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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 8-K/A
AMENDED CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) June 28, 1995
-----------------------------
NEUROGEN CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 0-18311 22-2845714
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
35 Northeast Industrial Road, Branford, Connecticut 06405
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 488-8201
---------------------------
None
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(Former name or former address, if changed since last report)
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Item 5. Other Events
------------
On June 28, 1995, the board of directors of Schering-Plough Corporation
approved its collaboration with Neurogen to develop a new generation of
pharmaceuticals that bind selectively to specific dopamine receptor subtypes. A
copy of the Collaberation and Licensing Agreement is attached hereto as Exhibit
10.1.
Item 7. Financial Statements and Exhibits
---------------------------------
(c) Exhibits
10.1 Collaboration and Licensing Agreement dated June 28, 1995
between Schering-Plough Ltd. and Schering-Plough
Corporation and Neurogen Corporation. CONFIDENTIAL
TREATMENT REQUESTED.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEUROGEN CORPORATION
----------------------------------------
(Registrant)
August 15, 1995 /s/ STEPHEN R. DAVIS
-------------------------- -----------------------------------------
DATE Stephen R. Davis
Vice President-Finance and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Sequentially
Number Exhibit Numbered Page
------ ------- -------------
10.1 Collaboration and Licensing Agreement
dated June 28, 1995 between Schering-Plough
Ltd. and Schering-Plough Corporation
and Neurogen Corporation. CONFIDENTIAL
TREATMENT REQUESTED.
<PAGE>
COLLABORATION AND LICENSE AGREEMENT
BY AND BETWEEN
NEUROGEN CORPORATION, A DELAWARE CORPORATION,
AND
SCHERING CORPORATION, A NEW JERSEY CORPORATION
AND
SCHERING-PLOUGH LTD., A SWISS CORPORATION
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TABLE OF CONTENTS
Page
----
<TABLE>
<S> <C>
ARTICLE 1 - DEFINITIONS...................................... 1
1.1 "Active Ingredient"................................ 1
1.2 "Affiliate"........................................ 1
1.3 "Collaboration Committee".......................... 2
1.4 "Development Committee"............................ 2
1.5 "Dopamine Agonist/Antagonist"...................... 2
1.6 "D4 Antagonist".................................... 2
1.7 "Earned Royalty"................................... 2
1.8 "Effective Date"................................... 3
1.9 "FDA".............................................. 3
1.10 "Field"........................................... 3
1.11 "Fully Burdened Manufacturing Costs".............. 3
1.12 "IND"............................................. 3
1.13 "Know-How"........................................ 3
1.14 "Licensed Combination"............................ 4
1.15 "Licensed Compound"............................... 4
1.16 "Licensed Product"................................ 4
1.17 "NDA"............................................. 4
1.18 "Net Sales"....................................... 4
1.19 "Neurogen Transfer Price"......................... 4
1.20 "Neurogen Dopamine Agonist/Antagonist
Technology"....................................... 4
1.21 "Patent Rights"................................... 5
1.22 "Program Dopamine Agonist/Antagonist"............. 5
1.23 "Research Program"................................ 6
1.24 "Schering D1 Dopamine Antagonists"................ 6
1.25 "Schering Technology"............................. 6
1.26 "Screening Agreement"............................. 6
1.27 "Subject Country"................................. 6
1.28 "Territory"....................................... 6
1.29 "Trademark"....................................... 6
1.30 "Valid Claim"..................................... 6
ARTICLE 2 - INTELLECTUAL PROPERTY
GRANTS AND LICENSE AND RESEARCH PAYMENTS
AND MANUFACTURING RIGHTS......................... 7
2.1 License Grants..................................... 7
2.2 Research Program Funding........................... 9
2.3 Other Program Funding.............................. 9
2.4 Schizophrenia Milestone Payments................... 9
2.5 Supplemental Indication Milestone Payments for
Indications in Addition to Schizophrenia........... 10
2.6 Other Milestone Payments........................... 10
2.7 Milestone Achievement Notices...................... 11
</TABLE>
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<TABLE>
<S> <C>
2.8 Screening Agreement Payments....................... 11
2.9 Manufacturing Rights............................... 11
ARTICLE 3 - ROYALTIES........................................ 17
3.1 Royalty Payment Dates.............................. 17
3.2 Direct Affiliate Licenses.......................... 17
3.3 Place of Royalty Payment and Currency Conversions.. 17
3.4 Royalties on Resales............................... 18
3.5 Royalty Deductions if Infringements................ 19
3.6 Duration of Royalty Payments....................... 19
3.7 Maintenance of Royalty Records..................... 20
3.8 Compulsory Royalties............................... 20
ARTICLE 4 - RESEARCH AND DEVELOPMENT PROGRAMS AND DILIGENT
EFFORTS OF THE PARTIES........................... 21
4.1 Research Programs and Extensions................... 21
4.2 Initial Neurogen Disclosures....................... 22
4.3 Research Programs, Reports, and Committees......... 23
4.4 Review of Research Program Data.................... 24
4.5 Development Program................................ 24
4.6 Schering Diligence................................. 25
4.7 Confidentiality Obligations........................ 26
4.8 Neurogen Rights to Relinquished Licensed
Compounds.......................................... 27
ARTICLE 5 - TRADEMARKS....................................... 27
ARTICLE 6 - PATENT RIGHTS AND THIRD PARTY UNLICENSED SALES... 27
6.1 Patents............................................ 27
6.2 Prosecution and Maintenance........................ 27
6.3 Patent Extensions.................................. 29
6.4 Third Party Infringements.......................... 29
6.5 Complete List of Patents........................... 29
ARTICLE 7 - TERM AND TERMINATION............................. 30
7.1 Term 30
7.2 Termination for Breach............................. 30
7.3 Voluntary Schering Termination..................... 30
7.4 Post Termination Royalties......................... 30
7.5 Post Termination Product Sales..................... 31
7.6 Termination Upon Bankruptcy or Insolvency.......... 31
7.7 Right Upon Termination............................. 33
ARTICLE 8 - WARRANTIES, COVENANTS AND LIABILITY.............. 34
8.1 Authority.......................................... 34
8.2 No Conflicting Undertakings........................ 34
8.3 No Conflicting Future Actions...................... 34
8.4 No Guarantee of Research Program Success and
Limitations of Liability........................... 34
8.5 Neurogen Ownership of Patents...................... 35
8.6 Compliance with Agreement and Laws................. 35
</TABLE>
ii
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<TABLE>
<S> <C>
8.7 No Government Rights to Licensed Property.......... 35
8.8 Data Summaries Accurate and Complete............... 35
8.9 No Third Party Infringements....................... 35
8.10 No Third-Party Rights to Compounds................ 36
ARTICLE 9 - INDEMNITY........................................ 36
9.1 Schering Indemnity................................. 36
9.2 Neurogen Indemnity................................. 36
9.3 Indemnity Obligations.............................. 36
9.4 Liability Insurance................................ 37
ARTICLE 10 - MISCELLANEOUS................................... 38
10.1 Waiver............................................ 38
10.2 Notices........................................... 38
10.3 Applicable Law.................................... 39
10.4 Arbitration....................................... 39
10.5 Captions.......................................... 39
10.6 Entire Agreement and Amendment.................... 39
10.7 Assignment........................................ 40
10.8 Survival of Terms................................. 40
10.9 No Agency......................................... 40
10.10 Severability..................................... 40
10.11 Force Majeure..................................... 40
10.12 Publicity........................................ 41
10.13 Counterparts..................................... 41
10.14 Other Programs................................... 41
10.15 Schering Performance............................. 41
10.16 Cooperation...................................... 41
10.17 Publication...................................... 42
10.18 Solicitation..................................... 42
10.19 Adverse Events Report............................ 42
</TABLE>
iii
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COLLABORATION AND LICENSE AGREEMENT
THIS AGREEMENT (hereinafter the "Agreement"), is made and effective as
of the end of the business day on the __ day of June, 1995 (the "Effective
Date"), by and between NEUROGEN CORPORATION, a corporation of the State of
Delaware (hereinafter "Neurogen"), and SCHERING CORPORATION, a corporation of
the State of New Jersey, and SCHERING-PLOUGH LTD., a Swiss corporation
(hereinafter collectively called "Schering"), provided that (i) on or before
June 30, 1995, the Schering-Plough Corporation Board of Directors has formally
approved the execution of this Agreement and the Screening Agreement without
change or qualification by authorized representatives of Schering and (ii) the
parties have agreed to their mutual satisfaction upon the contents of Exhibit 1.
W I T N E S S E T H:
WHEREAS Schering desires to fund certain Neurogen research efforts and
acquire certain license rights from Neurogen, and Neurogen is willing to conduct
certain research efforts with respect to dopamine agonist/antagonists, and to
grant and convey rights in a portion of Neurogen's existing and future
intellectual property rights with respect to making, using and selling dopamine
agonist/antagonists to Schering, all pursuant to the terms of this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and conditions hereinabove and hereinafter set forth, the parties
agree as follows:
ARTICLE 1 - DEFINITIONS
-----------------------
As used in this Agreement, the following terms have the following
meanings, and the singular shall include the plural and vice versa as the
context requires:
1.1 "Active Ingredient" means any ingredient having independent
therapeutic, prophylactic or diagnostic effect.
1.2 "Affiliate" means any company or organization controlling,
controlled by, or under common control with Schering or Neurogen, as the case
may be. For this purpose, the terms control, controlled and controlling mean
the possession of the power to direct or cause the direction of the management
and the policies of an entity, whether through ownership directly or indirectly
of over fifty percent (50%) of the stock entitled to vote, and for non-stock
organizations, the right to receive over fifty percent (50%) of the profits or
by contract or otherwise.
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1.3 "Collaboration Committee" shall have the meaning assigned to it
in Paragraph 4.3.
1.4 "Development Committee" shall have the meaning assigned to it in
Paragraph 4.5.
1.5 "Dopamine Agonist/Antagonist" means a dopamine agonist and/or a
dopamine antagonist. For purposes of this definition "dopamine agonist" means,
subject to Paragraph 2.1 D., any substance to specifically and selectively mimic
the actions of the neurotransmitter dopamine at one or a combination of its
receptor subtypes. For purposes of this definition, "dopamine antagonist"
means, subject to Paragraph 2.1 D., any substance acting to specifically and
selectively inhibit and/or reverse the actions of the neurotransmitter dopamine
at one or a combination of its receptor subtypes.
1.6 "D4 Antagonist" means any substance acting to specifically and
selectively inhibit and/or reverse the actions of the neurotransmitter dopamine
at the dopamine D4 receptor subtype. For purposes of this definition "dopamine
D4 receptor subtype" means the receptor which is currently defined by its
pharmacology and/or gene product as D4 (or its alternative nomenclature, D2C) by
the 1994 Receptor and Ion Channel Nomenclature Supplement of Trends in
----------------------------- ------------------------------------
Pharmacological Sciences.
------------------------
1.7 "Earned Royalty" means the following percentages of Net Sales of
each Licensed Product and Licensed Combination and the rate described in (C)
below with respect to Licensed Compound:
A. With respect to aggregate annual worldwide Net Sales of any
Licensed Product or Licensed Combination,
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
B. With respect to aggregate annual worldwide Net Sales of any
Licensed Combination, "Earned Royalty" means the foregoing applicable percentage
described in subparagraph A above times the product which is calculated
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
In the event there are no sales of such Licensed Product containing applicable
Licensed Compound as the sole Active
2
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Ingredient, the Earned Royalty for such Licensed Combination shall mean
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
In each case cost is to be determined in accordance with generally accepted
accounting principles.
C. With respect to Net Sales of Licensed Compound, the Earned Royalty
shall be determined pursuant to Paragraph 3.1B.
D. If a Licensed Product, Licensed Combination or Licensed Compound
contain the same Licensed Compound as an Active Ingredient, then in determining
the applicable annual percentage to be used in computing Earned Royalties,
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
1.8 "Effective Date" means the first date when both Neurogen and
Schering have executed and delivered both (i) this Agreement and (ii) the
Screening Agreement.
1.9 "FDA" means the United States Food and Drug Administration or any
corresponding foreign drug registration governmental authority.
1.10 "Field" means the therapeutic and/or prophylactic and/or
diagnostic use for the treatment of any disease and/or condition in humans
and/or animals.
1.11 "Fully Burdened Manufacturing Costs" means those costs as
defined and set forth in Exhibit 1 attached hereto and made a part hereof
calculated in accordance with GAAP and customary pharmaceutical industry
standards as consistently applied.
1.12 "IND" means an Investigational New Drug Application or its
foreign equivalent for initiating clinical trials in the United States or any
corresponding foreign country.
1.13 "Know-How" means all ideas, inventions, data, instructions,
know-how, processes, formulas, expert opinion and information (whether or not
patentable), technology and other intellectual property owned or controlled by
Neurogen and its Affiliates on the Effective Date or during the term of this
Agreement, as all of the foregoing relate to the discovery, research,
development, manufacture, use or sale of Licensed
3
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Compounds, Licensed Products and Licensed Combinations, including, without
limitation, all biological, chemical, pharmacological, toxicological,
pharmaceutical, physical and analytical, clinical, safety, manufacturing and
quality control data and information. Excluded from the foregoing is any
intellectual property which is otherwise included within the definition of
Patent Rights and within the definition of Neurogen Dopamine Agonist/Antagonist
Technology.
1.14 "Licensed Combination" means any product which contains a
Licensed Compound and one or more other Active Ingredients for use in the Field.
1.15 "Licensed Compound" means any Program Dopamine
Agonist/Antagonist.
1.16 "Licensed Product" means any pharmaceutical product containing a
Licensed Compound.
1.17 "NDA" means a New Drug Application, Product License Application
or its equivalent in the United States or any corresponding foreign application,
registration or certification for approval to market, including where applicable
applications for pricing and reimbursement approval.
1.18 "Net Sales" means the gross amounts received by Schering, its
Affiliates and sublicensees as a result of sales worldwide of Licensed Products,
Licensed Combinations and Licensed Compounds by Schering, its Affiliates and
sublicensees to third party customers after deduction of (i) cash, trade and/or
quantity discounts actually allowed; (ii) amounts repaid or credited by reason
of rejections, damaged goods or returns of goods, recalls, rebates (including
government mandated rebates) or because of retroactive price reductions; (iii)
freight, postage, and duties paid for and separately identified on the invoice
or other documentation maintained in the ordinary course of business; and (iv)
excises, sales taxes, duties and the like (the legal incidence of which is on
the purchaser). A "sale" of a Licensed Product, Licensed Combination or
Licensed Compound is deemed to occur upon the earliest of invoicing, shipment or
transfer of title in the Licensed Product, Licensed Combination or Licensed
Compound to a person other than Schering or its Affiliate or sublicensee.
