such information
to any third parties except as provided for in Section 10.2 of this
Article. Any confidential information disclosed under any other agreement
entered into between the two parties shall be deemed to have been disclosed
under the provisions of this Article X and shall be governed by the terms
of this Article X.
Section 10.2. Exceptions.
----------
(a) The obligations of nondisclosure and nonuse of this Article X shall not
apply to information which:
(i) is known to either party as evidence by written records maintained
by the receiving party, or to the public, prior to its disclosure
under this Agreement;
(ii) is hereafter lawfully disclosed to the receiving party by a third
party not under an obligation of confidence to the other party; or
(iii) subsequently becomes known to the public by some means other than a
breach of this Agreement.
(b) ADOLOR and KWANG DONG shall each retain in confidence information obtained
from the other under this Agreement and shall not disclose such information
to any third party except:
(i) consultants who are obligated to maintain in confidence pursuant to
written agreements which incorporate by reference the terms of this
Article;
(ii) as necessary to obtain approval from a governmental agency in order
to market the product;
(iii) as reasonably may be required in a patent application covering
subject matter which is encompassed within this Agreement; or
(iv) as otherwise may be required by law, regulation or judicial order,
and shall not use such information for any purposes other than those
contemplated by this Agreement. Each party shall take all reasonable
precautions to safeguard the confidentiality of the information.
-9-
<PAGE>
Section 10.3. Purpose of Article.
------------------
Each party acknowledges that the restrictions contained in this Article X
are necessary and reasonable to protect the legitimate interests of the
other party and. a violation of this Article may result in irreparable harm
to the injured party.
Section 10.4. Term.
----
The provisions of this Article X shall survive the expiration or
termination of this Agreement and continue for twelve (12) years
thereafter.
ARTICLE XI INVENTIONS AND PATENTS
----------------------
Section 11.1. Results and Data.
----------------
The data and test results of research and development conducted as a result
of this Agreement are confidential, proprietary and of great value to the
parties. The data and test results are subject to the terms of Article X of
this Agreement which are not inconsistent with this Section 11.1. KWANG
DONG shall not use or disclose the data or test results for any purpose
other than in accordance with the terms of this Agreement. The data and
test results shall be deemed to embody Technology. The data and test
results shall be owned solely by ADOLOR, and ADOLOR shall be free to use
the data and test results for any purpose, including but not limited to
disclosure to a third party.
Section 11.2. Ownership and Patent Applications.
---------------------------------
(a) All inventions, and resulting patent applications and patents, directed to
or relating to ADL-2- 1294, its composition, formulation, manufacture or
use, shall be owned solely by ADOLOR.
(b) All other inventions, other than those of Section 11.2(a), shall belong to
the party making the invention. All resulting patent applications and
patents shall belong to the party owning the claimed inventions. For
jointly made other inventions, ADOLOR and KWANG DONG shall have joint
rights to such intellectual property and any resulting patents shall be
jointly owned. KWANG DONG's improvements shall be cross-licensed to ADOLOR.
Any right for one party to sublicense shall require the prior written
approval of the other party.
(c) Neither ADOLOR nor KWANG DONG shall have any right with respect to the
others Technology, including Know-How and patents, which are not otherwise
specifically provided for in this Agreement.
(d) The parties shall agree on a plan to cause Licensed Patent to be marked on
some conspicuous part of a durable label firmly attached to the Licensed
Product or to the package for the Licensed Product made or sold under this
Agreement, in a manner which is easily seen and read and not easily
defaceable, either:
-10-
<PAGE>
(i) if a patent shall have been granted, the patent number applicable to
such Licensed Patent; or
(ii) if a patent shall not have been granted, words indicating that
letters patent have been applied for, if applicable.
Section 11. 3. Infringement of Third Party's Patent.
------------------------------------
(a) Each party shall notify the other party promptly if, to its knowledge, a
third party:
(i) shall have obtained a patent which discloses or claims the same as a
Licensed Patent in any country; or
(ii) is manufacturing a product based on either a Licensed Patent or the
same as claimed by a Licensed Patent.
(b) ADOLOR and KWANG DONG shall notify each, other promptly of any claim of, or
action for, infringement of any patents belonging to third parties which
shall have been threatened, or shall have been brought against either party
by reason of the manufacture, use or sale of the Licensed Product.
(c) In the event that an action for infringement with regard to the Licensed
Product shall have been brought, KWANG DONG shall defend such actions at
its own expense in the Territory. Any action which names ADOLOR shall be
subject to the indemnification provisions of Section 9 (Product Liability).
(d) Notwithstanding anything to the contrary in this Agreement, KWANG DONG
shall not interpose a Licensed Patent as a counterclaim in any legal
proceeding with a third party.
(e) ADOLOR shall consult and cooperate with KWANG DONG and provide such other
nonmonetary assistance as may reasonably be requested.
Section 11.4. Third-Party Infringement.
------------------------
(a) If either ADOLOR or KWANG DONG learns of an infringement or threatened
infringement of a Licensed Patent, such party shall notify the other party
promptly.
(b) The parties shall promptly meet to decide on the course of action to take.
ADOLOR may, at its own expense, take steps to prevent or terminate such
infringement, and KWANG DONG may join in such steps at its own expense. If
ADOLOR chooses to bring an action at its own expense, KWANG DONG may join
in such action at its own expense.
(c) ADOLOR shall retain for itself all recovery from any action commenced to
prevent or terminate the infringement, unless KWANG DONG shall have joined
in the action at its own expense as set forth below. KWANG DONG agrees to
cooperate with ADOLOR and provide such nonmonetary assistance as ADOLOR may
reasonably request in connection with such action. KWANG DONG may join
ADOLOR in any such action to
-11-
<PAGE>
prevent or terminate the infringement in which case any recoveries shall be
divided between ADOLOR and KWANG DONG after deduction of litigation
expenses in proportion to the financial contributions each party makes to
the total cost of the action.
(d) Should ADOLOR not pursue action to prevent or terminate an alleged
infringement per Section 11.4(b), KWANG DONG may then, at its sole expense,
pursue action to prevent or terminate the infringement, and retain any
recoveries which it shall obtain for such infringement. ADOLOR agrees to
cooperate with KWANG DONG and provide such nonmonetary assistance as KWANG
DONG may reasonably request in connection with any such action.
Section 11.5. Patent Costs.
------------
KWANG DONG acknowledges that the Licensed Patents are the property of
ADOLOR and KWANG DONG shall not challenge or contest ADOLOR's intellectual
property rights including that of Licensed Patents. ADOLOR shall control
the patent prosecution procedure and be responsible for the costs incurred
in doing so.
Section 11.6. ADOLOR's Work.
-------------
The results of all work undertaken by ADOLOR in the development and
commercialization of the Licensed Product shall be sole property of ADOLOR
and KWANG DONG shall have no right, title or interest thereto except as
provided under this Agreement.
Section 11.7. Accuracy and Ownership of Information Disclosed.
-----------------------------------------------
Information disclosed by each party to the other shall be accurate to the
best of the disclosing party's knowledge, but neither party expressly or
implicitly warrants as to the accuracy of such information. Neither party
represents that the use of the information disclosed to the other party
pursuant to this Agreement, or the manufacture, sale, or use of Licensed
Products does not infringe upon the rights of a third party. All
information furnished by a party pursuant to this Agreement shall remain
the sole and exclusive property of the disclosing party. Either party may
refuse to disclose and defer disclosure of information to the other party
to the extent such information is either unnecessary for the purposes of
this Agreement or not subject to disclosure under this Agreement.-
ARTICLE XII - EXPIRATION AND TERMINATION
--------------------------
Section 12.1. Expiration of Patent.
--------------------
(a) Unless terminated earlier under other provisions of this Agreement, this
Agreement will expire upon the expiration of the last obligation to pay
royalties under Section 7.2.
(b) In the event a product containing the same pharmaceutically active
substance and formulation for the treatment of the same therapeutic
indication as Licensed Product is
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<PAGE>
approved for sale and is actively sold in commercial quantities in the
Territory, ADOLOR and KWANG DONG shall meet and discuss the impact of such
"approved me too product" on the royalty due to ADOLOR.
Section 12.2. Termination without Cause.
-------------------------
KWANG DONG shall be free to terminate this AGREEMENT at any time prior to
commercial launch of Licensed Product upon ninety (90) days prior written
notice, and at any time after commercial launch of Licensed Product, upon
one (1) year's prior written notice. Any monies owed to ADOLOR prior to the
termination shall be promptly paid to ADOLOR upon the effective date of
termination.
Section 12.3. Material Defaults.
-----------------
(a) Either party may terminate this Agreement upon sixty (60) days' prior
written notice in the event of the other party's breach of any other
material provision of this Agreement, if such default or breach is not
remedied within thirty (30) days from the date of such notice.
(b) A material default includes, but is not limited to:
(i) sale or export by KWANG DONG of Formulation or Licensed Product
outside the Territory;
(ii) sale by KWANG DONG of Formulation or Licensed Product to a third
party who sells or exports the formulation or Licensed Product
outside the Territory;
(iii) failure to make any payments or reports due under this Agreement;
(iv) sublicensing by KWANG DONG of the license under this Agreement
except as provided under Section 2.1 (d); or
(v) failure by KWANG DONG to use its best efforts to pursue regulatory
approval of Licensed Product; or
(vi) failure by KWANG DONG to use its best effort to maximize sales of
Licensed Product in the Territory following regulatory approval.
(c) Any failure to terminate shall not be construed as a waiver by the
aggrieved party of its rights to terminate for future defaults or breaches.
Section 12.4. Bankruptcy.
----------
If, during the term of this Agreement, KWANG DONG makes an assignment for
the benefit of creditors, or shall go into liquidation, or a receiver or
trustee shall be appointed for its property, or if proceedings for
voluntary bankruptcy are instituted or KWANG DONG is declared bankrupt or
insolvent, by a court of competent jurisdiction, ADOLOR
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<PAGE>
may terminate this Agreement immediately upon delivery of written notice to
KWANG DONG.
Section 12.5. Surviving Rights.
----------------
The provisions of Sections 7.5, 12.6, 13.2 and Articles IX, X, and XI of
this Agreement shall survive the expiration or termination of this
Agreement.
Section 12.6. Effects of Termination.
----------------------
(a) Upon termination of this Agreement, each party shall, upon request, return
all books, records, documents and data which was received from the other
party pursuant to this Agreement, provided that this provision shall not be
applied in case this Agreement is terminated by either party pursuant to
Section 12.3 and 12.4.
(b) Termination of this Agreement by either party shall not prejudice the right
of ADOLOR to recover any royalty or other payments due at the time of
termination and shall not prejudice any cause of claim of action of either
party accruing under this Agreement.
(c) Upon termination of this Agreement ADOLOR shall be free to enter into
agreements with third parties for the use of ADOLOR's technical information
to develop, make, use, or sell products containing ADL 2-1294 in the
Territory subject to the terms of Article X of this Agreement.
ARTICLE XIII MISCELLANEOUS PROVISIONS
------------------------
Section 13.1. Entire Understanding.
--------------------
This Agreement sets forth the entire understanding between ADOLOR and KWANG
DONG pertaining to its subject matter and supersedes and replaces all prior
oral or written agreements between ADOLOR and KWANG DONG pertaining to such
subject matter, including but not limited to, the Letter of Intent of May
22, 1997.
Section 13.2. Amendments.
----------
This Agreement may not be amended, supplemented or otherwise modified
except by an instrument in writing signed by both parties.
Section 13.3. Assignment.
----------
KWANG DONG shall not assign this Agreement. ADOLOR shall be free to assign
this Agreement following prior written notice to KWANG DONG in connection
with the sale or transfer of ADOLOR's business, or the sale or merger of
ADOLOR and this Agreement shall survive in the event of such change.
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<PAGE>
Section 13.4. Waiver.
------
No provision of this Agreement shall be waived by any act, omission, or
knowledge of a party or its agents or employees, except by an instrument in
writing expressly waiving such provision and signed by the waiving party.
Section 13.5. Governing Law.
-------------
This Agreement shall be governed by and interpreted under the laws of the
State of Pennsylvania, without regard to conflicts of law. Venue shall be
in Philadelphia, Pennsylvania.
Section 13.6. Restriction of Distribution of this Agreement.
---------------------------------------------
This Agreement shall not be distributed to persons other than those
personnel of ADOLOR and KWANG DONG and ADOLOR's affiliates and sublicensees
who have a need to know its contents and those whose knowledge of the
contents will facilitate the performance of the obligations of the parties
under this Agreement, and others as may be required by law, regulation or
judicial order.
Section 13.7. Consents not Unreasonably Withheld or Delayed.