1.19 "Neurogen Transfer Price" shall have the meaning assigned to it
in Paragraph 2.9.
1.20 "Neurogen Dopamine Agonist/Antagonist Technology" means the
intellectual property rights described in Exhibit 2 attached hereto and made a
part hereof, including, without limitation, (i) the pending United States patent
applications and
4
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issued patents listed in said Exhibit 2 as well as (ii) all claims of any
foreign counterpart patent applications and/or issued patents of (i) and (iii)
any reissues, extensions (or statutory or other governmental equivalents
thereto), substitutions, confirmations, registrations, revalidations, additions,
continuations, continuations-in-part or divisions of or to any of the foregoing
which are hereafter granted in the Territory. Exhibit 2 shall be updated at
least annually by Neurogen to reflect the current status of the patents.
1.21 "Patent Rights" means (i) the pending United States patent
applications and issued patents if any, listed, as of the Effective Date of this
Agreement, in Exhibit 3 attached hereto and made a part hereof; (ii) claims of
any patent applications or issued patents filed or issued during the term of
this Agreement owned or controlled by Neurogen or its Affiliates (including,
without limitation, patents with joint inventors where at least one inventor is
obligated to assign the invention to Neurogen or an Affiliate) relating to any
compositions for, or processes for, or methods of use of, any Licensed Compound,
Licensed Product and Licensed Combination; (iii) all claims of any foreign
counterpart patent applications and/or issued patents of (i) and (ii); and (iv)
any reissues, extensions (or statutory or other governmental equivalents
thereto), substitutions, confirmations, registrations, revalidations, additions,
continuations, continuations-in-part or divisions of or to any of the foregoing
which are hereafter granted in the Territory. Exhibit 3 shall be updated at
least annually by Neurogen to reflect the current status of the Patent Rights.
Notwithstanding the foregoing, Patent Rights shall not include any patents
included in the Neurogen Dopamine Agonist/Antagonist Technology.
1.22 "Program Dopamine Agonist/Antagonist" means any Dopamine
Agonist/Antagonist, including without limitation those covered by a Valid Claim,
(i) conceived prior to the Effective Date to which Neurogen or a Neurogen
Affiliate has or obtains rights in whole or part by license (with the right to
sublicense), assignment or otherwise, or (ii) conceived during the period
commencing on the Effective Date and ending with the expiration or termination
of the Research Program by Neurogen or Schering and/or their respective
Affiliates, alone or jointly, or (iii) conceived during the first twelve (12)
months after the term of the Research Program by Neurogen or Schering and/or
their respective Affiliates, alone or jointly, where such compound is chemically
closely related to or derived from any compound described in the foregoing
clauses (i) or (ii) or (iv) conceived by Schering or its Affiliates after the
expiration or termination of the Research Program utilizing material elements of
the intellectual property contained in the Patent Rights or Know How or Neurogen
Dopamine Agonist/Antagonist Technology; provided, however, that a compound shall
not be considered "closely
5
<PAGE>
related" for the purposes of this Paragraph if a party demonstrates by competent
written proof that the compound was developed independently of and without
reference to the Research Program.
1.23 "Research Program" means the research program with respect to
Dopamine Agonists/Antagonists described in Exhibit 4 hereto, as such Exhibit may
be amended from time to time by the parties pursuant to the terms of this
Agreement.
1.24 "Schering D1 Dopamine Antagonists" shall have the meaning
assigned to it in Paragraph 3.1.
1.25 "Schering Technology" means all patents, patent applications,
know-how and other intellectual property developed solely by or under the
control of Schering (with the right to license or sublicense) (i) during and in
connection with the Research Program, or (ii) to the extent not included in the
preceding subsection (i), in connection with the discovery, evaluation,
development or testing of any Licensed Product, Licensed Combination or Licensed
Compound.
1.26 "Screening Agreement" shall mean the Screening Agreement
executed by the parties simultaneously with the execution of this Agreement and
attached as Schedule A hereto.
1.27 "Subject Country" shall have the meaning assigned to it in
Paragraph 3.6.
1.28 "Territory" means the entire world.
1.29 "Trademark" means any trademark selected, used and registered by
Schering, its Affiliates or sublicenses in the Territory for the marketing of a
Licensed Product or Licensed Combination.
1.30 "Valid Claim" means any claim contained in (i) any pending
patent application or issued patent (including reissues, reexaminations and
extensions) included within Neurogen Dopamine Agonist/Antagonist Technology or
(ii) any pending patent application or issued patent (including reissues,
reexaminations and extensions) included within the Patent Rights which in either
case has not been abandoned or declared invalid in a nonappealable order, as the
case may be, and which would be infringed by the use, manufacture, or sale or
offer to sell of a Licensed Product or Licensed Combination in the absence of
the licenses granted in this Agreement. Notwithstanding the foregoing, claim(s)
in patent applications which have been pending more than five (5) years shall be
excluded from this definition from such fifth anniversary until and unless the
patent claim(s) subsequently are granted.
6
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ARTICLE 2 - INTELLECTUAL PROPERTY
---------------------------------
GRANTS AND LICENSE AND RESEARCH PAYMENTS
----------------------------------------
AND MANUFACTURING RIGHTS
------------------------
2.1 License Grants.
--------------
A. In consideration of payment by Schering, on the Effective Date, of
$14,000,000 of which $7,000,000 is payable by Schering Corporation for the grant
of rights to it in the United States, including its territories and possessions,
and $7,000,000 is payable by Schering-Plough Ltd. for the grant of rights to it
in the rest of the Territory, Neurogen hereby grants to Schering exclusive,
worldwide licenses, exclusive even as to Neurogen, except as qualified in
subparagraphs B, C and D of this Paragraph 2.1, (i) under the Neurogen Dopamine
Agonist/Antagonist Technology, to make, use and sell, with right of sublicense
to third parties, during the Research Program, Licensed Compounds, Licensed
Products and Licensed Combinations, (ii) under the Neurogen Dopamine
Agonist/Antagonist Technology to make use and sell, with right of sublicense,
after the end of the Research Program, any pharmaceutical products, including
without limitation Licensed Compounds, Licensed Products and Licensed
Combinations and (iii) under the Patent Rights and using the Know-How, to make,
use and sell, with right to sublicense to third parties, Licensed Compounds,
Licensed Products and Licensed Combinations. Schering and its Affiliates are
also granted a non-exclusive license, after the termination or expiration of the
Research Program for the remainder of the term of this Agreement, under the
Patent Rights and Know-How to conduct research with respect to the discovery of
Dopamine Agonists/Antagonists; provided that such Dopamine Agonists/Antagonists
shall be, by operation of Paragraphs 1.14, 1.15, 1.16 and 1.22 herein, subject
to the milestones and royalty obligations in Articles 2 and 3 herein, and all
other applicable provisions of this Agreement. The foregoing licenses in (ii)
of this Paragraph will be deemed paid-up licenses with respect to discovering,
making, using and selling any pharmaceutical products under the Neurogen
Dopamine Agonist/Antagonist Technology after the end of the Research Program
other than Licensed Compounds, Licensed Products and Licensed Combinations.
Earned Royalties on Net Sales of Licensed Compounds, Licensed Products and
Licensed Combinations made, used or sold under the Neurogen Dopamine
Agonist/Antagonist Technology are or may be payable by Schering to Neurogen
pursuant to the
7
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other terms of this Agreement. Of the $14,000,000 payments hereunder,
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
is in consideration for grants under Patents and
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
is in consideration for grants to use Know-How.
B. Further, notwithstanding the foregoing grants, Neurogen shall
retain non-exclusive rights to conduct the Research Program using intellectual
property for which exclusive rights are granted to Schering pursuant to this
Paragraph 2.1 A and B.
C. Except for the rights specifically granted herein, Neurogen
reserves all rights to Know-How, and Patent Rights, and reserves the right to
utilize such intellectual property in any manner in its discretion consistent
with the terms of this Agreement.
D. Notwithstanding anything in this Agreement to the contrary, the
licenses granted in Paragraph A above shall not include any compounds discovered
by or on behalf of Neurogen or a designee outside of the Research Program, or
any intellectual property to the extent relating thereto, which exert their
activity primarily through a mechanism of action other than dopamine but may
have coincidental activity at the dopamine family of receptors, provided that
any such compounds exploited by Neurogen or a third party under grant of rights
from Neurogen, if commercially exploited at all shall be commercially introduced
first with respect to the other activity before commercial introduction with
respect to a dopamine activity.
E. The right of Schering to grant sublicenses to unaffiliated persons
and to Affiliates under this Agreement is subject to the conditions that:
(i) Each sublicense shall be consistent with all of the terms and
conditions of this Agreement;
(ii) Schering shall remain responsible to Neurogen for all of each
sublicensee's obligations under the sublicense; and
8
<PAGE>
(iii) Each sublicense shall provide for its continuation, at the sole
option of Neurogen, following early termination of Schering's license rights
from Neurogen and its assignment to Neurogen.
(iv) Schering shall advise Neurogen of its intent to grant any
sublicense, including identification of the sublicensee, prior to concluding any
sublicense agreement.
(v) Schering shall forward to Neurogen an accurate and complete copy
of each sublicense promptly following execution thereof.
2.2 Research Program Funding.
------------------------
A. On the Effective Date, Schering shall make its first quarterly
payment of Research Funding to Neurogen of $900,000 ($4500,000 payable by
Schering Corporation and $450,000 payable by Schering-Plough Ltd.). Schering
shall pay Neurogen seven (7) subsequent quarterly Research funding payments each
in the amount of $900,000 allocated as the first payment and payable in advance
at quarterly intervals. Neurogen shall utilize such funds in the conduct of the
Research Program during the two (2) year period commencing on the Effective
Date.
B. In the event Schering extends the Research Program for a third,
fourth or fifth year as provided in Paragraph 4.1 B, beginning within thirty
(30) days of the commencement of any such extension period, Schering shall pay
Neurogen $900,000 per quarter ($450,000 payable by Schering Corporation and
$450,000 payable by Schering-Plough Ltd.) with respect to such extension period,
and Neurogen shall utilize such funds in the conduct of the Research Program
during the applicable one (1) year extension period.
2.3 Other Program Funding. Schering will fund all costs of pre-
---------------------
clinical development, clinical development and commercialization (subject to
Neurogen's manufacturing rights as set forth in Paragraph 2.9) of Licensed
Products, Licensed Combinations and Licensed Compounds which it pursues and
which have not been relinquished to Neurogen pursuant to Paragraph 4.8. To the
extent that the parties agree in advance in writing that Neurogen should perform
or cause to be performed development or commercialization activities outside of
the Research Program and Neurogen's manufacturing rights as contemplated in
Paragraph 2.9, Schering will reimburse Neurogen for the properly documented
costs of such activities undertaken.
2.4 Schizophrenia Milestone Payments. In further consideration of
--------------------------------
the grant pursuant to Paragraph 2.1 A. herein of applicable Patent Rights,
milestone payments shall be payable on
9
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the first achievement of certain milestones for Licensed Product or Licensed
Combination which is a D4 Antagonist, with respect to a therapeutic indication
for treatment of schizophrenia, as hereinafter described.
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
Payments shall be made by the designated Schering party with respect to
applicable Patent Rights granted to it in its portion of the Territory in
accordance with the following chart.
================================================================================
Milestone Amount Payor
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
================================================================================
2.5 Supplemental Indication Milestone Payments for Indications in
---------------------------------------------- --------------
Addition to Schizophrenia. In further consideration of the grant pursuant to
-------------------------
Paragraph 2.1A. herein of applicable Patent Rights, milestone payments shall be
payable on the first achievement of certain milestones for Licensed Product or
Licensed Combination which is a D4 Antagonist which has been previously
developed hereunder for the treatment of schizophrenia and is subsequently
developed.
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
provided that, at the time any such payment is due, the Licensed Product or
Licensed Combination is still being developed or commercialized hereunder for
treatment of schizophrenia, all as hereinafter described. Payments shall be
made by the designated Schering party with respect to applicable Patent Rights
granted to it in its portion of the Territory in accordance with the following
chart.
================================================================================
Milestone Amount Payor
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
================================================================================
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2.6 Other Milestone Payments. In further consideration of the grant
------------------------
pursuant to Paragraph 2.1A. herein of applicable Patent Rights, milestone
payments shall be payable on the first achievement of certain milestones for
each Licensed Product or Licensed Combination
[CONFIDENTIAL MATERIAL OMITTED
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Payments shall be made by the designated Schering party with respect to
applicable Patent Rights granted to it in its portion of the Territory in
accordance with the following chart.
Notwithstanding the foregoing, milestone payment will be made even if
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2.7 Milestone Achievement Notices. Schering will advise Neurogen of
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the accomplishment of each of the milestones described in Paragraphs 2.4 to 2.6
within thirty (30) days thereof. Milestone payments due pursuant to Paragraphs
2.4 to 2.6 shall be due and payable within thirty (30) days of the
accomplishment of the relevant milestone.
2.8 Screening Agreement Payments.
----------------------------
A. In partial consideration of the grant of rights to it under the
Screening Agreement, Schering shall pay Neurogen $3,000,000 ($1,500,000 payable
by Schering Corporation and $1,500,000 payable by Schering-Plough Ltd.) on the
Effective Date.
B. In further consideration of the grant of rights to it under the
Screening Agreement, Schering shall pay Neurogen $3,000,000 ($1,500,000 payable
by Schering Corporation and $1,500,000 payable by Schering-Plough Ltd.) on the
first anniversary of the Effective Date.
C. Notwithstanding anything herein to the contrary, any breach of
either party's obligations under the Screening Agreement shall not be deemed to
be a breach of this Agreement, and any remedies relating to any such breach
shall arise solely from the Screening Agreement and not this Agreement, except
with respect to the monies described in subparagraphs A and B of this Paragraph
2.8.
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2.9 Manufacturing Rights. Neurogen shall have the right, at its
--------------------
option, to supply Schering with its United States requirements for bulk and
finished supplies of each Licensed Compound, Licensed Product and Licensed
Combination commercialized under this Agreement (during the period Earned
Royalties are payable with respect thereto) manufactured by Neurogen or an
Affiliate. In each instance, Neurogen must exercise its rights by giving notice
to Schering at least one (1) year prior to commencement of commercial supply to
Schering and shall designate in such notice the commencement date for such
commercial supply of Schering's United States requirements. Such commencement
date must occur during the period beginning on NDA approval for the relevant
Licensed Compound, Licensed product or Licensed Combination and ending on the
second annual anniversary thereafter. At least ninety (90) days prior to
exercising foregoing rights, Neurogen will notify Schering of its desire to
enter into a supply agreement, and the parties shall thereafter negotiate in
good faith the terms, which shall include and be consistent with the terms set
forth in this Paragraph 2.9, upon which Neurogen shall manufacture and supply,
or cause to be manufactured and supplied by an Affiliate, such Licensed
Compounds, Licensed Products and Licensed Combinations in bulk and finished
form. The parties shall conclude a definitive manufacturing and supply
agreement within ninety (90) days thereafter. Any such agreement shall include
provisions addressing the following:
(i) A grant to Schering of customary and reasonable rights to
manufacture such bulk Licensed Compound and/or finished Licensed Products and
Licensed Combinations, as the case may be, and/or qualify a second source or to
be that second source, in the event that Neurogen or its Affiliate fails to
fulfill its material production obligations under such agreement, after
reasonable and customary notice and opportunity to cure;
(ii) That Schering shall consult with Neurogen in connection with
process development, to assist Neurogen in establishing a cost-competitive
process which shall be identical to the process Schering develops to supply its
needs in the rest of the Territory;
(iii) A transfer price, subject to adjustment as set forth below (prior
to applicable freight (except to the extent ex-United States), postage, excises,
sales taxes, and the like, but excluding duties) not to exceed Neurogen's Fully
Burdened Manufacturing Cost plus
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(the "Neurogen Transfer Price").
(iv) A provision regarding reduction and termination of Neurogen
manufacturing rights as follows;
(a) Except as set forth below, while Schering is purchasing
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of its United States requirements from Neurogen, notwithstanding the calculation
of the applicable Neurogen Transfer Price, Schering shall not be required to pay
Neurogen more than
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for Licensed Compound, Licensed Product or Licensed Combination produced by
Schering or an Affiliate. While Schering is purchasing
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of its United States requirements from Neurogen, notwithstanding the calculation
of the applicable Neurogen Transfer Price, Schering shall not be required to pay
Neurogen more than
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for Licensed Compound, Licensed Product or Licensed Combination produced by
Schering or an Affiliate.
(b) If for
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commencing on an anniversary date of the receipt of the first commercial supply
shipment received by Schering under the manufacturing and supply agreement
during which Schering is purchasing
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of its United States requirements from Neurogen, the Neurogen Transfer Price is
more than
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as calculated pursuant to subsection (a) above, thereafter Neurogen shall be
entitled to supply
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of Schering's United States requirements. Notwithstanding the foregoing,
Schering shall have the option of continuing to purchase
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of its United States requirements at the Neurogen Transfer Price for
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provided that Schering shall in no event be required thereby to pay for such
excess quantities more than
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of Licensed Compound, Licensed Product or Licensed Combinations.
(c) If for any
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commencing on an anniversary date of the receipt of the first commercial supply
shipment received by Schering under the
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manufacturing and supply agreement during which Schering is purchasing
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of its United States requirements from Neurogen, the Neurogen transfer Price is
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as calculated pursuant to subsection (b) above, thereafter Neurogen
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Notwithstanding the foregoing, Schering shall have the option of continuing to
purchase
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(v) Notwithstanding the provisions in subsection (iv) above, (a)
Neurogen may retain its manufacturing rights by promptly rebating to Schering
any amounts by which Neurogen's Transfer Price exceeded
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as contemplated in subparts (b) and (c) of subsection (iv) of this Paragraph
2.9, and (b) if Neurogen has elected
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, then Neurogen shall supply
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Licensed Compound for United States requirements to Schering at
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the Licensed Compound.
(vi) A provision indicating whether, at
Neurogen's option, supply by Neurogen will be for
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Notwithstanding the foregoing, Schering may request, as a condition to
the exercise by Neurogen of its option rights hereunder, reasonable assurances
that Neurogen has, or will have at the time it commences supplying product, the
capability (internally or through an Affiliate) to fulfill Schering's
requirements for
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in a timely and reliable fashion and is willing to establish adequate commercial
manufacturing capability. Schering agrees that
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required for NDA approval and thereafter as long as Neurogen is preparing to
supply or supplying products hereunder, Schering
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Any disputes under this Paragraph 2.9 shall be resolved pursuant to Paragraph
10.4, and the parties shall endeavor to obtain an expedited resolution.
Notwithstanding anything herein to the contrary, any breach by a party
of obligations under any manufacturing agreement entered into pursuant to
Paragraph 2.9 of this
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Agreement shall not be deemed a breach of this Agreement, and any remedies
relating to any such breach shall arise from any such manufacturing agreement
and not this Agreement.
ARTICLE 3 - ROYALTIES
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3.1 Royalty Payment Dates.
---------------------
A. In partial consideration of the grant of license rights pursuant
to the operation of the terms of Article 2 herein, on the last business day
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during the term of this Agreement, following the commencement of marketing of
applicable Licensed Compounds, Licensed Products or Licensed Combinations
hereunder,
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B. The parties shall equitably agree on commercially reasonable
Earned Royalty rates with respect to Licensed Compound to provide substantially
equivalent payments as contemplated in subparagraph A of Paragraph 1.7 herein to
what would have been paid hereunder if such Licensed Compound had been converted
by Schering to Licensed Product and Earned Royalty was paid on Net Sales of the
Licensed Product as provided hereunder.
3.2 Direct Affiliate Licenses. Whenever Schering shall reasonably
-------------------------
demonstrate to Neurogen that, in order to facilitate direct royalty payments by
an Affiliate, it is desirable that a separate license agreement be entered into
between Neurogen and such Affiliate, Neurogen will grant such licenses directly
to such Affiliate by means of an agreement which shall be consistent with all of
the provisions hereof, including indemnification directly from such Affiliate,
provided that Schering guarantees the Affiliate's obligations under such
agreement or otherwise provides to Neurogen assurances of performance
satisfactory to Neurogen in its sole discretion.
3.3 Place of Royalty Payment and Currency Conversions. Earned Royalty
-------------------------------------------------
shall be deemed payable by the entity making the Net Sales from the country in
which earned in local currency and subject to foreign exchange regulations then
prevailing. Earned Royalty payments shall be made in United States dollars to
the extent that free conversion to United States dollars is
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permitted. The rate of exchange to be used in any such conversion from the
currency in the country where such Net Sales are made shall be the commercial
rate of exchange prevailing in the United States on the last day of the calendar
quarter for which such payments are made as customarily quoted for use for
currency conversions between Schering and its Affiliates. The current
applicable Schering policy is attached hereto and made a part hereof as Exhibit
5. No changes in such policy shall result in a reduction in payments which
would have been due in the absence of such changes. If, due to restrictions or
prohibitions imposed by national or international authority, payments cannot be
made as aforesaid, the parties shall consult with a view to finding a prompt and
acceptable solution, and Schering will, from time to time, deal with such monies
as Neurogen may lawfully direct at no additional out-of-pocket expense to
Schering. Notwithstanding the foregoing, if Earned Royalties in any country
cannot legally be remitted to Neurogen within
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after the end of the calendar quarter during which they are earned, then
Schering shall be obligated to deposit the Earned Royalties in a bank account
selected by Neurogen in such country in the name of Neurogen. If free
conversion of such funds to United States dollars is not possible within
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after the end of the calendar quarter in which such royalties were earned,
Schering shall pay to Neurogen at such time the United States dollar equivalent
(calculated as of the time earned) of such funds (including any interest earned
from the deposit of local currency), and the local currency shall become the
property of Schering. Earned Royalty payable by Schering-Plough Ltd. shall be
net of any foreign withholding taxes due which Schering-Plough Ltd. is legally
obligated to withhold, it being understood that such withholding taxes are the
obligation of Neurogen. Schering shall forward to Neurogen in a timely manner
all tax receipts relating to such withholding taxes.
3.4 Royalties on Resales. No Earned Royalty shall be payable in
--------------------
respect of sales between and among Schering, its Affiliates and sublicensees,
except if an Affiliate is an end-user customer, it being understood that in such
case royalties are to be paid on resale of Licensed Compounds, Licensed Products
and Licensed Combinations to independent third parties.
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3.5 Royalty Deductions if Infringements. If in both Schering's and
-----------------------------------
Neurogen's reasonable judgment Schering, its Affiliates or sublicensees shall
hereafter be required, in respect of sales of a Licensed Compound, Licensed
Product or Licensed Combination, to pay royalties to any third party whose
patents may be infringed by such sales solely because of the practice of the
Patent Rights or any patentable or patented subject matter included in the
Neurogen Dopamine Agonist/Antagonist Technology in making, using or selling such
Licensed Product or Licensed Combination, Schering may reduce any Earned Royalty
due Neurogen hereunder to reimburse it for any royalties actually paid to third
parties. The amount of the reduction shall be
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paid to third parties applicable to sales of the Licensed Compound, Licensed
Product or Licensed Combination in such country, but in no event shall the
Earned Royalty due Neurogen for any calendar quarter, with respect to any such
Licensed Compound, Licensed Product or Licensed Combination, be thereby reduced
to
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Earned Royalty otherwise due hereunder with respect to Net Sales in such
country. Any settlement of any infringement claim or action that would require
the payment of any royalty to a third party shall require the mutual agreement
of the parties, the consent of each party to be reasonably given.
3.6 Duration of Royalty Payments. With respect to Net Sales of any
----------------------------
Licensed Compound, Licensed Product or Licensed Combination in any country in
the Territory (the "Subject Country") for which Earned Royalties are due
hereunder, Earned Royalty shall be paid hereunder with respect to Net Sales of
such Licensed Compound, Licensed Product or Licensed Combination for
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Upon final expiration of the obligation to pay Earned Royalty on Net Sales
hereunder with respect to a Licensed Compound, Licensed Product or Licensed
Combination in the Subject Country, Schering, its Affiliates and sublicensees
shall thereafter be free during and after the term of this Agreement at no cost
to use any
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remaining proprietary rights of Neurogen granted pursuant to Article 2 herein to
commercialize the applicable Licensed Compound, Licensed Product or Licensed
Combination in such Subject Country.
3.7 Maintenance of Royalty Records. Schering shall maintain and
------------------------------
cause its Affiliates to maintain books of account and adequate records of all
Net Sales of Licensed Compounds, Licensed Products and Licensed Combinations,
including those made by sublicensees. Neurogen shall have the right, by an
independent public accounting firm reasonably acceptable to Schering, employed
by it and at its own expense, to examine pertinent books and records of Schering
and its Affiliates who are sublicensed hereunder or to whom Neurogen grants
direct licenses to hereunder, at all reasonable times (but not more often than
once each calendar year) for the purpose of determining and reporting to
Neurogen the correctness of royalty payments made hereunder; it being understood
that such examination with respect to any quarterly accounting period hereunder
shall take place
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following the expiration of said period.
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The accounting firm representatives shall execute customary confidential
agreements prior to any examination. If it appears that a sublicensee is
substantially under-reporting Net Sales based on review of IMS or other similar
data available for the sublicensed territory or any other information, Schering
will reasonably undertake an audit of the sublicensee's records, and will
promptly remit Neurogen's share, after collection, of any under-reported
royalties ascertained through audit or otherwise. The provisions of the
preceding sentence shall in no way limit Schering's other obligations under this
Agreement (including, without limitation, its obligations under Paragraph 3.1)
or Neurogen's right to seek any available remedies against Schering or any
Schering sublicensee.
3.8 Compulsory Royalties. If Schering, its Affiliates or
--------------------
sublicensees are legally obliged by any governmental authority in any country in
the Territory to grant licenses under the Patent Rights to any third party to
make, use, or sell Licensed Compound, Licensed Products or Licensed Combinations
at royalty rates less than payable pursuant to this Agreement,
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ARTICLE 4 - RESEARCH AND DEVELOPMENT PROGRAMS AND DILIGENT
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EFFORTS OF THE PARTIES
----------------------
4.1 Research Programs and Extensions.
--------------------------------
A. As of the Effective Date of this Agreement, Exhibit 4 contains a
description of the anticipated first two (2) years of the Research Program.
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Exhibit 4 may be amended during such two (2) year period in accordance with
Paragraph 4.1. Within sixty (60) days following receipt by Neurogen of
Schering's election to extend the Research Program for any one year period in
accordance with subparagraph B below, the Collaboration Committee shall
unanimously agree on an amendment to Exhibit 4 to describe the Research Program
for the extension year in at least the same scope and level of detail, including
projected milestone completion dates, as for the initial two (2) year term of
the Research Program and minimum annual staff levels of at least fifteen (15)
full-time equivalent research positions. Failure of the Collaboration Committee
to agree on an amendment to Exhibit 4 within the time prescribed shall entitle
Schering to terminate the applicable previously noticed extension of the
Research Program without liability or obligation by giving Neurogen written
notice of such termination within fourteen (14) days after such deadline.
Neurogen agrees to utilize due diligence, consistent with sound scientific and
business judgment, to undertake the Research Program in a timely fashion with at
least the minimum staff requirements provided for herein and using qualified
research staff and using at a minimum at least that level of effort it uses for
its other valuable research projects. During the initial two (2) year term of
the Research Program, Neurogen shall maintain minimum annual staff levels of
fifteen (15) full-time equivalent research positions.
B. The initial term of the Research Program shall commence on the
Effective Date and expire two (2) years after the Effective Date. Schering may
extend the term of the Research Program for up to three (3) additional one (1)
year periods by providing written notice of extension to Neurogen at least one
hundred twenty (120) days prior to the expiration of the original two (2) year
term or the expiration of any one (1) year
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extension, as the case may be. The Research Program shall be amended within
sixty (60) days of Schering's notice of extension.