---------------------------------------------
Whenever provision is made in this Agreement for either party to secure the
consent or approval of the other, such consent or approval shall not be
unreasonably withheld or delayed.
Section 13.8. Construction.
------------
The captions appearing in this Agreement are for reference purposes only
and shall not be considered for the purposes of interpreting or construing
this Agreement. The plural shall be substituted for singular numbers in any
place in which the context may require such substitution.
Section 13.9. Invalidity of Particular Provisions.
-----------------------------------
If any provision of this Agreement is invalid or unenforceable by reason of
any rule or law, administrative order or judicial decision, all other
provisions of this Agreement shall remain in full force and effect. The
parties shall reform such provisions to most closely reach the desired end
of the provision while overcoming the invalidity or unenforceability.
Section 13.10. Currency.
--------
All amounts preceded by a dollar sign shall mean United States dollars
unless otherwise stated. All amounts in Won shall be in Republic of South
Korea currency.
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<PAGE>
Section 13.11. Publicity.
---------
Subject to Article X, either party shall be free to publicize the existence
and purpose of this Agreement; However, each party shall provide a copy of
proposed press releases related to matters pursuant to this Agreement to
the other party for comment prior to the issuance of such press release.
Section 13.12. Notices.
-------
Any notice or report required or permitted hereunder shall be given in
writing by personal delivery or by registered or certified mail, return
receipt requested, postage prepaid, and, if sent by mail, shall be
effective upon delivery to the following addresses:
ADOLOR CORPORATION
371 Phoenixville Pike
Malvern PA 19355
Attention: President
KWANG DONG PHARMACEUTICAL COMPANY, LTD.
212-13, Kuro-Dong
Kuro-ku
Seoul, South Korea
Attention: President
or such address as a party may designate by prior written notice to the
other party.
Section 13.13. Wire Transfer
All payments to ADOLOR shall be made by wire transfer in immediately good
and transferable funds. ADOLOR shall provide KWANG DONG with standing wire
transfer instructions.
Section 13.14. Language
This Agreement is executed in two original English counterparts, each of
which shall be deemed an original. The English text of the Agreement shall
prevail over any translation thereof.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed in
duplicate by their duly authorized representative.
ATTEST: ADOLOR CORPORATION
Name: /s/ Peter J. Schied By: /s/ John J. Farrar
---------------------- ---------------------------------------------
Title: President and Chief Executive Officer
------------------------------------------
Date: November 5, 1997
-------------------------------------------
ATTEST: KWANG DONG PHARMACEUTICAL
COMPANY, LTD.
Name: /s/ illegible By: /s/ Soo Boo Choi
---------------------- ---------------------------------------------
Title:
Date: November 5
-------------------------------------------
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<PAGE>
Exhibit 10.4
------------
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as **. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
CONFIDENTIAL
EXECUTION COPY
LICENSE AGREEMENT
Between
ADOLOR CORPORATION
And
SB PHARMACO PUERTO RICO INC.
July 26, 1999
This document is the confidential information of both parties hereto.
It should be distributed on a need-to-know basis and kept in a secure area.
<PAGE>
LICENSE AGREEMENT
-----------------
THIS LICENSE AGREEMENT (hereinafter "AGREEMENT"), made as of the ____ day
of ____ 1999, between Adolor Corporation, a corporation of the State of
Delaware, having a principal place of business at 371 Phoenixville Pike,
Malvern, Pennsylvania 19355 and SB Pharmco Puerto Rico Inc., a corporation of
the Commonwealth of Puerto Rico, having a principal place of business at Road
172, KM 9.1/Bo.Certenejas, Cidra, Puerto Rico 00639,
WITNESSETH THAT:
---------------
WHEREAS, ADOLOR, as defined below, is the owner of all right, title and
interest or otherwise has certain rights in certain patents, identified in
APPENDIX A hereto, and know-how relating to PRODUCT; and
WHEREAS, SB, as defined below, desires to obtain certain licenses in
certain countries of the world from ADOLOR to develop and commercialize PRODUCT
in such countries under the aforesaid patents and know-how, and ADOLOR is
willing to grant to SB such licenses;
NOW, THEREFORE, in consideration of the covenants and obligations expressed
herein, and intending to be legally bound, and otherwise to be bound by proper
and reasonable conduct, the parties agree as follows:
1. DEFINITIONS
-----------
1.01. "ADOLOR" shall mean Adolor Corporation, a corporation of the State
of Delaware, having a principal place of business at 371 Phoenixville Pike,
Malvern, Pennsylvania 19355.
1.02. "ADOLOR FIELD" shall mean all uses of COMPOUND for the prophylaxis,
treatment and/or palliation of any INDICATION in animals including humans, in
any delivery form, including, but not limited to, all transdermal delivery forms
and parenteral administration,
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<PAGE>
except that topical uses of COMPOUND in humans in the ADOLOR FIELD shall be
limited to those related to:
(i) any ophthalmic INDICATION;
(ii) treatment of pain following dermal peels, laser procedures,
or any other dermatology procedure provided COMPOUND is used
exclusively by a health-care professional during the course of such
treatment in a health-care setting;
(iii) any oral, nasal, or otic cavity INDICATION; and
(iv) treatment of burns, abrasions, wounds, other cutaneous
injuries and cutaneous infections, provided that the COMPOUND is
formulated in combination with an antiinfective, is a prescription
product, and is exclusively promoted by or on behalf of ADOLOR in
hospital/emergency room settings or hospital burn centers.
COMPOUNDS employed for the treatments under Paragraphs 1.02(ii)
and (iv) shall be referred to as ADOLOR Topical Dermal Products.
1.03. "AFFILIATES" shall mean any corporation, firm, partnership or other
entity, whether de jure or de facto, which directly or indirectly owns, is owned
by or is under common ownership with a party to this AGREEMENT to the extent of
at least fifty percent (50%) of the equity (or such lesser percentage which is
the maximum allowed to be owned by a foreign corporation in a particular
jurisdiction) having the power to vote on or direct the affairs of the entity
and any person, firm, partnership, corporation or other entity actually
controlled by, controlling or under common control with such party.
1.04. "COMPOUND" shall mean any compound which is the subject of a PATENT
owned or controlled by ADOLOR at any time up to the fifth (5/th/) anniversary of
the EFFECTIVE DATE which is a peripherally selective mu opiate receptor agonist
without
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<PAGE>
significant central nervous system effects, or a prodrug or metabolite thereof,
or a peripherally selective mu opiate receptor agonist compound which inhibits
the production or function of Tumor Necrosis Factor (TNF) or other cytokines, or
prodrug or metabolite thereof. Examples of such compounds include, without
limitation, loperamide, diphenoxin, diphenoxylate, desmethyl-loperamide and
loperamide N-oxide and all esters, salts, hydrates, solvates, polymorphs and
isomers thereof which are structurally related to the compounds disclosed in the
PATENTS. A 'peripherally selective mu opiate receptor agonist' as used in this
paragraph means any mu opiate receptor agonist compound that has a selectivity
ratio of at least 30 fold (expressed as Ki ratio) for the human mu opioid
receptor versus human delta or kappa opiod receptors in standard opioid receptor
binding assays such as the Chinese Hamster Ovary (CHO), cloned human opioid
receptor binding assay, and is equal to or greater than diphenoxylate in
peripheral selectivity.
1.05. "COPYRIGHTS" shall mean any and all material that may be subject
to copyright protection and/or registration, including, but not limited to,
designs, graphics, logos, colors, and text, and any combinations thereof.
1.06. "EFFECTIVE DATE" shall mean the date upon which this AGREEMENT is
effective and shall be the date of this AGREEMENT first written above.
1.07. "FIELD" shall mean all dermal topical uses of PRODUCT for the
prophylaxis, treatment and/or palliation of any INDICATION in humans except for
those topical uses within the ADOLOR FIELD.
1.08. "INDICATION" shall mean the specific treatment or prevention of a
disease or one or more symptoms for a PRODUCT as an RX PRODUCT or an OTC PRODUCT
for use in the FIELD in the TERRITORY.
1.09. "KNOW-HOW" shall mean all present and future ADOLOR technical
information and know-how for PRODUCT in the FIELD which is confidential or is
not in the public domain and shall include, without limitation, all biological,
chemical, pharmacological,
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<PAGE>
toxicological, clinical, assay, control and manufacturing data and any other
information for PRODUCT in the FIELD and useful for the development and
commercialization of PRODUCT in the FIELD.
1.10. **
1.11. "NET SALES" shall mean the gross invoices representing sales of
PRODUCT in the FIELD in the TERRITORY under this AGREEMENT by SB, its
AFFILIATES, and sublicensees ("the Selling Party"): (a) in finished product form
(i.e., packaged and labeled for sale to the ultimate consumer); and (b) in any
product form other than finished product form (such as bulk stage material ready
for conversion to final form) to distributors who subsequently convert such
product into finished product form and sell to THIRD PARTIES who are not
AFFILIATES of SB, its AFFILIATES or its or their sublicensees (and such
distributors shall not be considered sublicensees for the purposes of this NET
SALES definition unless in fact sublicensees or, if SB, its AFFILIATES, or its
or their sublicensees, share in the proceeds of the sale by the distributor and,
further provided that, for the purposes of this Paragraph, such sales of PRODUCT
in final stage bulk material form shall only occur where such sales are due to
local country requirements as such requirements are determined by SB); less
deductions actually allowed or specifically allocated to PRODUCT by the Selling
Party using U.S. generally accepted accounting principles for:
(i) transportation charges, including insurance, for
transporting PRODUCT;
(ii) sales and excise taxes and duties and any other
governmental charges imposed upon the production, importation, use or
sale of such PRODUCT;
(iii) trade, quantity and cash discounts;
**=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-
<PAGE>
(iv) allowances or credits to customers on account of rejection
or return of PRODUCT or on account of retroactive price reductions
affecting PRODUCT;
(v) PRODUCT rebates and PRODUCT charge backs, including those
granted to managed-care entities and government agencies; and
(vi) bad debt actually incurred.
Sales between SB, its AFFILIATES and its or their sublicensees shall be excluded
from the computation of NET SALES and no royalties will be payable on such sales
unless the PRODUCT is administered or used by the party.
1.12. "OTC PRODUCT" shall mean a PRODUCT in the FIELD which is not an RX
PRODUCT.
1.13. "PATENTS" shall mean all patents and patent applications in the FIELD
which are or become owned by ADOLOR, or to which ADOLOR otherwise has, now or in
the future, the right to grant licenses, which generically or specifically claim
PRODUCT, a process for manufacturing PRODUCT, an intermediate use in such
process or a use of PRODUCT. Included within the definition of PATENTS are all
continuations, continuations-in-part, divisions, patents of addition, reissues,
renewals or extensions thereof and all SPCs. Also included within the definition
of PATENTS are any patents or patent applications in the FIELD which generically
or specifically claim any improvements on PRODUCT or intermediates or
manufacturing processes required or useful for production of PRODUCT which are
developed by ADOLOR, or which ADOLOR otherwise has the right to grant licenses,
now or in the future, during the term of this AGREEMENT.
The current list of patent applications and patents encompassed within PATENTS
is set forth in APPENDIX A attached hereto.
1.14. "PRODUCT" shall mean a composition or formulation containing
COMPOUND for use in the FIELD.
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<PAGE>
1.15. "RX PRODUCT" shall mean a PRODUCT in the FIELD in respect of which,
as a matter of law and/or regulation, the regulatory authorities in the country
in which it is purchased require a prescription from a physician or other
health-care professional to enable the consumer to purchase the product in such
country.
1.16. "SB" shall mean SB Pharmco Puerto Rico Inc., a corporation of the
Commonwealth of Puerto Rico, having a principal place of business at Road 172,
KM 9.1/Bo.Certenejas, Cidra, Puerto Rico 00639.
1.17. "SPC" shall mean a right based upon a PATENT to exclude others
from making, using or selling PRODUCT, such as a Supplementary Protection
Certificate.
1.18. "TERRITORY" shall mean all the countries and territories in the
world except for South Korea, People's Republic of North Korea, or any
subsequent unification of such two countries.
1.19. "TOPICAL ITCH PRODUCT" shall mean an RX PRODUCT or OTC PRODUCT,
depending on context, for the relief of itching, such as, but not limited to,
itching associated with skin irritations and/or rashes due to eczema, psoriasis,
insect bites, poison ivy, poison oak, poison sumac, sunburn, soaps, detergents,
cosmetics, and jewelry, as well as external vaginal or rectal itch. The scope
of the term TOPICAL ITCH PRODUCT shall not include any ** PRODUCT or ** PRODUCT.
1.20. "TRADE DRESS" shall mean any and all designs, colors, graphics and
TRADEMARKS of the PRODUCT packaging, these elements either separately or
together in combination thereof.