C. During the term of the Research Program, as it may be extended,
Neurogen shall not conduct any other research and development, alone or with
others (except as may be necessary for the conduct of the Research Program),
with respect to Dopamine Agonists/Antagonists. Notwithstanding the foregoing,
this Section 4.1 C. shall not apply to compounds relinquished to Neurogen
pursuant to Paragraph 4.8.
D. The Research Programs shall not be changed in any material
respect, except by mutual agreement of the parties in writing. Mutual agreement
may be evidenced by the unanimous written agreement of all members of the
Collaboration Committee at any time. The Research Program payments by Schering
shall be subject to all the audit provisions in Paragraph 3.7 mutatis/mutandi.
---------------
E. Neurogen shall have the responsibility at its sole cost and
expense of conducting all of its responsibilities under the Research Program
including, without limitation all manpower, capital equipment, facilities,
laboratory supplies, depreciation, research administration and management and
general and administrative expenses associated therewith at its own expenses,
and Schering shall have no responsibility in that regard except to make payment
when due pursuant to Paragraph 2.2. Schering shall have only such
responsibilities, financial or otherwise, under the Research Program as
specifically set forth in Exhibit 4.
4.2 Initial Neurogen Disclosures.
----------------------------
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Neurogen shall disclose all previously undisclosed Know-How and Neurogen
Dopamine Agonist/Antagonist Technology to Schering. During the term of this
Agreement for such period as Schering is diligently pursuing development and
commercialization of any Licensed Compound, Licensed Product or Licensed
Combination and, if applicable, paying royalties hereunder, Neurogen shall make
available to Schering, in a timely fashion, all applicable Know-How which is
necessary or useful to Schering's evaluation, development, registration and
commercialization of Licensed Compounds, Licensed Products or Licensed
Combinations. Further, for such period as Schering is diligently pursuing
development and commercialization of any Licensed Compound, Licensed Product, or
Licensed Combination and, if applicable, paying royalties hereunder, Neurogen
will provide reasonable technical assistance,
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at no additional cost, as may be necessary for Schering to utilize all of the
foregoing disclosures.
4.3 Research Programs, Reports, and Committees. At least
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times each year during the Research Program, and twice during the
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following the end of the Research Program, Neurogen shall provide written
reports of its research and development activities and Research Program progress
and results in a form reasonably specified by Schering. Neurogen will also
permit Schering to establish an electronic computer link with Neurogen, at the
option and at the expense of Schering, which will permit Schering to
electronically access mutually agreed upon scientific data generated and stored
by Neurogen and arising out of the Research Program, the consent of Neurogen not
to be unreasonably withheld, provided that Schering shall take such measures to
insure the security of such link as Neurogen shall reasonably request including,
without limitation, restricting access thereto and regulating the information
communicated pursuant thereto for purposes of maintaining confidentiality. In
addition, promptly after the Effective Date of this Agreement, the parties will
establish a collaboration committee (hereinafter the "Collaboration Committee")
consisting of six (6) members, three (3) from and selected by each of the
parties hereto, with Dr. John Tallman, to serve as the initial chairman. The
initial members shall be Dr. Jim Cassella,
Dr. John Tallman and Dr. Jan Wasley for Neurogen and Dr. Peder Jensen, Dr.
Michael Green and Dr. Robert McQuade for Schering. The Collaboration Committee
will hold its initial meeting at Neurogen's facilities within thirty (30) days
following the Effective Date and will meet regularly at the call of the chairman
at least three (3) times in each calendar year beginning in 1995, while the
Research Program is being undertaken. Successor chairman, if any, shall be
designated by Neurogen. The location of such meetings shall alternate between
Neurogen's and Schering's United States facilities. The purpose of the
Collaboration Committee shall be to act as an advisory committee with respect to
all scientific, technical, regulatory and other matters falling within the scope
of the Research Programs and to make changes to the Research Program as
expressly provided for herein. Each party shall bear its own meeting and travel
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expenses, and each party may designate successor Collaboration Committee members
on notice to the other party.
4.4 Review of Research Program Data. During the term of the Research
-------------------------------
Program, upon reasonable notice and during normal business hours, Neurogen shall
permit representatives of Schering to visit Neurogen's premises and view
Research Program work in progress. Neurogen shall also permit Schering to
review any data or documentation (and make copies), arising out of or relating
to the Research Programs; provided, that Neurogen may redact any data or
documentation which relates to Neurogen research and development other than the
Research Program. Neurogen shall not be required to maintain such records and
data beyond the period required by applicable laws and regulations, but shall
endeavor to offer to provide original copies of such records to Schering prior
to their destruction.
4.5 Development Program. Within a reasonable time after the
-------------------
Effective Date, the parties shall establish a development committee (hereinafter
the "Development Committee") consisting of six members, three (3) from and
selected by each of the parties hereto. The chairman of the Development
Committee shall be appointed by Schering. The Development Committee shall act
in an advisory capacity to Schering with respect to the clinical development of
Licensed Compounds, Licensed Products and Licensed Combinations and shall meet
regularly at the call of the chairman at least four (4) times in each calendar
year beginning upon identification of the initial clinical candidate and during
the period that any Licensed Compounds, Licensed Products or Licensed
Combinations are under clinical development. Schering shall inform Neurogen on
an ongoing basis of all relevant clinical development matters and will consult
with Neurogen, at the request of Neurogen, with respect to all material clinical
development decisions relating to Licensed Compounds, Licensed Products and
Licensed Combinations, provided, however, that all toxicology and clinical study
decisions, including whether to initiate toxicology or clinical studies of
Licensed Compounds, Licensed Products or Licensed Combinations shall be in the
sole discretion of Schering. The location of such meetings shall be as
designated by the chairman. Each party shall bear its own meeting and travel
expenses, and each party may designate successor Development Committee members
on written notice to the other party. The meetings shall be held to the extent
feasible on the same day and at the same location as Collaboration Committee
meetings. The Development Committee will provide to each party within thirty
(30) days of each meeting a written report regarding applicable Licensed
Compounds, Licensed Products and Licensed Combinations (i) describing the
results of its evaluation of Licensed Compounds, Licensed Products and Licensed
Combinations and (ii) summarizing clinical development efforts with respect to
such Licensed Compounds, Licensed Products and
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Licensed Combinations hereunder, including the results of clinical testing and
related in vitro and in vivo testing. Schering will also provide semi-annual
reports to Neurogen summarizing its clinical development and product
registration activities. Schering shall also permit Neurogen representative(s)
upon reasonable notice and during normal business hours to review and copy, at
the Schering location where kept in the ordinary course, governmental filings or
correspondence, protocols, investigator brochures and successor forms of such
documents, if any, with respect to Licensed Compound, Licensed Product or
Licensed Combination then under clinical development or subject to a pending
NDA.
4.6 Schering Diligence. Schering shall be obligated to exercise
------------------
continuing due diligence to develop and commercialize itself or through
Affiliate(s) or sublicensee(s) (but in the case of sublicensee(s), solely with
respect to manufacturing and marketing) at least one (1), but not more than one
(1) at the same time, commercially viable and royalty bearing Licensed Compound,
Licensed Product or Licensed Combination. Selection of the initial such Program
Dopamine Agonist/Antagonist and changes in such selection or additions in the
number of selections shall be in the sole discretion of Schering. Schering
shall begin commercial sales of a Licensed Product or Licensed Combination in a
country no later than
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after governmental health registration and pricing approval is obtained for such
sales in such country, provided that such period shall be extended for as long
as Schering has been and continues to exercise continuing due diligence to begin
commercial sales. Diligent efforts shall be comparable to those efforts Schering
makes with respect to its own pharmaceutical products of comparable market
status and value. If Schering fails to exercise such minimum diligent efforts
as described in this Paragraph 4.6 and Neurogen gives Schering written notice
thereof stating in reasonable detail the particular failure, then if Schering
shall not correct the failure within ninety (90) days of such notice or, with
respect to any failure which cannot reasonably be cured within ninety (90) days,
shall not initiate within ninety (90) days of such notice and thereafter
continues to diligently pursue actions reasonably expected to cure such failure
(even if requiring longer to cure than the one hundred eighty (180) days
specified in Paragraph 7.2), then such failure shall constitute a material
breach of this Agreement, and Neurogen shall have the right to terminate this
Agreement pursuant to Paragraph 7.2 herein, but without any further right
25
<PAGE>
for Schering to cure such breach notwithstanding anything to the contrary in
Paragraph 7.2.
Notwithstanding anything in this Paragraph 4.6 to the contrary, this
Paragraph 4.6 is meant to apply to Schering's obligations with respect to
advancing the clinical development and commercialization of Licensed Compounds,
Licensed Products and Licensed Combinations and shall in no way limit any other
obligations of Schering, including without limitation, its obligation to pay
monies.
4.7 Confidentiality Obligations. Except as necessary for the proper
---------------------------
exercise of its rights and obligations under this Agreement, each party agrees
that it and its Affiliates, employees, directors, agents, consultants and
outside contractors (and sublicensees in the case of Schering) will not publish
or otherwise divulge or use for its or their own benefit confidential
information furnished to it by the other party without the prior written
approval of such other party in each instance. The foregoing obligation shall
not be imposed on a party with respect to any information which it can
demonstrate (i) was at the time of disclosure to it (or shall thereafter, but
prior to its publication, divulgence or use for the benefit of a party or any of
its Affiliates, become, through no fault of such party or its Affiliates) a part
of the public domain by publication or otherwise; or (ii) was already properly
and lawfully in its possession at the time it was received from the other party;
or (iii) was lawfully received from a third party who was under no obligation of
confidentiality to the disclosing party with respect thereto; (iv) is required
by law to be disclosed (but only to the extent of such required disclosure); or
(v) is published with the mutual agreement of the parties. This obligation shall
extend until
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
years after such disclosure is made. The parties acknowledge that breach of the
confidentiality restrictions contained in this Paragraph will cause immediate
and irreparable harm for which money damages are an inadequate remedy and agree
that an aggrieved party shall be entitled to seek injunctive relief in a court
of competent jurisdiction, in addition to any other rights to remedies provided
under this Agreement or by law. Moreover, except as consented to by Schering in
writing in advance, Neurogen shall not disclose unpublished Patent Rights, Know-
How or Neurogen Dopamine Agonist/Antagonist Technology to the extent disclosure
reasonably may result in the diminution of the commercial value of rights
licensed by Schering hereunder or adversely affect their trade secret status.
26
<PAGE>
4.8 Neurogen Rights to Relinquished Licensed Compounds. Schering
--------------------------------------------------
will notify Neurogen in writing annually beginning on the second anniversary of
the Effective Date listing in the exercise of due diligence, each Licensed
Compound(s), Licensed Product(s) and Licensed Combination(s), if any, it and its
Affiliates are developing or plan to develop and each such compound Schering and
its Affiliates have decided to permanently discontinue as possible development
candidates. Such decisions will be in the sole discretion of Schering.
Compounds not listed in an annual report, for any reason whatsoever, including,
without limitation failure to exercise due diligence, shall under no
circumstances be deemed discontinued compounds subject to Neurogen option rights
hereunder. For one (1) year after being listed on a particular annual report,
Neurogen shall have the option to license, such Licensed Compound(s), if any,
identified in such report. The parties shall diligently endeavor to negotiate
and conclude a definitive worldwide license with respect to each such Program
Dopamine Agonist/Antagonist, which license shall contain terms reasonably
consistent with this Agreement, in consideration of which Neurogen shall pay to
Schering
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
ARTICLE 5 - TRADEMARKS
----------------------
Schering, its Affiliates and sublicensees shall be free to use and to
register in any trademark office in the Territory any Trademark for use with
Licensed Products and Licensed Combinations they desire in their sole
discretion. Schering shall own all right, title and interest in and to the
Trademark in its own name or that of its Affiliates or sublicensees during and
after the term of this Agreement.
ARTICLE 6 - PATENT RIGHTS AND THIRD PARTY UNLICENSED SALES
----------------------------------------------------------
6.1 Patents. As long as Schering has rights to Program Dopamine
-------
Agonists/AntagoniSts hereunder, Neurogen shall, as hereinafter provided,
prepare, file and prosecute, to the extent feasible, and maintain patent
applications and issued patents relating to applicable Patent Rights and patents
containing the Neurogen Dopamine Agonist/Antagonist Technology and for any
compositions-of-matter, methods of use thereof or processes therefor, in
accordance with the terms of this Article.
6.2 Prosecution and Maintenance. Neurogen shall prepare, file,
---------------------------
prosecute and maintain patent applications and
27
<PAGE>
issued patents relating to the applicable subject matter described in Paragraph
6.1 of this Article in the United States of America, the European Patent
Organization ("EPO") and Japan, Australia and New Zealand. Costs with respect
to the foregoing shall be allocated between the parties as follows. From and
after the Effective Date on a prospective basis, Schering shall reimburse
Neurogen for
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
Neurogen will exercise due diligence to seek patents of comparable quality and
scope as customarily obtained by pharmaceutical companies for comparable
inventions, and at least equivalent to those efforts used for its other valuable
patentable inventions, and to file, prosecute and maintain such patents.
Notwithstanding the foregoing, Neurogen shall have the right, consistent with
its reasonable business judgment, to abandon any patent application or issued
patent in the United States of America, the EPO, Japan, Australia and New
Zealand, as part of its overall patent strategy, in a manner and based on
considerations consistent with Schering's development and commercialization
efforts for Licensed Compounds, Licensed Products and Licensed Combinations and
a well conceived patent strategy of an established biopharmaceutical company for
projects of similar value and status. In the event of such abandonment,
Neurogen shall give Schering reasonable advance written notice thereof (at least
sixty (60) days) and an opportunity to continue the preparation or prosecution
of any such patent application or maintenance of any such issued patent, at
Schering's expense, and Neurogen shall have no further obligation or right
thereafter with respect to such patent application or issued patent except to
provide Schering reasonable assistance and cooperation in the filing by Schering
of such patents. If Schering desires patent protection in any additional
countries, Neurogen shall prepare, file, prosecute and maintain such patent
applications and issued patents. Schering shall reimburse Neurogen for its
reasonable out-of-pocket expenses for the patents, patent applications and
issued patents prepared, filed, prosecuted and maintained pursuant to this
Agreement as described in the preceding sentence, other than any patents
Neurogen chooses to continue as contemplated in the next sentence, incurred
after the Effective Date and properly documented. In the event Schering no
longer desires to continue prosecution in any such additional country, Schering
shall so notify Neurogen and Neurogen may discontinue such prosecution or
maintenance or continue at its own expense. Neurogen shall provide timely
disclosures and notices to Schering regarding the preparation and prosecution of
patent applications, and Neurogen shall provide Schering with a reasonable
opportunity
28
<PAGE>
to review and comment upon such applications and prosecution in the various
countries of the Territory.
6.3 Patent Extensions. With respect to any issued patent included
-----------------
within Paragraph 6.1 of this Article 6, Neurogen will designate Schering as its
agent for obtaining an extension of such patent or governmental equivalent which
extends the exclusivity of any of the patent subject matter where available in
any country in the Territory, or if not feasible, at Schering's option, permit
Schering to file in Neurogen's name or diligently obtain such extension for
Schering, its Affiliate(s) or sublicensee(s) at Schering's expense.
Furthermore, Neurogen agrees to provide reasonable assistance, at no out-of-
pocket expense, to facilitate Schering's efforts to obtain any extensions.
6.4 Third Party Infringements. Each party shall promptly notify the
-------------------------
other of its knowledge of any potential infringement of the Patent Rights or any
issued patents contained in the Neurogen Dopamine Agonist/Antagonist Technology
by a third party. Neurogen has the right, but not the obligation, to take all
reasonable legal action necessary to protect the Patent Rights against
infringements by third parties. If within three (3) months following receipt of
written notice from Schering, Neurogen fails to take such action to halt the
alleged infringement, Schering shall, in its sole discretion, have the right to
take such action as it deems warranted in its own name or in the name of
Neurogen or jointly. Each party agrees to render such reasonable assistance as
the prosecuting party may request. Costs of maintaining any such action and
damages recovered therefrom shall be paid by and belong to the party paying for
the action. However, if Schering consents to a sublicense to any third party,
which consent it shall not be required to give, who, but for the license, would
be infringing claims of issued patents included in the applicable Patent Rights
or issued patents included in the Neurogen Dopamine Agonist/Antagonist
Technology, then after deduction by Schering of any costs and expenses of
prosecuting any claims against the third party which are incurred by Schering
prior to licensing such party, the sales of such products by such third party
shall be included as a part of Net Sales.
6.5 Complete List of Patents. Neurogen represents that Exhibits 2
------------------------
and 3 taken together, are a complete list of Patent Rights and patents included
in the Neurogen Dopamine Agonist/Antagonist Technology as of the Effective Date,
with respect to Licensed Compounds, Licensed Products and Licensed Combinations.
Neurogen represents that it has disclosed to Schering all actions or
communications from the United States Patent and Trademark Office as of the day
prior to the Effective
29
<PAGE>
Date with respect to the Patent Rights and patents included in the Neurogen
Dopamine Agonist/Antagonist Technology.
ARTICLE 7 - TERM AND TERMINATION
--------------------------------
7.1 Term. Unless sooner canceled or terminated under the provisions
----
hereof, this Agreement shall expire thirty (30) years after its Effective Date.
7.2 Termination for Breach. Except as qualified in Paragraph 4.6,
----------------------
either party may by giving to the other party prior notice in writing to that
effect of not less than ninety (90) days, in the event that the other party
shall commit a material breach of this Agreement and shall fail to cure such
breach during the ninety (90) day period following receipt of said notice from
the non-breaching party, or such longer period (not to exceed one hundred eighty
(180) days) as may be necessary, provided the breaching party has commenced and
continues its diligent efforts to cure. Notwithstanding the foregoing, if a
breach by Schering occurs after the completion of the Research Program and the
breach specifically relates solely to a specific Licensed Compound arising from
the Research Program, this Agreement shall be terminable by Neurogen only with
respect to the Licensed Compound and related Licensed Products and Licensed
Combinations, to which such breach specifically relates. Such cancellation and
termination shall not release the breaching party from any obligations hereunder
incurred prior thereto nor prejudice any other rights or remedies of the
nonbreaching party. In the event of termination of this Agreement, or a
divisible portion thereof, by Neurogen pursuant to this Paragraph 7.2 Neurogen
and Schering shall have the rights and obligations set forth in the applicable
provisions of Paragraph 7.4 and 7.5 hereof.
7.3 Voluntary Schering Termination. After the termination or
------------------------------
expiration of the Research Program, Schering may terminate this Agreement at any
time upon one hundred eighty (180) days prior written notice to Neurogen, and in
such event, the parties shall have the rights and obligations set forth in the
applicable provisions of Paragraphs 7.4, 7.5 and 7.7 hereof.
7.4 Post Termination Royalties. Upon any Agreement cancellation,
--------------------------
expiration or termination, all Earned Royalties due for Net Sales of Licensed
Compounds, Licensed Products and Licensed Combinations to the effective date of
said cancellation or termination or expiration shall accrue and become due and
payable on the sixtieth (60th) day thereafter, but no Earned Royalties shall be
due on Net Sales after Agreement expiration.
30
<PAGE>
7.5 Post Termination Product Sales. In the event of the cancellation
------------------------------
or termination of any license rights with respect to a Licensed Compound,
Licensed Product or Licensed Combination, other than for reason of material
breach of this Agreement by Schering for safety reasons, prior to the expiration
thereof or termination of this Agreement, inventory of Licensed Product or
Licensed Combination may be sold for up to six (6) months after date of
termination, provided Earned Royalties are paid thereon, and (i) the obligations
of confidentiality under Paragraph 4.7 and indemnity order Article 9 shall
survive for the period specified therein, and (ii) all obligations of either
party accruing prior to such termination shall survive.
7.6 Termination Upon Bankruptcy or Insolvency.
-----------------------------------------
A. All rights and licenses granted under or pursuant to this
Agreement by Neurogen to Schering are, for all purposes of Section 365(n) of
Title 11 of the U.S. Code ("Title 11"), licenses of rights to intellectual
property as defined in Title 11. Neurogen agrees during the term of this
Agreement to create and maintain current copies or, if not amenable to copying,
detailed descriptions or other appropriate embodiments, to the extent feasible,
of all such intellectual property. If a case is commenced by or against
Neurogen under Title 11, then, unless and until this Agreement is rejected as
provided in Title 11, Neurogen (in any capacity, including debtor-in-possession)
and its successors and assigns (including, without limitation, a Title 11
trustee) shall, as Schering may elect in a written request, immediately upon
such request (i) perform all of the obligations provided in this Agreement to be
performed by Neurogen including, where applicable and without limitation,
providing to Schering portions of such intellectual property (including
embodiments thereof) held by Neurogen and such successors and assigns or
otherwise available to them or (ii) provide to Schering all such intellectual
property (including all embodiments thereof) held by Neurogen and such
successors and assigns or otherwise available to them. If a Title 11 case is
commenced by or against Neurogen, this Agreement is rejected as provided in
Title 11 and Schering elects to retain its rights hereunder as provided in Title
11, then Neurogen (in any capacity, including debtor-in-possession) and its
successors and assigns (including, without limitation, a Title 11 trustee) shall
provide to Schering all such intellectual property (including all embodiments
thereof) held by Neurogen and such successors and assigns or otherwise available
to them immediately upon Schering's written request therefor. Whenever Neurogen
or any of its successors or assigns provides to Schering any of the intellectual
property licensed hereunder (or any embodiment thereof) pursuant to this
Paragraph 7.6, Schering shall have the right to perform the obligations of
Neurogen hereunder with respect to such intellectual property, but neither such
provision
31
<PAGE>
nor such performance by Schering shall release Neurogen from any such obligation
or liability for failing to perform it. All rights, powers and remedies of
Schering provided herein are in addition to and not in substitution for any and
all other rights, powers and remedies now or hereafter existing at law or in
equity (including, without limitation, Title 11) in the event of the
commencement of a Title 11 case by or against Neurogen. Schering, in addition
to the rights, powers and remedies expressly provided herein, shall be entitled
to exercise all other such rights and powers and resort to all other such
remedies as may now or hereafter exist at law or in equity (including, without
limitation, Title 11) in such event. The parties agree that they intend the
foregoing Schering rights to extend to the maximum extent permitted by law,
including without limitation for purposes of Title 11, (i) the right of access
to any intellectual property (including all embodiments thereof) of Neurogen, or
any third party with whom Neurogen contracts to perform an obligation of
Neurogen under the Agreement, and, in the case of the third party, which is
necessary for the development, registration and manufacture of Licensed
Compounds, Licensed Products, and Licensed Combinations and (ii) the right to
contract directly with any third party described in (i) in this sentence to
complete the contracted work.
B. All rights and licenses granted under or pursuant to this
Agreement by Schering to Neurogen are, for all purposes of Section 365(n) of
Title 11 of the U.S. Code ("Title 11"), licenses of rights to intellectual
property as defined in Title 11. Schering agrees during the term of this
Agreement to create and maintain current copies or, if not amenable to copying,
detailed descriptions or other appropriate embodiments, to the extent feasible,
of all such intellectual property. If a case is commenced by or against
Schering under Title 11, then, unless and until this Agreement is rejected as
provided in Title 11, Schering (in any capacity, including debtor-in-possession)
and its successors and assigns Neurogen may elect in a written request,
immediately upon such request (i) perform all of the obligations provided in
this Agreement to be performed by Neurogen including, where applicable and
without limitation, providing to Schering portions of such intellectual property
(including embodiments thereof) held by Neurogen and such successors and assigns
or otherwise available to them. If a Title 11 case is commenced by or against
Schering, this Agreement is rejected as provided in Title 11 and Neurogen elects
to retain its rights hereunder as provided in Title 11, then Schering (in any
capacity, including debtor-in-possession) and its successors and assigns
(including, without limitation, a Title 11 trustee) shall provide to Neurogen
all such intellectual property (including all embodiments thereof) held by
Schering and such successors and assigns or otherwise available to them
immediately upon Neurogen's written request therefor. Whenever Schering or
32
<PAGE>
any of its successors or assigns provides to Neurogen any of the intellectual
property licensed hereunder (or any embodiment thereof) pursuant to this
Paragraph 7.6, Neurogen shall have the right to perform the obligations of
Schering hereunder with respect to such intellectual property, but neither such
provision nor such performance by Neurogen shall release Schering from any such
obligation or liability for failing to perform it. All rights, powers and
remedies of Neurogen provided herein are in addition to and not in substitution
for any and all other rights, powers and remedies now or hereafter existing at
law or in equity (including, without limitation, Title 11) in such event. The
parties agree that they intend the foregoing Neurogen rights to extend to the
maximum extent permitted by law, including without limitation for purposes of
Title 11, (i) the right of access to any intellectual property (including all
embodiments thereof) of Schering, or any third party with whom Schering
contracts to perform an obligation of Schering under the Agreement, and, in the
case of the third party, which is necessary for the development, registration
and manufacture of Licensed Compounds, Licensed Products, and Licensed
Combinations and (ii) the right to contract directly with any third party
described in (i) in this sentence to complete the contracted work.
7.7 Right Upon Termination. In the event of termination of this
----------------------
Agreement in its entirety or with respect to any Licensed Compound, the licenses
applicable to the portions terminated shall immediately terminate and all
applicable license rights shall revert to Neurogen except Schering shall have
continuing rights hereunder after such termination with respect to Schering D1
Antagonists. Further, with respect to a termination pursuant to Paragraph 7.3,
Schering shall within ninety (90) days of such termination grant to Neurogen an
exclusive, royalty free worldwide license (with the right to sublicense) under
applicable Schering Technology, and to the extent feasible in light of then
existing third party rights therein, and provided Neurogen prospectively assumes
any third party royalty obligations, (subject to reimbursement to Schering for
its reasonable out-of-pocket expenses in connection with granting such license),
to the extent necessary or useful to make, have made, use and sell products
based on any Licensed Compound(s) and related Licensed Products and Licensed
Combinations which were the subject of the termination. Neurogen shall, and
shall endeavor to cause its sublicensees to, indemnify and hold harmless
Schering and its Affiliates, employees, officers, directors, shareholders and
agents from and against all liabilities, losses, damages, costs or expenses,
including reasonable attorney's fees which such party may incur, suffer or be
required to pay resulting from or arising in connection with any product
liability or other claims arising from the sale or use by any person of any such
product that was manufactured, marketed, sold or distributed by Neurogen or any
Neurogen
33
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Affiliate or sublicensee pursuant to this Paragraph 7.7, which obligation of
indemnification shall be consistent with the procedures set forth in Paragraph
9.3 hereof. In addition, Schering shall grant to Neurogen, to the extent
consistent with Schering's other marketing efforts, an exclusive, royalty free
world-wide license to utilize Schering Trademarks which were used with Licensed
Products or Licensed Combinations based on such Licensed Compound(s), for a
reasonable period not to exceed eighteen (18) months, to permit Neurogen to
phase in its trademarks. Schering shall further return to Neurogen or dispose
of any applicable Know-How, to the extent feasible, as requested by Neurogen,
promptly after a termination.
ARTICLE 8 - WARRANTIES, COVENANTS AND LIABILITY
-----------------------------------------------
Each party makes the warranties, covenants and representations set
forth in this Article 8 as follows:
8.1 Authority. Each party represents and warrants to the other party
---------
that it has the legal power, authority and right to enter into this Agreement
and to perform all of its respective obligations set forth herein, including the
Exhibits hereto.
8.2 No Conflicting Undertakings. Each party represents and warrants
---------------------------
that as of the Effective Date of this Agreement it is not a party to any
agreement, arrangement or understanding with any third party which in any
material way conflicts with such party's ability to fulfill any of its
obligations under the terms of this Agreement, including the Exhibits hereto.
8.3 No Conflicting Future Actions. Each party covenants (and
-----------------------------
Neurogen also represents and warrants with respect to the grant of rights to
Schering under Article 2) that it will not knowingly commit any material acts or
knowingly fail to take any act which would cause a material omission and that it
will use its best efforts to not permit any acts or omissions to occur which
would be in conflict in any material manner with its obligations under this
Agreement and the Exhibits hereto or diminish the potential scope of the grant
of rights to Schering hereunder in any material respect.
8.4 No Guarantee of Research Program Success and Limitations of
-------------------------------------------- --------------
Liability. Neurogen makes no express or implied warranties, statutory or
---------
otherwise, concerning the success of the Research Program or the quality,
validity, commercial utility, freedom from infringement or any other
characteristics of any Licensed Compounds, Licensed Products, Licensed
Combinations Neurogen Dopamine Agonist/Antagonist Technology, Patent Rights or
intellectual property rights resulting from the Research Program.