1.21. "TRADEMARK(S)" shall mean any and all words, phrases, slogans,
designs, logos and combinations thereof used as an indication of source of the
PRODUCT or associated services.
1.22. "THIRD PARTY(IES)" shall mean any party other than SB and ADOLOR.
**=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.
-7-
<PAGE>
1.23. "UNAFFILIATED EXPERT" shall mean an individual who (i) is not a
current employee or director of, or consultant to, one of the parties or of an
entity which currently has a commercial alliance with one of the parties, (ii)
has disclosed any previous affiliation with one of the parties of the type
described in clause (i) of this Paragraph, (iii) is mutually acceptable to the
parties, and (iv) has suitable expertise on the topic in question.
1.24. "U.S.A." shall mean the United States of America and all of its
territories and possessions.
2. GRANT
-----
2.01. Subject to Paragraph 2.03, ADOLOR hereby grants to SB an exclusive
license, with the right to grant sublicenses, under PATENTS and KNOW-HOW to
make, have made, use, sell, offer for sale, and import PRODUCT in the FIELD in
the TERRITORY subject to the other terms and conditions of this AGREEMENT. The
rights to make, have made, use and sell shall include all activities concerning
the subject matter of PATENTS and KNOW-HOW which activities would, but for the
license herein granted, infringe PATENTS and KNOW-HOW.
2.02. In the event that SB determines that it needs a copromotion partner
for PRODUCT in the U.S.A. during the term of the AGREEMENT, SB shall notify
ADOLOR in writing, and ADOLOR shall have the first right to negotiate with SB
for the right to be such copromotion partner, but if SB and ADOLOR have failed
to agree to sign a binding agreement with respect to such copromotion within
ninety (90) days after ADOLOR's receipt of such notice, then SB shall thereafter
be free to negotiate and enter into such a copromotion agreement with a THIRD
PARTY.
2.03. All AFFILIATES and sublicensees of SB shall be bound by SB to observe
and perform the relevant terms and conditions contained in this AGREEMENT. A
breach of this AGREEMENT by such AFFILIATE or sublicensee shall be deemed to be
a breach by SB.
-8-
<PAGE>
2.04. In the event that ADOLOR develops a formulation for COMPOUND which is
for a topical form of COMPOUND in the ADOLOR FIELD, and provided that:
(a) ADOLOR developed such formulation without any analysis of any
PRODUCT independently developed by SB; and
(b) ADOLOR developed such formulation prior to the publication of
any patent owned by SB, or literature authored or authorized by
SB, which discloses such formulation,
then, in the event that SB subsequently owns any patents which cover such
formulation, ADOLOR will automatically have a royalty free exclusive license in
the ADOLOR FIELD with the right to grant sublicenses, under such patents, to
make, have made, use, sell, offer for sale, and import a topical form of
COMPOUND in such a formulation in the ADOLOR FIELD in the TERRITORY and South
and North Korea. If ADOLOR has not carried out such independent formulation
development work as described in the preceding sentence but SB owns patents
which cover a formulation for COMPOUND which would have use as a topical form of
COMPOUND in the ADOLOR FIELD, and such patents arose as a result of SB's work
under this AGREEMENT, SB shall grant to ADOLOR an exclusive license in the
ADOLOR FIELD, with the right to grant sublicenses, under such patents, to make,
have made, use, sell, offer for sale, and import a topical form of COMPOUND in
such a formulation in the ADOLOR FIELD in the TERRITORY and South and North
Korea upon royalty terms to be negotiated and agreed in good faith by the
parties at the time. ADOLOR warrants and represents that they will not
knowingly analyze any formulation of COMPOUND supplied by SB to any THIRD PARTY,
such as, without limitation, a clinician, during the course of this AGREEMENT.
3. PAYMENTS AND ROYALTIES
----------------------
3.01. In consideration for the license under PATENTS and KNOW-HOW granted
to SB in this AGREEMENT and subject to the provisions of this Agreement
including but not limited to Paragraph 3.11, SB shall make the following
milestone payments to ADOLOR, in the specified incremental amounts, within
thirty (30) days after the occurrence of the following milestones:
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<PAGE>
(a) EFFECTIVE DATE $ 500,000
(b) The first to occur of First Rx
INDICATION or Direct OTC INDICATION
(1) ** $ **
(2) ** $ **
(3) ** $ **
(4) ** $ **
(5) ** $ **
(6) ** $ **
(7) ** $ **
(8) ** $ **
(c) Second Rx INDICATION
(1) ** $ **
(2) ** $ **
(3) ** $ **
(4) ** $ **
(5) ** $ **
(d) Each of Third and Fourth Rx INDICATIONs
(1) ** $ **
(2) ** $ **
(3) ** $ **
(4) ** $ **
(5) ** $ **
(e) Each of Fifth and Sixth Rx INDICATIONs
(1) ** $ **
(2) ** $ **
(3) ** $ **
(4) ** $ **
(5) ** $ **
(f) ** $ **
(g) ** $ **
(h) ** $ **
provided that:
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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<PAGE>
(1) each such payment shall be made only one time based on the first time
a milestone is achieved, regardless of how many times such milestone
is achieved (except as otherwise provided by Paragraphs 3.01(f), and
no payment shall be owed for a milestone which is not reached. For
Paragraph 3.01(h), SB shall not be required to make more than ** (**)
such payments totaling $ **;
(2) each such payment shall be non-refundable;
(3) the term "**" shall mean the earlier to occur of (i) SB's
determination after the last patient has completed his/her last visit
** that such study was successful, or (ii) SB's decision to continue
development of the PRODUCT **;
(4) the term "**" shall mean, with respect to the relevant INDICATION
which is the subject of the study, the earlier to occur of (i) the
date on which SB determines that ** was successful, or (ii) SB's
decision to **.
(5) the term "**" shall mean with respect to the relevant INDICATION which
is the subject of the study the earlier to occur of (i) the date on
which SB determines that ** was successful, or (ii) SB's decision to
**.
(6) the term "**" as used in this Paragraph shall mean the **.
(7) the term "**" as used in this Paragraph shall mean the ** required for
the filing of a New Drug Application (hereinafter "NDA") with the U.S.
Food and Drug Administration (hereinafter "FDA") or the corresponding
regulatory agency in other countries for PRODUCT for the relevant
INDICATION which is the subject of the study as defined in 21 CFR
(S)312.21(c);
(8) the term "NDA Acceptance" shall mean, with respect to each INDICATION,
the earlier of (i) written notice of acceptance from the FDA of the
NDA filed by or on behalf of SB under this AGREEMENT necessary for
commercialization of PRODUCT for the relevant, whichever is
appropriate, or (ii) sixty (60) days
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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<PAGE>
following filing of such NDA with the FDA, assuming that SB has not
received a "Notice of Refusal to File" from the FDA with respect to
such NDA.
(9) the term "**", shall mean with respect to each INDICATION, the **.
(10) the term "EU" shall mean the European Economic Union provided that in
the event the relevant milestone occurs in a country which is within
the EU at such time, but is not any of the United Kingdom, France or
Germany, then SB shall owe only fifty percent (50%) of the relevant
milestone payment, and the other fifty percent (50%) shall be owed at
the time the relevant milestone occurs in the earliest of the United
Kingdom, France or Germany.
(11) the term "**" shall mean the first PRODUCT which meets the stated
milestones **;
(12) the term "**" shall mean a PRODUCT which is approved for ** in the
relevant geographic area;
(13) the terms "Second", "Third", "Fourth", "Fifth" and "Sixth" as applied
to the term "Rx INDICATION" shall mean a PRODUCT which meets the
stated milestones provided that such PRODUCT is either ** which has
not already been subject to milestone payments under Paragraph 3.01 or
is a ** for which another ** has not already been subject to milestone
payments under Paragraph 3.01. The terms assume that the **.
(14) the term "**" shall mean an RX PRODUCT which **;
(15) the term "**" shall mean, with respect to the relevant INDICATION in
the relevant geographical location, the FDA's (or relevant regulatory
agency's) approval of an NDA (or its equivalent) filed by or on behalf
of SB for marketing the relevant ** for such INDICATION.
(16) The term "**" shall mean an OTC PRODUCT which **.
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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<PAGE>
(17) TOPICAL ITCH PRODUCT and ** each constitute a single and separate
INDICATION, unless if for the TOPICAL ITCH PRODUCT or the **, a
different PRODUCT is sold for some of the INDICATIONS included within
the definition of TOPICAL ITCH PRODUCT or ** using the same TRADEMARK
in the same country as is used for the TOPICAL ITCH PRODUCT or **,
then the different PRODUCT shall not be considered as a separate
INDICATION unless the different PRODUCT is a Combination Rx PRODUCT
or a Combination OTC PRODUCT.
(18) The term "NDA Approval" shall mean approval for marketing by the FDA
or its equivalent in the particular geographic location, including
all requisite manufacturing, pricing and reimbursement approvals for
the relevant PRODUCT for the relevant INDICATION.
(19) The term "**" shall mean the earlier of **.
(20) **. For the avoidance of doubt, Exhibits One and Two of APPENDIX D to
this AGREEMENT provide examples of how this Paragraph 3.01(19) shall
operate.
3.02. As further consideration for the license under PATENTS granted
to SB under this AGREEMENT, and subject to the provisions of this AGREEMENT
including but not limited to Paragraph 3.11, SB shall make the following royalty
payments to ADOLOR:
** % (** percent) of annual NET SALES of all RX PRODUCT up to and including
** U.S. dollars (less than or equal to U.S. $**); and
** % (** percent) of annual NET SALES of all RX PRODUCT in excess of **
U.S. dollars (greater than U.S. $**); provided that, for purposes of this
Paragraph 3.02, achievement of the NET SALES of RX PRODUCT thresholds recited
above shall be determined by adding the total annual NET SALES of all RX
PRODUCTS in all countries of the TERRITORY in which there is (a) a granted and
enforceable PATENT which claims the relevant RX PRODUCT at the time
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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such NET SALES occur, or (b) a pending PATENT which claims the relevant RX
PRODUCT at the time such NET SALES occur, provided that the national filing date
for such PATENT is not greater than five (5) years prior to the time such NET
SALES occur.
3.03. As further consideration for the license to KNOW-HOW granted to SB
under this AGREEMENT, SB shall pay to ADOLOR **% (** percent) of annual NET
SALES of RX PRODUCT in those countries of the TERRITORY which are not subject to
the royalty obligation outlined in Paragraph 3.02.
3.04. As further consideration for the license under PATENTS granted to SB
under this AGREEMENT, SB shall make the following royalty payments to ADOLOR:
** % (** percent) of annual NET SALES of all OTC PRODUCTS up to and
including ** U.S. dollars (less than or equal to U.S. $**);
** % (** percent) of annual NET SALES of all OTC PRODUCTS in excess of **
U.S. dollars (greater than U.S. $**) up to and including ** U.S. dollars
(less than or equal to U.S. $**); and
** % (** percent) of annual NET SALES of all OTC PRODUCTS in excess of **
U.S. dollars (greater than U.S. $**); provided that, for purposes of this
Paragraph, achievement of the NET SALES of OTC PRODUCT thresholds recited above
shall be determined by adding the total annual NET SALES of the particular OTC
PRODUCT in all countries of the TERRITORY in which there is (a) a granted and
enforceable PATENT which claims the relevant OTC PRODUCT at the time such NET
SALES occur, or (b) a pending PATENT which claims the relevant OTC PRODUCT at
the time such NET SALES occur, provided that the national filing date for such
PATENT is not greater than five (5) years prior to the time such NET SALES
occur.
3.05. As further consideration for the license to KNOW-HOW granted to SB
under this AGREEMENT, and subject to the provisions of this AGREEMENT including
but not limited to Paragraph 3.11, SB shall pay to ADOLOR ** % (** percent) of
annual NET SALES of OTC
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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PRODUCT in those countries of the TERRITORY which are not subject to the royalty
obligation outlined in Paragraph 3.04.
3.06. An appropriate downward adjustment of the royalties outlined in
Paragraphs 3.02 through 3.05, whichever are relevant, for NET SALES of OTC
PRODUCT formulated with a concentration of greater than ** percent (** %) of the
therapeutically active ingredient shall be mutually agreed upon, when
appropriate, in good faith, by the parties.
3.07. An appropriate downward adjustment of the royalties outlined in
Paragraphs 3.02, 3.03, 3,04 and 3.05 for NET SALES of PRODUCT formulated in
combination with one or more additional therapeutically active ingredients shall
be mutually agreed upon, when appropriate, in good faith, by the parties.