34
<PAGE>
WITHOUT LIMITING THE FOREGOING, NEUROGEN MAKES NO EXPRESS OR IMPLIED WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR USE OR PURPOSE, QUALITY OR USEFULNESS
OF THE LICENSED COMPOUNDS, LICENSED PRODUCTS, LICENSED COMBINATIONS OR THE
INTELLECTUAL PROPERTY RIGHTS LICENSED TO SCHERING UNDER THIS AGREEMENT. NEUROGEN
SHALL NOT BE LIABLE TO SCHERING WITH RESPECT TO THE MANUFACTURE, USE OR SALE OF
LICENSED COMPOUNDS, LICENSED PRODUCTS, OR LICENSED COMBINATIONS EXCEPT TO THE
EXTENT SET FORTH IN ANY MANUFACTURING AGREEMENT ENTERED INTO PURSUANT TO
PARAGRAPH 2.9. NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR INDIRECT,
INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES OR LOST PROFITS.
8.5 Neurogen Ownership of Patents. Neurogen represents and warrants
-----------------------------
that, except for the rights herein granted to Schering and as otherwise provided
under this Agreement, it has and shall use its reasonable best efforts to retain
all right, title and interest in and to the Patent Rights and Neurogen Dopamine
Agonist/Antagonist Technology and the patents included therein.
8.6 Compliance with Agreement and Laws. Each party shall comply in
----------------------------------
all material respects with the terms of this Agreement and with all laws, rules
and regulations applicable to the discovery, development, manufacture,
distribution, import and export and sale of pharmaceutical products pursuant to
this Agreement.
8.7 No Government Rights to Licensed Property. Neurogen represents
-----------------------------------------
and warrants that the license rights granted by it to Schering with respect to
Program Dopamine Agonists/Antagonists are not and shall not be subject to any
retained rights of any state, federal or foreign government or governmental
entity, including without limitation rights of the United States government
under the Bayh-Doyle Act.
8.8 Data Summaries Accurate and Complete. Neurogen represents and
------------------------------------
warrants that all data summaries included in KnowHow disclosed by Neurogen to
Schering prior to the Effective Date fairly summarize the underlying raw data,
and that Neurogen has not withheld disclosures of material information prior to
the Effective Date, to its knowledge based on diligent inquiry, which contain
data unfavorable to the commercial prospects of Program Dopamine
Agonists/Antagonists.
8.9 No Third Party Infringements. Neurogen represents and warrants
----------------------------
that as of the Effective Date it has no knowledge that making, using and selling
existing Program Dopamine Agonists/Antagonists as pharmaceutical products may or
do infringe the patent rights of any third party nor does it have any knowledge
that any third party may be or is infringing the Patent Rights. It is agreed
and understood that Neurogen has
35
<PAGE>
provided to Schering by letter dated August 29, 1994, a copy of the legal
opinion of Alegretti & Witcoff dated August 25, 1994 with respect to certain
patent matters.
8.10 No Third-Party Rights to Compounds. Neurogen represents and
----------------------------------
warrants that as of the Effective Date it has no agreements, understandings or
undertakings with any third parties or entities regarding ownership or
disposition of any Dopamine Agonists/Antagonists.
ARTICLE 9 - INDEMNITY
---------------------
9.1 Schering Indemnity. Schering will indemnify and hold harmless
------------------
Neurogen and its Affiliates, employees, officers, directors, shareholders and
agents (a "Neurogen Indemnified Party") from and against any and all
liabilities, losses, damages, costs, or expenses (including reasonable
attorneys' fees) which the Neurogen Indemnified Party may incur, suffer or be
required to pay resulting from or arising in connection with (i) the breach by
Schering of any covenant, representation or warranty contained in this
Agreement, (ii) any product liability or other claims arising from the use by
any person of any Licensed Compound, Licensed Product or Licensed Combination
that was manufactured, marketed, sold or distributed by Schering or any
Affiliate or sublicensee, or (iii) the successful enforcement by a Neurogen
Indemnified Party of any of the foregoing.
9.2 Neurogen Indemnity. Neurogen will indemnify and hold harmless
------------------
Schering and its Affiliates, employees, officers, directors, shareholders and
agents (a "Schering Indemnified Party") from and against any and all
liabilities, losses, damages, costs or expenses (including reasonable attorneys'
fees) which the Schering Indemnified Party may incur, suffer or be required to
pay resulting from or arising in connection with (i) the breach by Neurogen of
any covenant, representation or warranty contained in this Agreement, or (ii)
the successful enforcement by a Schering Indemnified Party of any of the
foregoing. It is agreed and understood that nothing herein shall limit any
obligation undertaken by Neurogen to indemnify Schering which is contained in
any manufacturing agreement entered into pursuant to Paragraph 2.9.
9.3 Indemnity Obligations. The aforesaid obligations of the
---------------------
indemnifying party shall be subject to the indemnified party fulfilling the
following obligations:
(i) The indemnified party shall fully cooperate with the indemnifying
party in the defense of any claims, actions, etc., which defense shall be
controlled by the indemnifying party; provided that if the interests of the
indemnified party
36
<PAGE>
and those of the indemnifying party conflict, the indemnified party shall be
allowed to control its own defense (including obtaining separate legal counsel)
and the indemnified party shall assume the cost of such defense, and the
indemnifying party shall reimburse the indemnified party for its reasonable
attorney fees in the event that the indemnified party is exonerated in any
litigation and the indemnifying party is found liable in such litigation, and
(ii) The indemnified party, shall not, except at its own cost,
voluntarily make any payment or incur any expense with respect to any claim or
suit (except for legal fees incurred by the indemnified party pursuant to (i)
above) without the prior written consent of the indemnifying party, which such
party shall not be required to give.
9.4 Liability Insurance.
-------------------
(i) Schering shall procure and maintain, at its sole expense, broad
form comprehensive general liability insurance, including products and completed
operations coverage, in amounts which are commercially reasonable in light of
the business being conducted by Schering pursuant to this Agreement, which may
include self insurance with excess coverage, providing insurance coverage for
claims and suits arising from the development, manufacture, use, distribution or
sale of any Licensed Compound, Licensed Product or Licensed Combination in the
Territory. Neurogen shall be named an additional insured on the policy of
insurance, and a certificate of insurance will be provided to Neurogen.
(ii) If Neurogen manufactures Licensed Compound pursuant to the terms
of this Agreement or any supplementary agreement, Neurogen shall procure and
maintain at its sole expense broad form comprehensive general liability
insurance, including products and completed operations coverage, with at least a
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
minimum limit of liability. Schering shall be named an additional insured on
the policy of insurance and a certificate of insurance will be provided to
Schering.
(iii) If Neurogen manufactures Licensed Product or Combination
Product pursuant to the terms of this Agreement, Neurogen shall procure and
maintain, at its sole expense, automobile liability insurance with a minimum
37
<PAGE>
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
limit of liability. Schering shall be named an additional insured with respect
to this Licensed Agreement and a certificate of insurance will be provided to
Schering.
ARTICLE 10 - MISCELLANEOUS
--------------------------
10.1 Waiver. The failure on the part of Schering or Neurogen to
------
exercise or enforce any right conferred upon it hereunder shall not be deemed to
be a waiver of any such right, nor operate to bar the exercise or enforcement
thereof at any time or times thereafter.
10.2 Notices. Any notice required or permitted to be given by the
-------
terms of this Agreement by a party shall be given by prepaid, registered air
mail or by express delivery service, such as Federal Express or DHL properly
addressed to the address of the other party set forth below, or to such other
address as may, from time to time, be designated in writing by such other party,
and shall be deemed to have been given upon receipt:
As to Schering:
Schering Corporation
2000 Galloping Hill Road
Kenilworth, NJ 07033
Attn: President
Schering-Plough Ltd.
Topferstrasse 5
Lucerne, Switzerland
Attn: Managing Director
With copy to:
Senior Legal Director Licensing
Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, NJ 07033
As to Neurogen:
Neurogen Corporation
35 Northeast Industrial Road
Branford, CT 06405
Attn: President
38
<PAGE>
With copy to:
Neurogen Corporation
35 Northeast Industrial Road
Branford, CT 06405
Attn: Vice President, Finance
10.3 Applicable Law. This Agreement shall be construed and
--------------
interpreted according to the laws of the State of New Jersey without giving
effect to its conflict of law provisions.
10.4 Arbitration. The parties shall follow the procedures set forth
-----------
below to resolve any dispute or issue under this Agreement to the extent
permitted by applicable law. Upon written notice from either party to the other
of such dispute or issue, the parties shall hold a meeting, attended by
Neurogen's and Schering's respective Directors of Research and Development (or
the equivalent position) (the "Representatives") to attempt in good faith to
negotiate a resolution of the dispute, which resolution shall be subject to
approval by the parties' respective Chief Executive Officers or their designated
representatives ("CEOs"). If, within thirty (30) days after such meeting, the
parties have not succeeded in negotiating a resolution of the dispute, the
matter shall be referred for review and resolution by the CEOs. The
Representatives shall state in writing the specific nature of the dispute and
possible conditions for the resolution of the dispute. The CEOs shall attempt
in good faith to resolve the matter in dispute for a period of thirty (30) days.
If no successful resolution of the dispute has been mutually agreed to the
matter shall be submitted to arbitration in New York, New York. Such
arbitration shall be conducted under the commercial rules of the American
Arbitration Association, and any award or decision made in such arbitration
shall be binding and final upon the parties hereto to the maximum extent
permitted by law. Notwithstanding the foregoing, each party reserves the right
(and the other party agrees not to contest such right) to seek injunctive relief
and other equitable remedies in a court of competent jurisdiction, instead of
arbitration, with respect to a breach by the other party relating to the non-
breaching party's proprietary intellectual property.
10.5 Captions. The captions to the Articles and Paragraphs of this
--------
Agreement are for convenience only, and shall not be deemed of any force or
effect whatsoever in construing this Agreement.
10.6 Entire Agreement and Amendment. The terms and provisions
------------------------------
contained herein, including the Exhibits hereto, and the Screening Agreement,
constitute the entire agreement between the parties and shall supersede all
previous communications,
39
<PAGE>
representations, agreements or understandings, either oral or written, between
the parties hereto with respect to the subject matter hereof. No amendment to
this Agreement varying or extending the terms hereof will be binding upon either
party hereto unless in writing, signed by duly authorized officers of the
respective parties, and referencing this Agreement.
10.7 Assignment. This Agreement shall not be assignable by either
----------
party, except (i) to an Affiliate of such party, provided the assigning party
guarantees the performance of the Affiliate, (ii) as mutually agreed to in
writing in advance or (iii) to a successor to the entire pharmaceutical business
of such party, whether in a merger, sale of stock, sale of assets or other
transaction. Any permitted assignment shall be binding on the successors of the
assigning party. Any assignment or attempted assignment by either party in
violation of the terms of this Paragraph 10.7, shall be null and void and of no
legal effect.
10.8 Survival of Terms. The provision of Section 4.7 and of Article
-----------------
9 and any other terms of this Agreement which by their intent or meaning have
validity beyond the term of this Agreement shall survive the early termination
or expiration of this Agreement.
10.9 No Agency. Except as provided in Paragraph 6.3 herein, nothing
---------
herein shall be deemed to constitute either party as the agent or representative
of the other party or both parties as joint venturers or partners for any
purpose. Neurogen shall be an independent contractor, not an employee or
partner of Schering. Neither party shall be responsible for the acts or
omissions of the other party, and neither party will have authority to speak
for, represent or obligate the other party in any way without prior written
authority from the other party.
10.10 Severability. In the event that any provisions of this
------------
Agreement are held by a court of competent jurisdiction to be unenforceable
because it is invalid or in conflict with any law of any relevant jurisdiction,
(i) the validity of the remaining provisions shall not be affected, (ii) the
particular provision shall to the extent permitted by law be reasonably
construed and equitably reformed to be valid and enforceable, and (iii) the
rights and obligations of the parties hereto shall be construed and enforced as
if the Agreement did not contain the unreformed, particular provisions held to
be unenforceable.
10.11 Force Majeure. In the event that either party is prevented from
-------------
performing or is unable to perform any of its obligations under this Agreement
due to any act of God; fire; casualty; flood; any act, exercise, assertion or
requirement of governmental authority; epidemic; destruction of research or
40
<PAGE>
production facilities; riots; insurrection; inability to procure or use
materials, labor, equipment, transportation or energy; or any other cause beyond
the reasonable control of the party invoking this Paragraph 10.11 if such party
shall have used diligent efforts to avoid such occurrence, such party shall give
notice to the other party in writing promptly, and thereupon the affected
party's performance shall be excused and the time for performance shall be
extended for the period of delay or inability to perform due to such occurrence.
10.12 Publicity. Each party agrees not to issue a press release or
---------
otherwise publicize this Agreement or the contents of this Agreement except (i)
on the advice of its in-house or outside counsel, as required by law (e.q., any
Securities and Exchange Commission filings and disclosures) and provided the
party who will be disclosing has consulted with the other party to the extent
feasible prior to disclosure with respect to the substance of the disclosure, or
(ii) as consented to in advance by the other party in writing. Notwithstanding
the foregoing, each party shall have the right to issue an initial press
release, in the form attached hereto as Exhibit 6. Any matter disclosed as
permitted pursuant to this Paragraph 10.12 may be thereafter disclosed by either
party as it shall see fit, provided that any such further disclosure shall not
be more extensive than the original disclosure.
10.13 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original.
10.14 Other Programs. The parties acknowledge that each may
--------------
commercialize products other than Program Dopamine Agonists/Antagonists for the
treatment and/or prevention of schizophrenia, as a cognitive enhancer or for
other similar diseases and conditions and agree that such commercialization will
not constitute a breach by either party of its obligations under this Agreement.
10.15 Schering Performance. Schering Corporation and Schering-
--------------------
Plough, Ltd. shall act as one pursuant to this Agreement, each shall be jointly
and severally responsible for the performance of all of their collective
obligations hereunder, and any breach by one such entity shall constitute a
breach by both.
10.16 Cooperation. Neurogen agrees to cooperate with Schering to
-----------
furnish such information as shall be reasonably requested by the FDA or other
governmental authorities with respect to Licensed Products and Licensed
Combinations.