3.08. SB's royalty obligations under Paragraph 3.02 or 3.04, whichever is
relevant, shall become effective in each country in the TERRITORY at such time
as the relevant PRODUCT is commercially Launched in such country by SB, its
AFFILIATES, or its sublicensees. SB's royalty obligations under Paragraph 3.03
or 3.05, whichever is relevant, shall become effective in each country in the
TERRITORY at the Launch of the relevant PRODUCT in such country by SB, its
AFFILIATES or its sublicensees;
3.09. (a) In the event that any person or party initiates any legal or
administrative proceeding challenging the validity, scope or enforceability of a
PATENT by opposing the grant of the PATENT in the European Patent Office then
the royalty obligation on NET SALES for such PRODUCT in any country governed by
such PATENT outlined in Paragraph 3.02 or 3.04, whichever is relevant, shall not
be applicable to NET SALES of such PRODUCT in such country during the pendency
of the proceeding provided there is Substantial Competition for the PRODUCT and
there are no other PATENTS covering the PRODUCT, and the royalty obligation in
Paragraph 3.03 or 3.05, whichever is relevant, shall be applicable to NET SALES
of such PRODUCT in such country during the pendency of the proceeding.
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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(b) ** .
(c) If the enforceability of at least one claim claiming PRODUCT in
the PATENT under challenge in accordance with Paragraph 3.09(a) is upheld by the
European Patent Office front which no appeal is or can be taken, then the
royalty obligation in Paragraph 3.02 or 3.04, whichever is relevant, shall
thereafter be applicable.
(d) If all claims in the PATENT claiming PRODUCT are held to be
invalid or otherwise unenforceable by the European Patent Office from which no
appeal is or can be taken, then no further royalties under Paragraph 3.02 or
3.04, whichever is relevant, shall be owed with respect to the sale of such
PRODUCT in such country, and the royalty obligation in Paragraph 3.03 or 3.05,
whichever is relevant, shall be applicable to NET SALES of such PRODUCT in such
country, and SB shall retain the licenses granted herein.
3.10. SB and ADOLOR hereby acknowledge that if SB determines in good faith
that with respect to a particular PRODUCT, the amount of each of any of the
milestones and/or royalty payments to be made by SB to ADOLOR under this Article
3 would render the commercialization of such PRODUCT commercially unfeasible, SB
shall promptly notify ADOLOR in writing and the parties shall promptly negotiate
in good faith an appropriate downward adjustment to such milestone and/or
royalty payments that would still allow both parties to receive adequate
remuneration for such PRODUCT.
4. COMPULSORY LICENSES AND THIRD PARTY LICENSES
--------------------------------------------
4.01. In the event that a governmental agency in any country or territory
grants or compels ADOLOR to grant a license to any THIRD PARTY for PRODUCT, SB
shall have the benefit in such country or territory of the terms granted to such
THIRD PARTY to the extent that such terms are more favorable than those of this
AGREEMENT.
4.02. If, during the term of this AGREEMENT, SB, in its sole discretion,
deems it necessary to seek a license from any THIRD PARTY in order to avoid
infringement during the
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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exercise of the license herein granted, provided that such license is related to
the making, use, or sale of the COMPOUND and/or use of the COMPOUND which is
claimed in such THIRD PARTY'S patent in such country, then ** percent (** %) of
any royalties or other fees paid to such THIRD PARTY under such license may be
deducted from royalties otherwise due ADOLOR for the same PRODUCT covered by a
claim of a PATENT under Paragraphs 3.02 or 3.04 of this AGREEMENT, provided in
no event shall such deduction reduce the royalties otherwise payable to ADOLOR
during any calendar year by more than ** percent (** %) provided that any excess
deduction shall be carried over into subsequent years of the AGREEMENT until the
full deduction is taken.
5. DEVELOPMENT AND SUPPLY OF PRODUCT
---------------------------------
5.01. (a) As of the EFFECTIVE DATE, and during the term of the AGREEMENT,
SB shall have full control and authority, with full responsibility over
research, development, registration and commercialization of PRODUCT in the
FIELD in the TERRITORY. All such activity shall be undertaken at SB's expense.
SB will exercise its reasonable efforts and diligence in developing and
commercializing PRODUCT, and in undertaking investigations and actions required
to obtain appropriate governmental approvals to market PRODUCT in the TERRITORY,
using efforts and resources normally used by SB for a compound owned by it or to
which it has rights which is of similar market potential at a similar stage in
its product life, taking into account the competitiveness of the marketplace,
the proprietary position of the compound, the regulatory structure involved, the
profitability of the applicable products, and other relevant factors including,
without limitation, technical, legal, scientific or medical factors, provided
that SB's development of PRODUCT as a TOPICAL ITCH PRODUCT following the
respective relevant achievements of ** (as defined in Paragraph 3.01(3)) shall
be in accordance with the Outline Development Plan which is attached hereto as
APPENDIX C and fully incorporated into this AGREEMENT as though fully set out
herein. All regulatory timelines and
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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proposed studies contained in such Outline Development Plan may be amended by SB
as necessary to appropriately account for any medical, scientific or regulatory
factors and/or changes or delays which are beyond SB's reasonable direct control
(b) In the event that SB has not initiated the development of a
PRODUCT in the FIELD to be delivered either **, whichever is relevant, within **
(**) years after the flat commercial Launch in the TERRITORY of a TOPICAL ITCH
PRODUCT in the form of the first OTC PRODUCT (such non-developed PRODUCT(s)
hereinafter referred to in this Paragraph 5.01(b) as "non-developed
PRODUCT(s)"), then such non-developed PRODUCT(s) shall become part of the ADOLOR
FIELD.
(c) In the event that SB has not initiated the development of a
PRODUCT in the FIELD for the treatment of ** within ** years after the Launch
in the TERRITORY of the first OTC PRODUCT, then the scope of the FIELD shall
thereafter exclude all PRODUCTS for the treatment of ** and such PRODUCT shall
become part of the ADOLOR FIELD.
(d) If, in respect of a **, SB decides to cease development, or has
not initiated development within **, then SB shall communicate such decision to
ADOLOR and the parties shall then meet to discuss in good faith the excluding of
** from the scope of the FIELD and such ** then forming part of the ADOLOR
FIELD.
(e) For any PRODUCT in the FIELD for which NDA Approval has been
received for an INDICATION but which has not been the subject of a Launch within
the TERRITORY within one (1) year of such NDA Approval then, unless the delay
can be attributed to medical, scientific, regulatory or other changes or delays
which are beyond SB's reasonable control, such PRODUCT for said INDICATION shall
no longer be in the scope of the FIELD and shall become part of the ADOLOR
FIELD.
5.02. (a) SB shall provide ADOLOR with a brief summary in writing of SB's
progress in respect of the preclinical and clinical development of PRODUCT (but
not, for the
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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avoidance of doubt, any technical information on any formulation(s) of PRODUCT)
and SB's efforts to commercialize PRODUCT in the TERRITORY on a quarterly basis.
(b) Subject to ADOLOR's obligations to a THIRD PARTY, ADOLOR shall
provide SB with a brief summary in writing of ADOLOR's progress in respect of
the pre-clinical and clinical development and commercialization of PRODUCT
either in the FIELD outside of the TERRITORY or for ADOLOR's Topical Dermal
Products anywhere in the world (but not, for the avoidance of doubt, any
technical information on any formulation(s) of such PRODUCT) on a quarterly
basis.
5.03. ADOLOR shall provide to SB, at SB's request, reasonable technical
assistance within its area of expertise concerning preclinical and clinical
development, registration, production and commercialization of PRODUCT in the
FIELD, including, without limitation, technical assistance related to PRODUCT
formulation and safety data integration. Provision of such technical assistance
shall include, but not be limited to, visits by ADOLOR. personnel to SB, at
ADOLOR's expense if such visits are within the Commonwealth of Pennsylvania, the
State of New Jersey and the State of Delaware, and at SB's expense everywhere
else, and visits by SB personnel to ADOLOR, at SB's expense, at times and for
periods of time upon which the parties will agree, and supply any KNOW-HOW that
SB may require.
5.04. SB shall be responsible for supplying all of SB's, its AFFILIATES'
and its and their sublicensee's and distributor's requirements of PRODUCT in all
countries of the TERRITORY during the term of this AGREEMENT. SB shall have no
obligation to supply any of ADOLOR's, its AFFILIATES' or its sublicensee's or
distributor's requirements of PRODUCT anywhere in the world during or after the
term of this AGREEMENT.
5.05. All PRODUCT in the FIELD sold by SB, its AFFILIATES and its or their
sublicensees or distributors in the TERRITORY under this AGREEMENT shall bear a
legend on
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its packaging stating that such PRODUCT is sold under a license from ADOLOR, to
the extent such legend is legally permissible.
5.06. SB and ADOLOR shall promptly, and in accordance with the relevant
regulatory requirements, inform the other party of any safety information,
including, but not limited to, any adverse drug reactions regarding COMPOUND or
PRODUCT.
6. EXCHANGE OF INFORMATION AND CONFIDENTIALITY
-------------------------------------------
6.01. Promptly after the date of this AGREEMENT first written above, ADOLOR
shall disclose and supply to SB all KNOW-HOW. Thereafter, ADOLOR shall promptly
disclose and supply to SB any further KNOW-HOW which may become known to ADOLOR.
All KNOW-HOW disclosed to SB is confidential information and shall be governed
by the provisions of Paragraph 6.03.
6.02. The responsibilities of the parties for reporting of adverse drug
experiences related to PRODUCT to regulatory authorities throughout the
TERRITORY shall be performed in accordance with the pharmacovigilance agreement
attached to this AGREEMENT as APPENDIX B.
6.03. During the term of this AGREEMENT and for five (5) years thereafter,
irrespective of any termination earlier than the expiration of the term of this
AGREEMENT, ADOLOR and SB shall not use or reveal or disclose to THIRD PARTIES
any confidential information received from the other party without first
obtaining the written consent of the disclosing party, except as may be
otherwise provided herein (including, but not limited to, the grant of any
rights by SB to ADOLOR under Paragraph 10.4(b) in which case ADOLOR would be
entitled to use such confidential information if necessary to exercise such
rights and/or reveal or disclose such confidential information to any THIRD
PARTY subject to and in accordance with the same conditions of confidentiality
as are contained herein), or as may be required for the purposes of
investigating, developing, manufacturing or marketing PRODUCT or for securing
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essential or desirable authorizations, privileges or rights from governmental
agencies, or is required to be disclosed to a governmental agency or is
necessary to file or prosecute patent applications concerning PRODUCT or to
carry out any litigation concerning PRODUCT. Prior to such disclosure, the party
obliged to disclose the other party's confidential information shall promptly
inform the other party of the potential disclosure and work diligently to avoid
such disclosure or to obtain confidential treatment of such confidential
information. This confidentiality obligation shall not apply to such information
which is or becomes a matter of public knowledge, or is already in the
possession of the receiving party, or is disclosed to the receiving party by a
THIRD PARTY having the right to do so, or is subsequently and independently
developed by employees of the receiving party or AFFILIATES thereof who had no
knowledge of the confidential information disclosed, or is required by law to be
disclosed. The parties shall take reasonable measures to assure that no
unauthorized use or disclosure is made by others to whom access to such
information is granted. Either party may disclose confidential information
received from the other party hereunder to THIRD PARTIES to the extent necessary
to perform its obligations under this AGREEMENT, provided such THIRD PARTIES
execute confidentiality agreements containing terms no less strict than those
contained herein.
6.04. Nothing herein shall be construed as preventing SB from disclosing
any information received from ADOLOR hereunder to an AFFILIATE, sublicensee or
distributor of SB, provided, in the case of a sublicensee or distributor, such
sublicensee or distributor has undertaken a similar obligation of
confidentiality with respect to the confidential information.
6.05. All confidential information disclosed by one party to the other
shall remain the intellectual property of the disclosing party. In the event
that a court or other legal or administrative tribunal, directly or through an
appointed master, trustee or receiver, assumes partial or complete control over
the assets of a party to this AGREEMENT based on the
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insolvency or bankruptcy of such party, the bankrupt or insolvent party shall
promptly notify the court or other tribunal (i) that confidential information
received from the other party under this AGREEMENT remains the property of the
other party and (ii) of the confidentiality obligations under this AGREEMENT. In
addition, the bankrupt or insolvent party shall, to the extent permitted by law,
take all steps necessary or desirable to maintain the confidentiality of the
other party's confidential information and to ensure that the court, other
tribunal or appointee maintains such information in confidence in accordance
with the terms of this AGREEMENT.
6.06. No public announcement or other disclosure to THIRD PARTIES
concerning the terms of this AGREEMENT shall be made, either directly or
indirectly, by any party to this AGREEMENT, except as may be legally required or
as may be required for recording purposes, without first obtaining the approval
of the other party and agreement upon the nature and text of such announcement
or disclosure. Such approval shall not be unreasonably withheld or delayed. The
parties will agree to a press release which can be released by ADOLOR on or
after the EFFECTIVE DATE. The party desiring to make any such public
announcement or other disclosure shall inform the other party of the proposed
announcement or disclosure in reasonably sufficient time prior to public
release, and shall provide the other party with a written copy thereof, in order
to allow such other party to comment upon such announcement or disclosure. Each
party agrees that it shall cooperate fully with the other with respect to all
disclosures regarding this AGREEMENT to the Securities Exchange Commission and
any other governmental or regulatory agencies, including requests for
confidential treatment of proprietary information of either party included in
any such disclosure. Notwithstanding any other provision of this AGREEMENT, each
party may disclose the terms of this AGREEMENT to lenders, investment bankers
and other financial institutions ("THIRD PARTY Lender") of its choice solely for
purposes of financing the business operations of such party either (i) upon the
written consent of the other party or (ii) if the disclosing party obtains,
using reasonable commercial
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efforts, a signed confidentiality agreement with such financial institution with
respect to such information, such agreement to contain the following:
(a) The THIRD PARTY Lender shall hold the information disclosed to
it by such party ("Loan Information") in strict confidence and shall use
diligent efforts, which shall not in any event be less than the THIRD PARTY
Lender uses to prevent unauthorized use or disclosure of its own valuable,
confidential information, to prevent any unauthorized use or disclosure of such
Loan Information.
(b) The THIRD PARTY Lender shall not, without the prior written
consent of such party, use the Loan Information disclosed to it for any purpose
of other than the use for which such Loan Information was disclosed by such
party.
(c) Upon completion of the authorized use by such THIRD PARTY
Lender and in the absence of any further agreement between the Parties, the
THIRD PARTY Lender shall cease all use and make no further use of the Loan
Information and shall, upon written request from such party, promptly return all
Loan Information to such party.
6.07. ADOLOR warrants and represents that it will not knowingly do
anything which will harm the development and/or commercialization of PRODUCT in
the FIELD as a result of ADOLOR's development and/or commercialization of
PRODUCT outside of the FIELD, or in the FIELD outside of the TERRITORY. The
contribution of each party shall be noted in all publications or presentations
by acknowledgment or coauthorship, whichever is appropriate.
6.08. Nothing in this AGREEMENT shall be construed as preventing or in any
way inhibiting either party from complying with statutory and regulatory
requirements governing the development, manufacture, use and sale or other
distribution of products containing COMPOUND in any manner which it reasonably
deems appropriate, including, for example, by disclosing to regulatory
authorities confidential or other information received from the other party or
THIRD PARTIES.
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7. PATENT PROSECUTION AND LITIGATION
---------------------------------
7.01. Each party shall have and retain sole and exclusive title to all
inventions or discoveries conceived by and know-how, including but not limited
to any KNOW-HOW, made or generated by, its employees, agents, or other persons
acting under its authority in the course of or as a result of this AGREEMENT.
Each party shall own a fifty percent (50%) undivided interest in all such
inventions, discoveries and know-how made, conceived, or generated jointly by
employees, agents, or other persons acting under the authority of both parties
in the course of or as a result of this AGREEMENT. However, for inventions,
discoveries and know-how jointly owned by the parties, ADOLOR shall have a
royalty-free exclusive license with the right to sublicense in the ADOLOR FIELD
and SB shall have a royalty-free exclusive license with the right to sublicense
in the FIELD. Except as expressly provided in this AGREEMENT, and to the extent
legally permitted, each joint owner may make, use, sell, keep, license, assign,
or mortgage such jointly owned inventions, discoveries and know-how, and
otherwise undertake all activities a sole owner might undertake with respect to
such inventions, discoveries and know-how, without the consent of and without
accounting to the other joint owner.
7.02. (a) ADOLOR warrants and represents that it has disclosed to SB the
complete texts of all PATENTS filed by or otherwise controlled by ADOLOR as of
the EFFECTIVE DATE in the TERRITORY (including, but not limited to, method and
use claims relating to PRODUCT) as well as all information received as of the
EFFECTIVE DATE concerning the institution or possible institution of any
interference, opposition, re-examination, reissue, revocation, nullification or
any official proceeding involving a PATENT anywhere in the TERRITORY, ADOLOR
further warrants and represents that it will disclose to SB the complete texts
of all PATENTS filed by or otherwise controlled by ADOLOR after the EFFECTIVE
DATE in the TERRITORY as well as all information received after the EFFECTIVE
DATE concerning the institution or possible institution any interference,
opposition, re-examination,
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reissue, revocation, nullification or any official proceeding involving a PATENT
(the "Administrative Proceedings") anywhere in the TERRITORY. SB shall have the
right to review all such PATENTS and other proceedings relating thereto and make
recommendations to ADOLOR concerning them and their conduct. ADOLOR agrees to
keep SB promptly and fully informed of the course of patent prosecution or other
proceedings including by providing SB with copies of substantive communications,
search reports and THIRD PARTY observations submitted to or received from patent
offices throughout the TERRITORY. SB shall provide such patent consultation to
ADOLOR at no cost to ADOLOR. SB shall hold all information disclosed to it under
this Paragraph 7.02 as the confidential information of ADOLOR subject to the
provisions of Paragraphs 6.03 and 6.04.
(b) On or after the date the milestone referred to in Paragraph
3.01 (b)(2) (`**') has been achieved in accordance with the terms of Paragraph
3.01(3), SB shall assist in the defraying of out of pocket costs incurred
thereafter by ADOLOR relating to the preparation, prosecution, Administrative
Proceeding and maintenance of PATENTS ("Patent Costs") subject to, and in
accordance with, the following terms:
(i) the Patent Costs must first be approved by SB (such
approval not to be unreasonably withheld) prior to being incurred;
(ii) subject to Paragraph 7.02(b)(iii), if such Patent Costs
are approved in accordance with Paragraph 7.02(b)(i), then SB and
ADOLOR shall each pay fifty percent (50%) of the total amount of
such Patent Costs provided however that if PATENTS which are the
subject matter of such Patent Costs are, or have been, licensed to
one or more THIRD PARTIES outside of the FIELD, then SB's
obligation under this Paragraph 7.02(b)(ii) to pay fifty percent
(50%) of the total amount of such Patent Costs ("the SB Total
Contribution") shall be reduced such that SB's amended contribution
("the SB Reduced Contribution") then equates to
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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an amount equivalent to [the SB Total Contribution] divided by
(the number of such THIRD PARTIES plus one].
For the avoidance of doubt, if any Patent Costs are not approved by SB under
Paragraph 7.02(b)(i) then this Paragraph 7.02(b) shall not apply and all such
Patent Costs shall be the sole responsibility of ADOLOR.
(c) Subject to any THIRD PARTY agreement, at SB's sole discretion
and option, SB can assume the preparation, prosecution, Administrative
Proceeding and maintenance of any PATENT not licensed by ADOLOR to a THIRD PARTY
and SB shall thereafter keep ADOLOR promptly and fully informed of the course of
patent prosecution or other proceedings including providing ADOLOR with copies
of substantial communications, search reports and THIRD PARTY observations
submitted to received from patent offices throughout the TERRITORY. SB shall
provide such patent services at no cost to ADOLOR. SB shall hold all information
disclosed to it under this Paragraph 7.02 as the confidential information of
ADOLOR subject to the provisions of Paragraphs 6.03 and 6.04. However, if ADOLOR
subsequently licenses to a THIRD PARTY one or more PATENTS for which SB has
assumed responsibility under this Paragraph 7.02(c), ADOLOR shall thereafter
assume responsibility for such newly licensed PATENTS, including, subject to
Paragraph 7.02(b), all costs relating thereto.
7.03. SB shall have the right, but not the obligation, to assume
responsibility for any PATENT or any part of a PATENT which ADOLOR intends to
abandon or otherwise cause or allow to be forfeited. ADOLOR shall give SB
reasonable written notice prior to abandonment or other forfeiture of any PATENT
or any part of a PATENT so as to permit SB to exercise its rights under this
Paragraph and, further, for the avoidance of doubt, such PATENT or any part of a
PATENT, shall not thereafter be royalty bearing under this AGREEMENT.
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<PAGE>
7.04. In the event of the institution of any suit by a THIRD PARTY against
ADOLOR, SB or its AFFILIATES, sublicensees or distributors for patent
infringement involving the manufacture, use, sale, distribution or marketing of
PRODUCT in the FIELD by, or on behalf of, SB under this AGREEMENT anywhere in
the TERRITORY, the party sued shall promptly notify the other party in writing.
The conduct of the defense to any such suit shall be determined by SB and at its
own expense and the provisions of Paragraph 12.07 shall apply. ADOLOR shall
provide reasonable non-monetary assistance to SB and reasonably cooperate in any
such litigation at SB's request without expense to the requesting party.
7.05. In the event that ADOLOR or SB becomes aware of actual or threatened
infringement of a PATENT anywhere in the TERRITORY, that party shall promptly
notify the other party in writing. Subject to any THIRD PARTY agreement, SB
shall have the first right, but not the obligation, to bring, at its own
expense, an infringement action against any THIRD PARTY for a PRODUCT in the
FIELD and to use ADOLOR's name in connection therewith and to name ADOLOR as a
party thereto, but only to the extent that SB is not precluded from doing so by
an agreement between ADOLOR and a THIRD PARTY. If SB does not commence a
particular infringement action within ninety (90) days of receipt of the notice
of infringement, then ADOLOR, after noticing SB in writing, shall be entitled to
bring such infringement action at its own expense. The party conducting such
action shall have full control over its conduct, including settlement thereof
subject to Paragraph 7.07. SB and ADOLOR shall have the right but not the
obligation, to join in any such infringement action or in an action or claim of
PATENT invalidity or unenforceability in which event any recovery shall be
shared in proportion to the out-of-pocket THIRD PARTY litigation costs,
including attorneys fees, incurred by SB and ADOLOR. In any event, ADOLOR and SB
shall provide reasonable assistance to one another and shall reasonably
cooperate in any such litigation at the other's request without expense to the
requesting party.
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7.06. ADOLOR and SB shall recover their respective actual out-of-pocket
expenses, or equitable proportions thereof, associated with any litigation or
settlement thereof from any recovery made by any party. In the event that SB was
the party which controlled the litigation or settlement, any excess amount shall
be shared equally between SB and ADOLOR, provided in no event shall ADOLOR's
share of the excess amount exceed the royalties which would otherwise be due
ADOLOR for the sales of PRODUCT that were the subject of the litigation had such
sales been made by SB, its AFFILIATES or its sublicensees under this AGREEMENT.
In the event that ADOLOR was the party which controlled the litigation or
settlement because SB was precluded from doing so by an agreement between ADOLOR
and a THIRD PARTY, any excess amount shall be shared equally between SB and
ADOLOR., provided in no event shall ADOLOR's share of the excess amount exceed
the royalties which would otherwise be due ADOLOR for the sales of PRODUCT that
were the subject of the litigation had such sales been made by SB, its
AFFILIATES or its sublicensees under this AGREEMENT. In the event that ADOLOR
was the party which controlled the litigation or settlement for any reason
except because SB was precluded from doing so by an agreement between ADOLOR and
a THIRD PARTY, any excess amount shall be retained by ADOLOR. In the event SB
and ADOLOR both joined in the litigation, the provisions of Paragraph 7.05 shall
apply.
7.07. The parties shall keep one another informed of the status of and of
their respective activities regarding any litigation or settlement thereof
concerning PATENTS, provided however that no settlement or consent judgment or
other voluntary final disposition of any suit defended or action brought by a
party pursuant to this Article 7 may be entered into without the consent of the
other party if such settlement would require the other party to be subject to an
injunction or to make a monetary payment or would otherwise adversely affect the
other party's rights under this AGREEMENT.
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7.08. Notwithstanding ADOLOR's independent right to seek extensions of the
term of PATENTS in any country of the TERRITORY, ADOLOR shall be obliged to seek
extensions of the term of PATENTS, at SB's request and expense, in any country
of the TERRITORY and in this latter case SB shall provide to ADOLOR any
information necessary for such purpose; provided however that SB shall have the
right to extend the term of any of its own patents covering PRODUCT in any
country of the TERRITORY instead of extending the term of PATENTS.
7.09. Notwithstanding ADOLOR's independent right to obtain SPCs based on
PATENTS in any country of the TERRITORY, ADOLOR shall be obliged to seek to
obtain SPCs based on PATENTS, at SB's request and expense, in any country of the
TERRITORY, and, where necessary, SB shall provide to ADOLOR any information
necessary for such purpose; provided however that SB shall have the right to
seek to obtain SPCs based on any of its own patents covering PRODUCT in any
country of the TERRITORY instead of seeking to obtain SPCs based on PATENTS.