41
<PAGE>
10.17 Publication. Any manuscript by Schering or Neurogen and their
-----------
Affiliates describing the scientific results of the Research Program shall be
subject to the prior review of the non-publishing party at least thirty (30)
days prior to submission. Further, to avoid loss of patent rights as a result
of premature public disclosure of patentable information, the receiving party
shall notify the disclosing party in writing within thirty (30) days after
receipt of a disclosure whether the receiving party desires to file a patent
application on any invention disclosed in such scientific results in accordance
with Article 6 or otherwise. In the event that the receiving party desires to
file such a patent application, the disclosing party shall withhold publication
or disclosure of such scientific results until the earlier of (i) a patent
application is filed thereon, or (ii) the parties determine after consultation
that no patentable invention exists, or (iii) ninety (90) days after receipt by
the disclosing party of the receiving party's written notice of the receiving
party's desire to file such patent application. Further, if such scientific
results contain the information of the receiving party that is subject to use
and nondisclosure restrictions under Paragraph 4.7, the disclosing party agrees
to remove such information from the proposed publication or disclosure.
10.18 Solicitation. Neither party shall solicit or hire employees
------------
(or former employees of the other party within six (6) months of termination)
for employment during or for six (6) months after the expiration or termination
of the Research Program without the prior written consent of the other party.
10.19 Adverse Events Report. After the Effective Date and during the
---------------------
limited period Neurogen is conducting phase 1 clinical trials before the
transition to Schering occurs, Neurogen will report any adverse events to
Schering in accordance with the provisions of Exhibit 7 attached hereto and made
a part hereof.
42
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their duly authorized officers as of the date first
above written.
SCHERING-PLOUGH LTD. SCHERING CORPORATION
By:_________________________ By:__________________________
Title:______________________ Title:_______________________
NEUROGEN CORPORATION
By:_________________________
Title:______________________
43
<PAGE>
EXHIBIT 1
Elements of Fully Burdened Manufacturing Costs
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
<PAGE>
EXHIBIT 2
Neurogen Dopamine Agonist/Antagonist Technology
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
<PAGE>
EXHIBIT 3
Patent Rights
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
<PAGE>
EXHIBIT 4
Research Program
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
<PAGE>
EXHIBIT 5
CURRENCY CONVERSION POLICY
SUBJECT: TRANSLATION OF FOREIGN CURRENCIES
SECTION: ADMINISTRATIVE AND GENERAL
PURPOSE
-------
To provide general guidelines for the translation of foreign currency financial
statements to equivalent U.S. dollars.
See also the following specific-subject policies for additional related
information:
0406.1 Translation of Foreign Currencies: Special Situations - Hyper-
Inflationary Economics
0407 Current Bookkeeping Exchange Rates
5410 Foreign Currency Exposure Reporting
APPLICATION
-----------
Applies to Schering-Plough Corporation, its divisions and all subsidiaries
except those designated by the International Finance Committee and advised by
their respective division. These divisions and subsidiaries should follow
Finance Manual Policy No. 0406.1 - Translation of Foreign Currencies: Special
Situations and Hyper-Inflationary Economies.
DEFINITION
----------
Current Bookkeeping Exchange Rate - as published by Corporate Treasury, the
---------------------------------
exchange rate for assets and liabilities at the balance sheet date. For
revenues and expenses, the exchange rates published at the end of the previous
accounting period (prior month). See Finance Manual Policy No. 0407 - Current
Bookkeeping Exchange Rates.
Historical Exchange Rate - the rate in effect at the time the transaction was
------------------------
recorded in the original books of entry.
<PAGE>
POLICY/PROCEDURE
----------------
The procedure for translating foreign currencies follows. Where appropriate,
Divisions will initial and prepare supplemental detailed polices as required.
Statement of Income
-------------------
All elements of the Statement of Income of foreign subsidiaries, expressed in a
currency other than U.S. dollars, are translated into U.S. dollars at the
current bookkeeping exchange rates in effect at the end of the prior month.
. Exception: The foreign currency value of depreciation expense
applicable to the revaluation of fixed assets is not
translated to U.S. dollars nor reported in the
Statement of Income in accordance with U.S. Generally
Accepted Accounting Principles (GAAP).
Balance Sheet
-------------
Balance sheets of foreign subsidiaries, expressed in a currency other than U.S.
dollars, are translated into U.S. dollars at current bookkeeping exchange rates.
. Exceptions: Intercompany Investments (as defined in the Schering-
Plough Chart of Accounts) and Capital accounts are
translated at historical exchange rates.
Foreign currency values applicable to the revaluation
of fixed assets (i.e., Real Estate, Plant and Equipment
Revaluation and Real Estate Plant and Equipment,
Allowance for Depreciation Revaluation) are not
translated to U.S. dollars, nor reported in financial
statements prepared in accordance with U.S. GAAP.
The net difference resulting from translating a foreign currency Balance Sheet
to U.S. dollars is recorded and shown in the Foreign Currency Translation
Adjustment account (S-P COA #098-20) in the equity section of the Balance Sheet
and is not included in the determination of net income for the period. See
Financial Manual Policy No. 0406.1 - Translation of Foreign Currencies: Special
Situations and Hyper-Inflationary Economies for special situations.
2
<PAGE>
Retained Earnings
-----------------
Retained Earnings are translated to U.S. dollars at a composite exchange rate
determined by adding the U.S. dollars of all components of Retained Earnings as
follows:
. Beginning of Year Balance (S-P COA #095-10) - the U.S. dollar amount
-------------------------
reported at the end of the prior year as Retained Earnings-Ending
Balance. This figure cannot be restated nor revised. Any changes
must be recorded in the retained earnings adjustment account.
. Net Income (S-P COA #095-20) - from the Statement of Income.
----------------------------
. Dividends Declared (S-P COA #095-30/40) - translated and maintained at
------------------
the current bookkeeping exchange rate in effect at the end of the
month prior to declaration.
. Other Changes (S-P COA #095-90) - translated and maintained at the
-------------
historical rate of exchange.
. Fixed Asset Revaluation: Cumulative (S-P COA #096-00) - no U.S. dollar
------------------------------------
equivalent in accordance with U.S. GAAP.
. Ending Balance - arrived at by adding the U.S. dollar value of all the
--------------
components of Retained Earnings previously described.
Compliance with GAAP
--------------------
Prior to translation, financial statements of subsidiaries must be restated to
conform to GAAP in the United States. GAAP requires assets and liabilities
denominated in a currency other than the book currency of the subsidiary to be
revalued based on the current bookkeeping exchange rates. Any resulting
currency gain or loss is included as foreign exchange expense in the
determination of net income for the period.
Subsidiaries whose books are kept in U.S. dollars will, at the end of the
accounting period, revalue assets and liabilities, including intercompany
accounts denominated in a currency other than the book currency of the
subsidiary based on the current bookkeeping exchange rate. Any resulting U.S.
dollar gain or loss is recorded as foreign exchange expense (S-P COA #820-831)
in the determination of net income for the period.
3
<PAGE>
Sale or Liquidation of Foreign Subsidiary
-----------------------------------------
A sale or complete (or substantially complete) liquidation of the assets of a
foreign subsidiary requires the recognition in income of all or a portion of the
Translation Adjustment account (S-P COA #098-20) attributable to such entity in
measuring the gain or loss on sale or liquidation. For example, if 100%
ownership of a foreign subsidiary with a debit balance of $1 million in its
Translation Adjustment account was sold to a third party, any gain (loss) on the
sale would be reduced (increased) by the $1 million.
A partial sale by the parent of a foreign subsidiary's common shares to an
----
unrelated party would require that a pro-rata portion (based on the percentage
of ownership sold) of the Translation Adjustment account be included in
measuring the gain or loss on the sale, even if the sale involves only a
minority share in the subsidiary. For example, if the parent sold a 20% share
of the subsidiary to a third party, 20% of the Translation Adjustment account
for that subsidiary would be removed from the balance sheet and charged to
income (or expense). Therefore, if the subsidiary had a $1 million debit
balance in its Translation Adjustment account and 20% of its outstanding stock
was sold to another company at a gain of $500,000, the gain would be reduced by
a $200,000 charge from recognizing 20% of the Translation Adjustment account
into income. This would be reported on the parent company's books.
A liquidation must encompass substantially all of the assets of a subsidiary in
-----------
order to recognize the Translation Adjustment account in income. If the
liquidation is substantially complete even though the legal entity remains, the
entire Translation Adjustment account is recognized in income. A liquidation
that is not substantially complete (e.g., sale of product line) requires no
recognition of the Translation Adjustment account into income. The Translation
Adjustment account is recognized in income if the subsidiary is liquidated in
substance, not merely form. For example, if a legal entity of the Company is
liquidated, but the assets and operations of such entity are retained and merely
transferred to another Schering-Plough legal entity, no recognition of the
Translation Adjustment account into income is required. The issue of
liquidation is complex and the financial impact can be significant; therefore,
proposed accounting treatment of all potential liquidations must be reviewed and
approved by the Corporate Vice President -Controller, or designee, prior to
recording an official subsidiary record.
4
<PAGE>
RESPONSIBILITY
--------------
The chief financial officer, or designee, of each division/subsidiary is
responsible for implementation and adherence to this policy.
5
<PAGE>
EXHIBIT 6
Press Release
<PAGE>
Contact Ronald J. Asinari
(201) 822-7402
Neurogen Corporation
Stephen R. Davis
(203) 488-8201 X3016
Noonan/Russo Comm.
Susan Noonan
(212) 696-4455 X203
SCHERING-PLOUGH, NEUROGEN IN AGREEMENT
--------------------------------------
TO DEVELOP NEURO-PSYCHIATRIC DRUGS
----------------------------------
MADISON, N.J., and BRANFORD, CONN., June 15, 1995 --Schering-Plough Corporation
(NYSE:SGP) and Neurogen Corporation (NASDAQ:NRGN) today announced an agreement
to enter into a strategic alliance to develop and commercialize drugs for the
treatment of neuro-psychiatric disorders.
The collaboration, subject to approval by Schering-Plough's board of
directors, will seek to develop a new generation of pharmaceuticals that bind
selectively to specific dopamine receptor sub-types. Dopamine receptors have
been implicated in a number of disorders, including schizophrenia. By binding
to specific receptors, such new drugs may be more effective and have fewer side-
effects than currently marketed central nervous system drugs.
"We are pleased to join Neurogen in this agreement, which will expand
and complement Schering-Plough's ongoing efforts in central nervous system drug
research," said Richard J. Kogan, Schering-Plough president and chief operating
officer.
<PAGE>
"We look forward to working with Neurogen's scientists and are optimistic that
these efforts will lead to important new therapies," he added.
Harry H. Penner, Jr., Neurogen's president and chief executive
officer, said, "While this collaboration both secures our capital needs through
1997 and implements our ratcheted growth strategy, these were not our primary
considerations. Rather, Schering-Plough's experience in dopamine research
provides optimum possibility for synergy in an effort to bring novel drugs to
the market to treat schizophrenia and a variety of dopamine-mediated neuro-
psychiatric disorders," Penner said.
Neurogen's initial development efforts have been focusing on a
dopamine D4 antagonist (NGD 94-1), currently in Phase I clinical trials for
schizophrenia. The agreement gives Schering-Plough exclusive rights to all
therapeutic modalities resulting from Neurogen's dopamine discovery program and
rights to test certain compounds from Neurogen's combinatorial chemistry program
in selected Schering-Plough assays.
The agreement, with affiliated companies of Schering-Plough, provides
for Schering-Plough to make upfront payments of $17 million, to fund a two-to-
five year research program at Neurogen, to make certain milestone payments and
to fund the clinical development of drugs resulting from the collaboration. If
all milestones are met and the research program continues a full five years, the
payments to Neurogen will approximate $70 million.
2
<PAGE>
Schering-Plough will receive an exclusive worldwide license to market
products resulting from the collaboration, with Neurogen receiving royalties on
sales. Neurogen will retain an option to manufacture products resulting from
the collaboration for the U.S. market.
Neurogen Corporation, located in Branford, Conn., is a leading
neuropharmaceuticals company engaged in the design and development of a new
generation of highly receptor-specific psychotherapeutic drugs based on advances
in neurobiology, molecular biology and medicinal chemistry.
Schering-Plough Corporation, based in Madison, N.J., is a research-
based company engaged in the discovery, development, manufacturing and marketing
of pharmaceutical and health care products worldwide.