7.10. Notwithstanding ADOLOR'S independent right to obtain "pipeline"
protection for PATENTS, at SB's request and expense, ADOLOR shall cooperate with
SB to obtain "pipeline" protection for PATENTS which may be available under the
patent laws of countries in the TERRITORY in which the patent laws thereof are
amended to provide improved protection for PRODUCT.
8. TRADEMARKS
----------
8.01. SB shall be responsible for the selection of all TRADEMARKS, TRADE
DRESS, packaging, selling marks (e.g., taglines and slogan marks), and
advertising which it employs in connection with PRODUCT in the FIELD in the
TERRITORY and shall own and control such TRADEMARKS, TRADE DRESS, packaging,
selling marks (e.g., taglines and slogan marks), and advertising. SB shall be
responsible for registration and maintenance of all such
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TRADEMARKS. Nothing in this AGREEMENT shall be construed as a grant of rights,
by license or otherwise, to ADOLOR to use such TRADEMARKS or any other
TRADEMARKS owned by SB for any purpose or to use such packaging, selling marks
(e.g., taglines and slogan marks), or advertising for any purpose. SB shall own
such tradenames and TRADEMARKS, TRADE DRESS, packaging, selling marks (e.g.,
taglines and slogan marks), and advertising, and shall retain such ownership
upon termination or expiration of this AGREEMENT. ADOLOR acknowledges SB's
ownership of the TRADEMARKS, TRADE DRESS, packaging, selling marks (e.g.,
taglines and slogan marks), and advertising, as well as any COPYRIGHTS therein,
and agrees that it will do nothing inconsistent with such ownership, and agrees
that nothing in this AGREEMENT shall give ADOLOR any right, title or interest in
the TRADEMARKS, TRADE DRESS, packaging, selling marks (e.g., taglines and slogan
marks), and advertising. If SB's rights to PRODUCT in the FIELD are terminated
in accordance with this AGREEMENT in a particular country, ADOLOR shall not be
permitted to use SB's TRADEMARKS, TRADE DRESS, packaging, selling marks (e.g.,
taglines and slogan marks), or advertising with respect to PRODUCT in such
country, and shall not permit its subsequent licensees to use SB's TRADEMARKS,
TRADE DRESS, packaging, selling marks (e.g., taglines and slogan marks), or
advertising with respect to PRODUCT in such country.
8.02. With respect to the TRADEMARKS selected by SB under Paragraph 8.01
for PRODUCT in the FIELD in the TERRITORY, subsequent to adoption by SB by use
in commerce or by an application for an intent to use, ADOLOR, its AFFILIATES
and sublicensees shall not adopt, use, or register any acronym, trademark,
tradename, service mark or other marketing name or any confusingly similar mark
or symbol and/or design as part of ADOLOR's or its AFFILIATE's own trademark or
tradename for PRODUCT in the FIELD outside of the TERRITORY or for PRODUCT
outside of the FIELD in the TERRITORY. With respect to the packaging or selling
marks (e.g., taglines and slogan marks) selected by SB for
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PRODUCT in the FIELD in the TERRITORY, ADOLOR, its AFFILIATES and its
sublicensees shall not adopt or use any confusingly similar TRADE DRESS
packaging or selling marks (e.g., taglines and slogan marks) as part of ADOLOR's
or its AFFILIATE's own TRADE DRESS packaging or selling marks (e.g., taglines
and slogan marks) for PRODUCT in the FIELD outside of the TERRITORY or for
PRODUCT outside of the FIELD.
9. STATEMENTS AND REMITTANCES
--------------------------
9.01. SB shall keep and require its AFFILIATES, sublicensees and
distributors to keep complete and accurate records of all sales of PRODUCT under
the licenses granted herein. ADOLOR shall have the right, at ADOLOR's expense,
through a certified public accountant or like person reasonably acceptable to
SB, to examine such records during regular business hours during the life of
this AGREEMENT and for six (6) months after its termination; provided, however,
that such examination shall not take place more often than once a year and shall
not cover such records for more than the preceding two (2) years, unless a
material discrepancy is found, and provided further that such accountant shall
report to ADOLOR only as to the accuracy of the royalty statements and payments.
In the event such audit reveals an underpayment of five percent (5%) or more of
the amount actually due, SB shall reimburse ADOLOR for the costs of such audit
in addition to promptly remitting to ADOLOR the amount of any underpayment along
with liquidated damages at the annual rate of the prime rate (as published in
the Wall Street Journal plus two percent (2%) pro rated for each month or
-------------------
portion thereof for the period of such underpayment. In the event such audit
reveals an overpayment of five percent (5%) or more of the amount actually due,
ADOLOR shall promptly reimburse such amount to SB.
9.02. All royalties due under this AGREEMENT shall be payable in U.S.
Dollars. If governmental regulations prevent remittances from a foreign country
with respect to sales made in that country, ADOLOR shall receive payment in that
country in local currency.
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9.03. Any tax, duty or other levy paid or required to be withheld by SB on
account of royalties payable to ADOLOR under this AGREEMENT shall be deducted
from the amount of royalties otherwise due. SB shall secure and send to ADOLOR
proof of any such taxes, duties or other levies withheld and paid by SB or its
sublicensees for the benefit of ADOLOR.
9.04. Monetary conversions from the currency of a foreign country, in
which PRODUCT is sold, into U.S. dollars shall be made at the official exchange
rate in force in that country for financial transactions on the last business
day of the calendar quarter for which the royalties are being paid. If there is
no such official exchange rate, the conversion shall be made at the rate for
such remittances on that date as certified by Citibank, N.A., New York, New
York, U.S.A.
9.05. Royalty obligations due to SB under Paragraph 10.04(c) of this
AGREEMENT shall be treated as follows:
(a) royalty obligations due to SB under Paragraph 10.04(c) of this
AGREEMENT for each PRODUCT shall expire in each country of the TERRITORY upon
the later of the expiration of all patents licensed to ADOLOR under Paragraph
10.04(b) which cover such PRODUCT or ten (10) years from the date of first
marketing of any such PRODUCT by ADOLOR or it's licensee in any country.
Termination of royalty obligations to SB under Paragraph 10.04(c) of this
AGREEMENT shall not preclude ADOLOR or its permitted licensees from making,
having made, use or sale of such PRODUCT in the FIELD in such country and to use
the know-how licensed to ADOLOR under Paragraph 10.04(b) in such country without
further royalty payments or other compensation to SB.
(b) ADOLOR shall keep and require its licensees to keep complete
and accurate records of all sales of PRODUCT under Paragraph 10.04(c) of this
AGREEMENT. SB shall have the right, at SB's expense, through a certified public
accountant or like person reasonably acceptable to ADOLOR, to examine such
records during regular business hours
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during the duration of ADOLOR's royalty obligation to SB under Paragraph
10.04(c) of this AGREEMENT and for six (6) months after its termination;
provided, however, that such examination shall not take place more often than
once a year and shall not cover such records for more than the preceding two (2)
years, unless a material discrepancy is found, and provided further that such
accountant shall report to SB only as to the accuracy of the royalty statements
and payments. In the event such audit reveals an underpayment of five percent
(5%) or more of the amount actually due, ADOLOR shall reimburse SB for the costs
of such audit in addition to promptly remitting to SB the amount of any
underpayment along with liquidated damages at the annual rate of the prime rate
as published in the Wall Street Journal plus two percent (2%) pro rated for each
-------------------
month or portion thereof for the period of such underpayment. In the event such
audit reveals an overpayment of five percent (5%) or more of the amount actually
due, SB shall promptly reimburse such amount to ADOLOR;
(c) Within sixty (60) days after the close of each calendar
quarter, ADOLOR shall deliver to SB a true accounting of all PRODUCT sold by
ADOLOR and its licensees under Paragraph 10.04(c) of this AGREEMENT during such
quarter and shall at the same time pay all royalties due. Such accounting shall
show sales on a country-by-country and PRODUCT-by-PRODUCT basis.
(d) Any tax, duty or other levy paid or required to be withheld by
ADOLOR on account of royalties payable to SB under Paragraph 10.04(c) of this
AGREEMENT shall be deducted from the amount of royalties otherwise due. ADOLOR
shall secure and send to SB written proof of any such taxes withheld and paid by
ADOLOR or its sublicensees for the benefit of SB.
(e) All royalties due under Paragraph 10.04(c) of this AGREEMENT
shall be payable in U.S. dollars. If governmental regulations prevent
remittances from a foreign country
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with respect to sales made in that country. SB shall receive payment in that
country in local currency.
(f) Monetary conversions from the currency of a foreign country,
in which PRODUCT is sold, into U.S. dollars shall be made at the official
exchange rate in force in that country for financial transactions on the last
business day of the calendar quarter for which the royalties are being paid. If
there is no such official exchange rate, the conversion shall be made at the
rate for such remittances on that date as certified by Citibank, N.A., New York,
New York, U.S.A.
10. TERM AND TERMINATION
--------------------
10.01. (a) Royalty obligations under Paragraph 3.02 or 3.04, whichever
is relevant, in each country of the TERRITORY shall expire upon the expiration
or invalidation of the last remaining licensed PATENT in such country which
claims the PRODUCT sold. Expiration of SB's royalty obligations under Paragraph
3.02 or 3.04, whichever is relevant, for a particular PRODUCT under this
provision shall not preclude SB from continuing to market such PRODUCT and to
use KNOW-HOW in such country without further royalty payments or any other
remuneration to ADOLOR, except to the extent that Paragraph 3.03 or 3.05,
whichever is relevant, is still applicable to the NET SALES of the particular
PRODUCT in the particular country.
(b) (i) Royalty obligations under Paragraph 3.03 in each country
shall expire upon the earlier of: (a) ten (10) years from the date of first
marketing in such country, or (b) in the European Economic Union only, when all
KNOW-HOW used by SB in the making, using or selling of PRODUCT has become
publicly known otherwise than through the fault of SB or an undertaking
connected therewith. Expiration of SB's royalty obligations for a particular
PRODUCT under this provision shall not preclude SB from continuing to market
such
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PRODUCT and to use KNOW-HOW in such country without further royalty payments or
any other remuneration to ADOLOR
(ii) Royalty obligations under Paragraph 3.05 in each country
shall expire upon the earlier of: (a) fifteen (15) years from the
date of first marketing in such country, or (b) in the European
Economic Union only, when all KNOW-HOW used by SB in the making,
using or selling of PRODUCT has become publicly known otherwise
than through the fault of SB or an undertaking connected therewith.
Expiration of SB's royalty obligations for a particular PRODUCT
under this provision shall not preclude SB from continuing to
market such PRODUCT and to use KNOW-HOW in such country without
further royalty payments or any other remuneration to ADOLOR.
10.02. Unless otherwise terminated, this AGREEMENT shall expire upon the
later of (a) the expiration, lapse or invalidation of the last remaining PATENT
in the TERRITORY which claims PRODUCT, or (b) SB's last obligation to pay
royalties under Paragraphs 3.03 or 3.05. Expiration of this AGREEMENT under
this provision shall not preclude SB from continuing to make, have made, use and
sell PRODUCT and to use KNOW-HOW in the TERRITORY without further royalty
payments or any other remuneration to ADOLOR.
10.03. If either party materially fails or neglects to perform covenants
or provisions of this AGREEMENT and if such default is not corrected within
sixty (60) days after receiving written notice from the other party with respect
to such default, such other party shall have the right to terminate this
AGREEMENT by giving written notice to the party in default provided the notice
of termination is given within six (6) months of the default and prior to
correction of the default.
10.04. (a) SB may terminate this AGREEMENT on a country by country basis,
in its entirety, or on a PRODUCT by PRODUCT basis, by giving ADOLOR at least
thirty (30) days
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written notice thereof at any time before SB first markets PRODUCT in such
country based on a reasonable determination by SB, using the same standards SB
would use in assessing whether or not to continue development of a product of
its own making that the patent, medical/scientific, technical, regulatory or
commercial profile of PRODUCT does not justify continued development of PRODUCT
in such country. After marketing PRODUCT, SB may terminate this AGREEMENT on a
country by country basis, or in its entirety, or on a PRODUCT by PRODUCT basis
by giving ADOLOR at least six (6) months prior written notice thereof based on a
reasonable determination by SB, using the same standards SB would use in
assessing whether or not to continue marketing of a product of its own making,
that the patent, medical/scientific, technical, regulatory or commercial profile
of PRODUCT does not justify continued development of PRODUCT in such country.
Termination of this AGREEMENT for all PRODUCTS in all countries of the TERRITORY
shall constitute a termination of this AGREEMENT in its entirety.
(b) In the event that this AGREEMENT is terminated by SB under
Paragraph 10.04(a) in one or more countries of the TERRITORY, in its entirety,
or for one or more PRODUCTS, or SB's rights to certain PRODUCTS in the FIELD are
terminated in accordance with Paragraph 5.01, all rights granted to SB under
this AGREEMENT in such countries or for such PRODUCTS shall revert to ADOLOR and
shall become part of the ADOLOR FIELD, and ADOLOR shall automatically be
granted, subject to any prior license rights granted by a THIRD PARTY to SB, an
exclusive license, with a right to sublicense, under all patents and know-how
owned by SB at the time of termination in such countries to make, have made,
use, sell, offer for sale and import the PRODUCT in the FIELD in such countries,
but only to the extent that such patents and know-how arose as a result of work
done by SB in relation to such PRODUCT or PRODUCTS in the FIELD under this
AGREEMENT, and ADOLOR shall have no rights to any other patents or know-how
owned by SB, and provided that such exclusive license shall be
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subject to SB's rights outlined in Paragraph 10.04(c). In addition, at ADOLOR's
election, either (i) SB will transfer to ADOLOR any regulatory filings made by
SB or its permitted sublicensees in such countries, or (ii) ADOLOR and/or its
THIRD PARTY licensees will have a right of reference to any regulatory filings
made by SB or its permitted sublicensees in such countries to the extent legally
permitted. ADOLOR shall thereafter be free to develop and commercialize the
PRODUCT without limitation or further obligation to SB in such countries,
subject to SB's rights outlined under Paragraph 10.04(c). In addition, SB shall
promptly provide ADOLOR, with the SB Transfer Documents (as defined below),
which ADOLOR may use as ADOLOR sees fit and which ADOLOR may provide to a THIRD
PARTY licensee for use in continuing development and commercialization of the
PRODUCT in the FIELD in such countries. ADOLOR shall reimburse SB for all out-
of-pocket expenses paid to THIRD PARTIES incurred by SB in the provision of such
Transfer Documents to ADOLOR within thirty (30) days after receipt of SB's
invoice therefor. For purposes of this Paragraph, "SB Transfer Documents" shall
mean: (i) a copy of all protocols prepared by or on behalf of SB and regulatory
filings made by or on behalf of SB under this AGREEMENT; (ii) a copy of all
reports on non-clinical and clinical studies sponsored by SB under this
AGREEMENT which have been filed or prepared for filing with the regulatory
authorities; (iii) the data underlying any non-clinical and clinical database
owned by SB in computer-readable form if readily available in a non-proprietary
format, and (iv) a copy of all case report forms for patients enrolled in
clinical studies sponsored by SB for which no report has been prepared at the
time of termination.
(c) In the event that, in accordance with Paragraph 10.04(b),
ADOLOR promotes PRODUCT in the FIELD in a country on its own, or grants such
right to a THIRD PARTY, as consideration for SB's investment in the development
of PRODUCT in the FIELD, ADOLOR will pay SB royalties on Adolor Net Sales as
follows on a PRODUCT by PRODUCT basis:
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(i) ** percent (**%) of Adolor Net Sales if, at the time of
termination, there exists an ** by SB for PRODUCT in the FIELD;
(ii) ** percent (**%) of Adolor Net Sales if, at the time of
termination, ** have been completed by SB;
(iii) ** percent (**%) of Adolor Net Sales if, at the time of
termination, ** have been completed by SB;
(iv) ** percent (**%) of Adolor Net Sales if, at the time of
termination, ** have been completed by SB; or
(v) ** percent (**%) of Adolor Net Sales if, at the time of
termination, ** have been completed by SB;
provided that royalty obligations due to SB under this paragraph shall be made
in accordance with Paragraph 9.05 of this AGREEMENT. The term "Adolor Net
Sales" as used in this provision shall have the same meaning as NET SALES except
that the gross receipts used in the calculation of Adolor Net Sales shall
represent sales of PRODUCT in the FIELD in such countries by ADOLOR, its
AFFILIATES and its sublicensees and the provisions of Paragraphs 3.06, 3.07,
3.09, 3.11, 4.01 and 4.02 shall apply as if such provisions related to PRODUCT
sold by ADOLOR, its AFFILIATES and sublicensees and not SB, its AFFILIATES and
sublicensees. The royalties under Paragraph 10.04(c)(i)-(iv) shall not be owed
to SB for a milestone, if the milestone was achieved by ADOLOR as of the
EFFECTIVE DATE.
10.05. Either party may terminate this AGREEMENT if, at any time, the
other party shall file in any court or agency pursuant to any statute or
regulation of any state or country, a petition in bankruptcy or insolvency or
for reorganization or for an arrangement or for the appointment of a receiver or
trustee of the party or of its assets, or if the other party proposes a written
agreement of composition or extension of its debts, or if the other party shall
be served with an involuntary petition against it, filed in any insolvency
proceeding, and such petition shall
**=Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to
the omitted portions.
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not be dismissed with sixty (60) days after the filing thereof, or if the other
party shall propose or be a party to any dissolution or liquidation, or if the
other party shall make an assignment for the benefit of creditors.
10.06. Notwithstanding the bankruptcy of ADOLOR, or the impairment of
performance by ADOLOR of its obligations under this AGREEMENT as a result of
bankruptcy or insolvency of ADOLOR, SB shall be entitled to retain the licenses
granted herein, subject to ADOLOR's rights to terminate ibis AGREEMENT for
reasons other than bankruptcy or insolvency as expressly provided in this
AGREEMENT.
10.07. All rights and distribution rights granted under or pursuant to
this AGREEMENT by ADOLOR to SB are, and shall otherwise be deemed to be, for
purposes of Section 365(n) of the U.S. Bankruptcy Code, licenses of rights to
"intellectual property" as defined under Section 101(52) of the U.S. Bankruptcy
Code. The parties agree that SB, as a licensee of such rights under this
AGREEMENT, shall retain and may fully exercise all of its rights and elections
under the U.S. Bankruptcy Code, subject to performance by SB of its preexisting
obligations under this AGREEMENT. The parties further agree that, in the event
of the commencement of a bankruptcy proceeding by or against ADOLOR under the
U.S. Bankruptcy Code, SB 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 SB (a) upon any such commencement of
a bankruptcy proceeding upon written request therefor by SB, unless ADOLOR
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 ADOLOR upon written request therefor by SB, provided, however, that
upon ADOLOR's (or its successor's) written notification to SB that it is again
willing and able to perform all of its obligations under this AGREEMENT, SB
shall promptly return all such tangible materials to ADOLOR, but only to the
extent that SB does not
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require continued access to such materials to enable SB to perform its
obligations under this AGREEMENT.
11. RIGHTS AND DUTIES UPON TERMINATION
----------------------------------
11.01. Upon termination of this AGREEMENT, ADOLOR shall have the right to
retain any sums already paid by SB hereunder, and SB shall pay all sums accrued
hereunder which are then due.
11.02. Upon termination of this AGREEMENT, SB undertakes not to use any
KNOW-HOW provided to SB by ADOLOR under this AGREEMENT, except as may be
otherwise provided in this AGREEMENT. Furthermore, promptly after the effective
date of such termination, SB shall return all tangible KNOW-HOW to ADOLOR to the
extent that such is practicable. Nothing in this provision shall be construed as
superseding SB's rights to use KNOW-HOW upon the expiration of this AGREEMENT as
outlined in Paragraphs 10.01 and 10.02.
11.03. Upon termination of this AGREEMENT in its entirety or with respect
to any PRODUCT in any country under Paragraphs 10.03, 10.04, or 10.05, SB shall
notify ADOLOR of the amount of PRODUCT SB, its AFFILIATES, sublicensees and
distributors then have on hand, the sale of which would, but for the
termination, be subject to royalty, and SB, its AFFILIATES, sublicensees and
distributors shall thereupon be permitted to sell that amount of PRODUCT
provided that SB shall pay the royalty thereon at the time herein provided for.
11.04. Termination of this AGREEMENT shall terminate all outstanding
obligations and liabilities between the parties arising from this AGREEMENT
except those described in Articles 6, 9, 10, 11 and 14 and Paragraphs 7.04,
12.07, 12.08, 12.09 and 12.10, and any other obligations otherwise provided by
this AGREEMENT which have accrued. In addition, any other provision required to
interpret and enforce the parties' rights and obligations under this AGREEMENT
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shall also survive, but only to the extent required for the full observation and
performance of this AGREEMENT.
11.05. Termination of the AGREEMENT in accordance with the provisions
hereof shall not limit remedies which may be otherwise available in law or
equity.
12. WARRANTIES AND REPRESENTATIONS
------------------------------
12.01. ADOLOR warrants and represents that it owns or otherwise controls
the entire right, title and interest in the PATENTS listed in APPENDIX A, or
filed by or on behalf of ADOLOR pursuant to Section 7, and the KNOW-HOW provided
to SB under this AGREEMENT, and that it otherwise has the right to enter into
this AGREEMENT. ADOLOR further warrants and represents that it will not
encumber any such PATENTS and KNOW-HOW with liens, mortgages, security interests
which impair SB's rights. ADOLOR further warrants and represents that there is
nothing in any THIRD PARTY agreement ADOLOR has entered into as of the EFFECTIVE
DATE which, in any way, will limit ADOLOR's ability to perform all of the
obligations undertaken by ADOLOR hereunder, and that it will not enter into any
AGREEMENT after the EFFECTIVE DATE under which ADOLOR would incur any such
limitations.
12.02. Nothing in this AGREEMENT shall be construed as a warranty that
PATENTS are valid or enforceable as of the EFFECTIVE DATE, or that they will be
so during the effective term of this AGREEMENT. ADOLOR hereby warrants and
represents that it has no present knowledge as of the EFFECTIVE DATE from which
it can be inferred that PATENTS are invalid or that their exercise would
infringe patent rights of THIRD PARTIES.
12.03. ADOLOR warrants and represents that it has not, up through and
including the EFFECTIVE DATE, omitted to furnish SB with any information in its
possession concerning PRODUCT in the FIELD or the transactions contemplated by
this AGREEMENT, which would
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be material to SB's decision to enter into this AGREEMENT and to undertake the
commitments and obligations set forth herein.
12.04. ADOLOR warrants and represents that it has no present knowledge of
the existence of any pre-clinical or clinical data or information concerning the
PRODUCT which it has not provided to SB prior to the EFFECTIVE DATE which
suggests that there may exist quality, toxicity, safety and/or efficacy concerns
which may materially impair the utility and/or safety of the PRODUCT.
12.05. ADOLOR warrants and represents that it will not knowingly engage in
any activity regarding development of PRODUCT in the FIELD outside of the
TERRITORY or for ADOLOR's Topical Dermal Products, including, but not limited
to, publication of preclinical or clinical data for PRODUCT or ADOLOR's Topical
Dermal Product, which is or ought to be recognized by ADOLOR as posing a present
or potential harm to the development of PRODUCT in any country of the TERRITORY.
Subject to any agreements entered into prior to the EFFECTIVE DATE, ADOLOR
further warrants that it will use its reasonable commercial efforts to require
all of its AFFILIATES and sublicensees of PRODUCT in the FIELD outside of the
TERRITORY or ADOLOR's Topical Dermal Product to enter in a binding agreement
with ADOLOR which contains the same warranty and representation as outlined in
this Paragraph. ADOLOR further warrants and represents that neither it nor its
AFFILIATES, licensees or other agents shall promote the PRODUCT described in
Paragraph 1.02(iv) except in the manner expressly set forth in such Paragraph.
All gross receipts from the sale of PRODUCT described in Paragraph 1.02(iv)
which are attributable to a breach of this warranty or representation shall be
promptly paid by ADOLOR to SB after receipt by ADOLOR from SB of written
evidence of the amount of such sales.
12.06. ADOLOR warrants and represents that it:
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(a) has received all necessary consents and waivers, in writing,
which ADOLOR requires from any other THIRD PARTY by virtue of the rights granted
to SB under this AGREEMENT;
(b) shall pay all royalties or other sums and other payments which
ADOLOR may owe to any THIRD PARTY by virtue of this AGREEMENT, and shall perform
and observe all of the other obligations outlined in all present and future
agreements between ADOLOR and any THIRD PARTY which are in any way related to
ADOLOR's ability to grant the rights granted to SB under this AGREEMENT or to
ADOLOR's ability to perform its obligations to SB under this AGREEMENT; and
(c) has received no notices that it is in breach of its
obligations under its agreements with any THIRD PARTY which are in any way
related to ADOLOR's ability to grant the rights granted to SB under this
AGREEMENT or to ADOLOR's ability to perform its obligations to SB under this
AGREEMENT. In the event that ADOLOR receives notice from any such THIRD PARTY
that ADOLOR has committed a breach of its obligations under any such agreement,
or if ADOLOR anticipates such breach, such as may give rise to a right by such
THIRD PARTY to terminate or otherwise diminish ADOLOR's rights to PATENTS and/or
KNOW-HOW and/or otherwise diminish ADOLOR's ability to perform its obligations
to SB under this AGREEMENT, ADOLOR shall immediately notify SB of such
situation, and ADOLOR shall promptly cure such breach. However, if ADOLOR is
unable to cure such breach, ADOLOR shall, to the extent possible, permit SB to
cure such breach and to negotiate directly with such THIRD PARTY.
12.07. SB hereby agrees to save, defend and hold ADOLOR, its AFFILIATES
and its and their respective officers, directors, shareholders, representatives,
agents, employees, successors and assigns harmless from and against any and all
suits, claims, actions, demands, liabilities, expenses and/or losses, including
reasonable legal expense and attorneys' fees
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(collectively and individually, the "Losses"), brought by a THIRD PARTY or that
arise in connection with any claim brought by a THIRD PARTY with respect to the
PRODUCT in the FIELD in the TERRITORY or Losses which result from breach by SB,
its AFFILIATES, its and their sublicensees or distributors of any provision of
this AGREEMENT, including without limitation, the SB warranties and
representations set forth in this AGREEMENT, except to the extent such Losses
result from (i) the negligence or willful misconduct of ADOLOR or its
AFFILIATES, or (ii) breach by ADOLOR or its AFFILIATES of any provision of this
AGREEMENT, including without limitation, the ADOLOR warranties and
representations set forth in this AGREEMENT.
12.08. ADOLOR hereby agrees to save, defend and hold SB, its AFFILIATES
and its and their respective officers, directors, shareholders, representatives,
agents, employees, successors and assigns harmless from and against any and all
suits, claims, actions, demands, liabilities, expenses and/or losses, including
reasonable legal expense and attorneys' fees (collectively and individually, the
"Losses"), brought by a THIRD PARTY or that arise in connection with any claim
brought by a THIRD PARTY with respect to the COMPOUND in the FIELD outside of
the TERRITORY or COMPOUND outside of the FIELD or Losses which result from
breach by ADOLOR, its AFFILIATES, its and their sublicensees or distributor of
any provision of this AGREEMENT, including without limitation, the ADOLOR
warranties and representations set forth in this AGREEMENT, except to the extent
such Losses result from (i) the negligence or willful misconduct of SB, its
AFFILIATES, its or their sublicensees or distributors (ii) breach by SB, its
AFFILIATES, its or their sublicensees or distributors of any provision of this
AGREEMENT, including without limitation, the SB warranties and representations
set forth in this AGREEMENT.
12.09. In the event ADOLOR is seeking indemnification from SB under
Paragraph 12.07, SB shall have no such obligation unless ADOLOR:
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(a) gives SB prompt notice of any claim or lawsuit or other action
for which it seeks to be indemnified under this AGREEMENT;
(b) cooperates fully with SB and its agents in defense of any such
claim, complaint, lawsuit or other cause of action; and
(c) SB is granted full authority and control over the defense,
including settlement or other disposition thereof, against such claim or lawsuit
or other action, provided that ADOLOR shall have the right to retain counsel of
its choice to participate in the defense of any such claim or lawsuit at
ADOLOR's own expense, provided that such counsel shall not interfere with SB's
full authority and control, and further provided that such settlement does not
impair the validity or enforceability of PATENTS.
12.10. In the event SB is seeking indemnification under Paragraph 12.08,
ADOLOR shall have no such obligation unless SB:
(a) gives ADOLOR prompt notice of any claim or lawsuit or other
action for which it seeks to be indemnified under this AGREEMENT;
(b) cooperates fully with ADOLOR and its agents in defenses of any
such claim, complaint, lawsuit or other cause of action; and
(c) ADOLOR is granted full authority and control over the defense,
including settlement or other disposition thereof, against such claim or lawsuit
or other action, provided that SB shall have the right to retain counsel of its
choice to participate in the defense of any such claim or lawsuit at SB's own
expense, provided that such counsel shall not interfere with ADOLOR's full
authority and control.
12.11. SB and ADOLOR represent and warrant that they are authorized to
enter into this AGREEMENT and have not as of the EFFECTIVE DATE and will not
enter into any agreement inconsistent with this AGREEMENT.
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12.12. ADOLOR MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OR
CONDITIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, WITH RESPECT TO THE PATENTS,
KNOW-HOW, COMPOUNDS, AND PRODUCTS INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, VALIDITY OF PATENTS AND KNOW-
HOW, PATENTED OR UNPATENTED, OR NON-INFRINGEMENT OF THE INTELLECTUAL PROPERTY
RIGHTS OF THIRD PARTIES.
13. FORCE MAJEURE
-------------
13.01. If the performance of any part of this AGREEMENT by either party,
or of any obligation under this AGREEMENT, is prevented, restricted, interfered
with or delayed by reason of any cause beyond the reasonable control of the
party liable to perform, unless conclusive evidence to the contrary is provided,
the party so affected shall, upon giving written notice to the other party, be
excused from such performance to the extent of such prevention, restriction,
interference or delay, provided that the affected party shall use its reasonable
best efforts to avoid or remove such causes of non-performance and shall
continue performance with the utmost dispatch whenever such causes are removed.
When such circumstances arise, the parties shall discuss what, if any,
modification of the terms of this AGREEMENT may be required in order to arrive
at an equitable solution.
14. GOVERNING LAW AND DISPUTE RESOLUTION
------------------------------------
14.01. This AGREEMENT shall be deemed to have been made in the
Commonwealth of Pennsylvania and its form, execution, validity, construction and
effect shall be determined in accordance with the laws of the Commonwealth of
Pennsylvania.
14.02. Any dispute, controversy or claim arising out of or relating to
this AGREEMENT (hereinafter collectively referred to as "Dispute") shall be
attempted to be settled by the parties,
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in good faith, by submitting each such Dispute to appropriate senior management
representatives of each PARTY in an effort to effect a mutually acceptable
resolution thereof.
14.03. In the event no mutually acceptable resolution is achieved as a
result of Paragraph 14.02 then, at either party's request, such Dispute may be
submitted to an UNAFFILIATED EXPERT for resolution. In such event, the parties
shall select a single UNAFFILIATED EXPERT within twenty (20) days of the request
of the party invoking this Paragraph 14.03. Each party shall have twenty (20)
days after selection of the UNAFFILIATED EXPERT to submit to such individual
such assumptions, methodology, data and information as such party believes
necessary to resolve the dispute in question. The UNAFFILIATED EXPERT may then
hold a joint meeting with the parties (including any other experts that the
parties have engaged in respect of that matter) on the issues that need to be
resolved. The UNAFFILIATED EXPERT shall promptly thereafter make a
recommendation as to the resolution of the dispute, which recommendation may
either adopt the proposal of either party or adopt an alternative approach.
Each party shall bear its own expenses in connection with a procedure under this
Paragraph 14.03, and the fees and expenses of the UNAFFILIATED EXPERT shall be
borne equally by the parties regardless of the ultimate recommendation of such
person. The results of a procedure under this Paragraph 14.03 shall be used by
the parties to guide their own decisions, but shall not have legal effect.
14.04. In the event no mutually acceptable resolution of such Dispute is
achieved in accordance with Paragraph 14.03, then either party shall be entitled
to seek final settlement of such Dispute by any administrative or judicial
mechanism which may be available.
15. WAIVER OF BREACH
----------------
15.01. The failure of either party at any time or times to require
performance of any provision hereof shall in no manner affect its rights at a
later time to enforce the same. No
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waiver by either party of any condition or term in any one or more instances
shall be construed as a further or continuing waiver of such condition or term
or of another condition or term.
16. SEPARABILITY
------------
16.01. In the event any portion of this AGREEMENT shall be held illegal,
void or ineffective, the remaining portions hereof shall remain in full force
and effect.
16.02. If any of the terms or provisions of this AGREEMENT are in conflict
with any applicable statute or rule of law, then such terms or provisions shall
be deemed inoperative to the extent that they may conflict therewith and shall
be deemed to be modified to conform with such statute or rule of law.
16.03. In the event that the terms and conditions of this AGREEMENT are
materially altered as a result of Paragraphs 16.01 or 16.02, the parties will
renegotiate the terms and conditions of this AGREEMENT to resolve any
inequities.
17. ENTIRE AGREEMENT
----------------
17.01. This AGREEMENT, entered into as of the date written above,
constitutes the entire agreement between the parties relating to the subject
matter hereof and supersedes all previous writings and understandings. No terms
or provisions of this AGREEMENT shall be varied or modified by any prior or
subsequent statement, conduct or act of either of the parties, except that the
parties may amend this AGREEMENT by written instruments specifically referring
to and executed in the same manner as this AGREEMENT.
18. NOTICES
-------
18.01. Any notice required or permitted under this AGREEMENT shall be in
writing and sent to the following addresses of the parties by prepaid registered
or certified air mail or by overnight express mail (e.g., Federal Express), or
by facsimile confirmed by prepaid registered or certified air mail letter or by
overnight express mail (e.g., Federal Express), and shall be
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deemed to have been properly served to the addressee upon receipt of such
written communication:
If to ADOLOR:
Adolor Corporation
371 Phoenixville Pike
Malvern, Pennsylvania 19355, U.S.A.
Attention: Dr. John J. Farrar, President and CEO
copy to: or
Dechert Price & Rhoads Dechert Price & Rhoads
Princeton Pike Corporate Center Princeton Pike Corporate Center
P.O. Box 5218 997 Lenox Drive
Princeton, NJ 08543-5218 Lawrenceville, NJ 08648
Attn.: Allen Bloom Attn.: Allen Bloom
If to SB:
SB Pharmco Puerto Rico Inc.
Road 172
KM 9.1/Bo.Certenejas
CIDRA
Puerto Rico, 00639
Attention: Don Parman, Director
copies to:
SmithKline Beecham Corporation
One Franklin Plaza (Mail Code FP1820)
P.O. Box 7929
Philadelphia, Pennsylvania 19101, U.S.A.
Attention: Vice President and Director
SmithKline Beecham Consumer Healthcare
Worldwide Business Development
SmithKline Beecham Corporation
One Franklin Plaza (Mail Code FP2360)
P.O. Box 7929
Philadelphia, Pennsylvania 19101, U.S.A.
Attention: Corporate Law-U.S.
19. ASSIGNMENT
----------
19.01. This AGREEMENT and the licenses herein granted shall be binding
upon and inure to the benefit of the successors in interest of the respective
parties. Neither this
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AGREEMENT nor any interest hereunder shall be assignable by either party without
the written consent of the other provided, however, that either party may assign
this AGREEMENT or any part of its rights and obligations hereunder, or any
PATENT owned by it, to any AFFILIATE or to any corporation (hereinafter
"Transferee") with which it may merge or consolidate, or to which it may sell or
otherwise transfer all or substantially all of its assets to which this
AGREEMENT relates, without obtaining the consent of the other party.
Notwithstanding the above, each party warrants and represents that any such
assignment by it to an AFFILIATE or Transferee shall only be valid and effective
if such AFFILIATE or Transferee is put on notice that it shall be bound by the
assigning party to observe and perform terms and conditions similar to those
contained in this AGREEMENT.
20. RECORDING
---------
20.01. SB shall have the right, at any time, to record, register, or
otherwise notify this AGREEMENT in appropriate governmental or regulatory
offices anywhere in the TERRITORY, and ADOLOR shall provide reasonable
assistance to SB in effecting such recording, registering or notifying.
21. EXECUTION IN COUNTERPARTS
-------------------------
21.01. This AGREEMENT may be executed in any number of counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
22. CONSTRUCTION
------------
22.01. The captions appearing in this AGREEMENT are for reference purposes
only and shall not be considered for the purpose of interpreting or construing
this AGREEMENT. References to either the singular or plural number can be
substituted with the other in any place in which the context may require such
substitution.
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IN WITNESS WHEREOF, the parties, through their authorized officers, have
executed this AGREEMENT as of the date first written above.
SB PHARMCO PUERTO RICO INC.
BY: /s/ [ILLEGIBLE]^^
------------------------------
TITLE: ___________________________
ADOLOR CORPORATION
BY: /s/ John J. Farrar
------------------------------
TITLE: President and Chief Executive Officer
-------------------------------------
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Exhibit 23.1
When the transaction referred to in the second paragraph in Note 12 of the
Notes to Financial Statements has been consummated, we will be in a position to
render the following consent.
KPMG LLP
Princeton, New Jersey
February 18, 2000
Accountants' Consent
The Board of Directors
Adolor Corporation
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
Princeton, New Jersey