# # #
3
<PAGE>
EXHIBIT 7
Adverse Event Reporting Procedures
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
<PAGE>
SCHEDULE A
Screening Agreement
<PAGE>
TABLE OF CONTENTS
1. Definitions ............................................. 1
1.1 "Active Ingredient"................................ 1
1.2 "Affiliate"........................................ 1
1.3 "Analogs".......................................... 1
1.4 "Collaboration and License Agreement".............. 2
1.5 "Compound Mixture"................................. 2
1.6 "Earned Royalty"................................... 2
1.7 "Hit Compound"..................................... 2
1.8 "Hit Mixture"...................................... 2
1.9 "Homologs"......................................... 2
1.10 "Isomers"......................................... 3
1.11 "Net Sales"....................................... 3
1.12 "Neurogen Compound"............................... 3
1.13 "Patent Rights"................................... 3
1.14 "Priority Screen"................................. 3
1.15 "Royalty Bearing Compound"........................ 3
1.16 "Schering Compound"............................... 4
1.17 "Schering Relinquished Royalty Bearing Compound".. 4
1.18 "Secondary Screens"............................... 4
1.19 "Valid Claim"..................................... 4
1.20 "Derivative"...................................... 4
2. Provision of Neurogen Compounds ......................... 4
3. Neurogen Compound Mixture Screening ..................... 4
3.1 Schering Screening Obligation...................... 4
3.2 Neurogen Retained Screen Rights.................... 5
3.3 Schering Priority Screen Rights.................... 5
4. Hit Mixture Priority Rights ............................. 6
4.1 Confirmation of Hit Mixture and Hit Compound....... 6
5. Hit Compound Licensing 7
5.1 Availability for License of Hit Compound........... 7
5.2 Third Party Restrictions........................... 7
6. Disclosure of Data on Licensable Neurogen Compound ...... 8
8. Grant of License Rights by Neurogen ..................... 9
9. Provision of Schering Compounds ......................... 10
10. Screening of Schering Compounds ......................... 10
10.1 Notification of Screening Activity of Schering
Compound.......................................... 10
11. Royalty Limitations on Schering Compounds .............. 11
<PAGE>
12. License Fees and Royalty Payments ...................... 12
12.1 Royalty Bearing Compounds......................... 12
12.2 Milestone License Fee............................. 12
12.3 Royalty Rate and Duration......................... 13
13. When Royalties Payable ................................. 13
14. Direct Affiliate Licenses .............................. 14
15. Currency Conversions ................................... 14
16. Royalties Payable Only on Sales to Third Parties ....... 15
17. Royalty Payment Records ................................ 15
18. Compulsory Licenses .................................... 15
19. Schering Trademark Rights .............................. 15
20. Patent Extensions ...................................... 16
21. No Relinquishment of Rights by Schering to Schering
Compounds .............................................. 16
22. Royalties to Schering on Relinquished Compounds ........ 16
23. Medicinal Chemistry Diligence Requirements for Neurogen
Compounds .............................................. 17
24. Diligence Efforts after Commencement of Clinical Trials
for Neurogen Compounds ................................. 17
25. Termination for Due Diligence Failure .................. 17
26. Reimbursement for Neurogen Patent Costs ................ 18
27. Inventorship ........................................... 18
28. Enforcement of Neurogen Patents ........................ 18
29. No Combinatorial Libraries ............................. 19
30. Term ................................................... 19
31. Termination for Breach ................................. 19
32. Schering Voluntary Termination ......................... 20
33. Royalty Payments After Termination ..................... 20
34. Sale of Inventory After Termination .................... 20
ii
<PAGE>
35. Bankruptcy ............................................. 21
36. Licenses Terminated Upon Agreement Termination ......... 23
37. Warranties ............................................. 24
38. Indemnities of Schering ................................ 25
39. Indemnities of Neurogen ................................ 25
40. Qualifications to Indemnity Obligations ................ 25
41. Liability Insurance .................................... 26
42. Miscellaneous Terms .................................... 26
42.1 Confidentiality ................................ 26
42.2 Waiver ......................................... 27
42.3 Notices ........................................ 27
42.4 Applicable Law ................................. 28
42.5 Arbitration .................................... 28
42.6 Captions ....................................... 28
42.7 Entire Agreement and Amendment ................. 28
42.8 Assignment...................................... 29
42.9 Survival of Terms............................... 29
42.10 No Agency ..................................... 29
42.11 Severability................................... 29
42.12 Force Majeure ................................. 29
42.13 Publicity ..................................... 30
42.14 Counterparts .................................. 30
42.15 Solicitation .................................. 30
42.16 Schering Performance .......................... 30
iii
<PAGE>
SCREENING AGREEMENT
THIS SCREENING AGREEMENT (hereinafter the "Agreement"), made as of the
_____ day of June, 1995, by and between NEUROGEN CORPORATION, a corporation of
the State of Delaware, (hereinafter "Neurogen") and SCHERING CORPORATION, a
corporation of the State of New Jersey, and SCHERING-PLOUGH LTD., a Swiss
corporation (hereinafter collectively called "Schering"). This Agreement shall
be effective (the "Effective Date") on the date that the Collaboration and
License Agreement, as hereinafter defined, becomes effective.
W I T N E S S E T H:
WHEREAS Schering and Neurogen desire to permit, under the terms of
this Agreement, screening of certain of their library compounds by the other
party for activity and to agree upon terms for future development and commercial
exploitation of compounds found to be active as a result of such screening
efforts.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and conditions hereinafter set forth, the parties agree as follows:
1. Definitions. As used in this Agreement, the following terms have
-----------
the following meanings, and the singular shall include the plural and vice versa
as the context requires:
1.1 "Active Ingredient" shall mean any ingredient having independent
therapeutic, prophylactic or diagnostic effect.
1.2 "Affiliate" shall mean any company or organization controlling,
controlled by, or under common control with Schering or Neurogen, as the case
may be. For this purpose, the terms control, controlled and controlling mean
the possession of the power to direct or cause the direction of the management
and the policies of an entity, whether through ownership directly or indirectly
of over fifty percent (50%) of the stock entitled to vote, and for non-stock
organizations, the right to receive over fifty percent (50%) of the profits or
by contract or otherwise.
1.3 "Analogs" shall mean
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
<PAGE>
1.4 "Collaboration and License Agreement" shall mean the
Collaboration and License Agreement of which this Agreement is a schedule
executed by the parties simultaneously with the execution of this Agreement.
1.5 "Compound Mixture" shall mean coded mixtures of Neurogen
Compounds.
1.6 "Earned Royalty" shall mean the following percentages of Net
Sales of each product containing a Royalty Bearing Compound as a single Active
Ingredient and combination product containing a Royalty Bearing Compound and an
additional compound both as Active Ingredients:
A. with respect to aggregate annual worldwide Net Sales of any
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
of Net Sales during any calendar year;
B. with respect to worldwide Net Sales of any
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
"Earned Royalty" means the percentage described in subparagraph A above
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
1.7 "Hit Compound" shall mean a compound within a Hit Mixture that is
shown to have activity as described in Paragraph 4.
1.8 "Hit Mixture" shall be a Compound Mixture which has activity as
described in Paragraph 4 in a Priority Screen or a Secondary Screen.
1.9 "Homologs" shall mean
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
2
<PAGE>
1.10 "Isomers" shall mean
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
1.11 "Net Sales" shall mean the gross amounts received by Schering,
its Affiliates and sublicensees as a result of sales worldwide of products
containing Royalty Bearing Compounds by Schering, its Affiliates and
sublicensees to third party customers after deduction of (i) cash, trade and/or
quantity discounts actually allowed; (ii) amounts repaid or credited by reason
of rejections, damaged goods or returns of goods, recalls, rebates (including
government mandated rebates) or because of retroactive price reductions; (iii)
freight, postage, and duties paid for and separately identified on the invoice
or other documentation maintained in the ordinary course of business; and (iv)
excises, sales taxes, duties and the like (the legal incidence of which is on
the purchaser). A "sale" of product containing a Royalty Bearing Compound is
deemed to occur upon the earliest of invoicing, shipment or transfer of title to
a person other than Schering or its Affiliate or sublicensee.
1.12 "Neurogen Compound" shall mean coded compounds supplied to
Schering in Compound Mixtures pursuant to this Agreement.
1.13 "Patent Rights" shall mean (i) claims of all United States and
foreign patent applications and issued patents filed or issued during the term
of this Agreement owned or controlled, in whole or part, by either party or its
Affiliates (including, without limitation, patents with joint inventors where at
least one inventor is obligated to assign the invention to the Party or an
Affiliate) which are subject to grant of license by the party to the other party
pursuant to the express terms of this Agreement; and (ii) any reissues,
extensions (or statutory or other governmental equivalents thereto),
substitutions, confirmations, registrations, revalidations, additions,
continuations, continuations-in-part or divisions of or to any of the foregoing
which are hereafter granted. A Schedule 1.13 to this Agreement will be provided
by the parties in a timely fashion for any identified patents included in the
Patent Rights and shall be updated periodically thereafter (at least annually)
so as to be kept current.
1.14 "Priority Screen" shall be the screening assays listed in
Schedule A.
1.15 "Royalty Bearing Compound" shall be as defined in Paragraph 12
of this Agreement.
3
<PAGE>
1.16 "Schering Compound" shall mean Schering compounds supplied to
Neurogen pursuant to this Agreement.
1.17 "Schering Relinquished Royalty Bearing Compound" shall be as
defined in Paragraph 12 of the Agreement.
1.18 "Secondary Screens" shall be Schering screening assays other
than Priority Screens.
1.19 "Valid Claim" shall mean any claim contained in any pending
patent application or issued patent (including reissues, reexaminations and
extensions) included within the Patent Rights which has not been abandoned or
declared invalid in a non-appealable order, as the case may be, and which would
be infringed by the manufacture, use, sale or offer to sell of a product
containing a Royalty Bearing Compound hereunder in the absence of the license(s)
granted in this Agreement. Notwithstanding the foregoing, claims in patent
applications which have been pending more than five (5) years in a country shall
be excluded from this definition unless and until a patent is issued in such
country.
1.20 "Derivative" shall mean
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
2. Provision of Neurogen Compounds. Neurogen will provide Schering
-------------------------------
with
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
coded compounds in Compound Mixtures per year delivered quarterly or as
otherwise agreed during the year for two (2) years beginning on the Effective
Date. Neurogen will provide reasonable quantities of Compound Mixtures
(minimums to be agreed upon) formatted for use in Schering's high throughput
FLASH automated screening system. Neurogen will package and ship Compound
Mixtures to Schering at Neurogen expense. Schering agrees not to attempt any
structure analysis of the Compound Mixtures or compounds within Compound
Mixtures. Any unused samples shall be destroyed or returned to Neurogen as
directed by Neurogen and at the expense of Neurogen.
3. Neurogen Compound Mixture Screening.
-----------------------------------
3.1 Schering Screening Obligation. Schering shall screen the
-----------------------------
Compound Mixtures in four (4) Priority Screens and any
4
<PAGE>
one (1) or more of twelve (12) additional Secondary Screens within twelve (12)
months of receipt of each such Compound Mixture(s).
3.2 Neurogen Retained Screen Rights. Notwithstanding anything in the
-------------------------------
Agreement to the contrary, (i) Schering agrees not to screen any Compound
Mixtures or any Neurogen Compound within Compound Mixtures (or Homologs,
Isomers, Analogs or Derivatives thereof) in any screen for Central Nervous
System ("CNS") activity and not to otherwise use or permit the use of such
compounds for the discovery or development of drugs for CNS activity, except to
the extent (A) the applicable compounds are documented to have been conceived
and reduced to practice by Schering or a Schering Affiliate without using (x)
any Compound Mixture or Neurogen Compound within a Compound Mixture (including
any known compound structure information) or (y) material elements of the
intellectual property contained in the Neurogen Patent Rights or other Neurogen
proprietary intellectual property disclosed hereunder, and (ii) Neurogen will
have no limitation, except with respect to Priority Screens as previously stated
in this Paragraph, on screening any of its compounds for its own account prior
to Schering notifying it of a Hit Mixture. For purposes of this Agreement "CNS
activity" means activity affecting behavior by impacting the functioning of
neurotransmitters and intended for the treatment of human psychiatric or
neurological diseases. Included, without limitation, in this definition are
drugs for the treatment of schizophrenia and related psychoses, depression,
anxiety, cognition (including drugs for learning, memory and Alzheimer's
disease), epilepsy, stress, eating disorders, sleep disorders, stroke,
Parkinson's disease, ALS and affective disorders (e.g., mania, bipolar
disorders). Excluded from this definition are drugs whose primary activity is
against another disease/target that secondarily affects the CNS as exemplified
by, but not limited to, the following: anti-cancer drugs that affect tumors in
the CNS; cytokine modulating drugs that affect immunologic function within the
CNS; and drugs whose target might be the CNS but whose ultimate action is not
the CNS (e.g., a central alphaadrenergic agonist for the treatment of
hypertension).
3.3 Schering Priority Screen Rights. Neurogen agrees that, for a
-------------------------------
period of two (2) years after the Effective Date, but in any event at least
twelve (12) months after receipt of any Compound Mixtures, it will not grant
rights to another party to screen the Compound Mixtures (or individual Neurogen
Compounds contained therein) in any Priority Screen nor itself directly or
indirectly undertake such screening. In furtherance of this obligation,
Neurogen will be permitted to reveal to third parties the identity of Schering's
Priority Screens, provided it does not identify Schering as being associated
with the Priority Screens. Schering will not be required to initially reveal
the identity of
5
<PAGE>
Secondary Screens to Neurogen, and Neurogen will be free to enter into future
screening agreements without any obligation to deter third parties or itself
from running a Secondary Screen.
4. Hit Mixture Priority Rights. If Schering identifies and confirms
---------------------------
a screening Hit Mixture before an authorized third party and elects to pursue
the Hit Mixture (all as described in Paragraphs 4-6 herein) Schering rights will
take precedence.
4.1 Confirmation of Hit Mixture and Hit Compound.
--------------------------------------------
(a) Initial Hit Mixture. If Schering identifies a Hit Mixture as a
-------------------
result of screening a Compound Mixture and wishes to pursue the Hit Mixture, it
will notify Neurogen of the coded number of the Hit Mixture and that Schering
has identified activity.
(b) Confirmation of Hit Mixture. Upon notification of a Hit Mixture,
---------------------------
Neurogen will then send additional amounts of the Hit Mixture at Neurogen's
expense to Schering within thirty (30) days of Schering notification so that the
hit may be confirmed and the potency of the compounds in those Hit Mixtures
established. Schering shall notify Neurogen within sixty (60) days of receiving
such additional Hit Mixture whether or not it has confirmed the hit.
(c) Hit Compound Confirmation. Upon any such confirmation, Neurogen
-------------------------
will provide at Neurogen's expense within thirty (30) days of Schering
confirmation of the Hit Mixture in accordance with Paragraph 4.1 (b), an amount
of each of the compounds in the Hit Mixture so that Schering may further confirm
the coded Hit Compound(s) producing the hit and determine the quality of the
hit. Schering shall notify Neurogen within sixty (60) days of receiving such
coded compounds whether or not it has confirmed the hit.
(d) Schering Notification. Assuming timely supply of materials from
---------------------
Neurogen, Schering will notify Neurogen whether or not it has identified
activity as a result of screening a Compound Mixture within one hundred eighty
(180) days of receiving such Compound Mixture. Any unused samples shall be
destroyed or returned to Neurogen as directed by Neurogen and at the expense of
Neurogen. After notification of an initial Hit Mixture in accordance with
Paragraph 4.1 (a) by Schering and until the earlier of (i) the applicable period
contemplated within this Paragraph 4.1 and paragraphs 6 and 7 has expired or
(ii) Neurogen has notified Schering of the unavailability of the applicable
Neurogen Compound for licensing, Neurogen will not undertake any new screening
efforts on the Hit Mixture.
6
<PAGE>
(e) Minimum Screening Activity. With respect to each notification or
--------------------------
confirmation of a hit described in this Paragraph 4, minimum levels of activity
which must be obtained before a notification or confirmation may be made are
greater than fifty percent (50%) inhibition at the screening concentration. If
the foregoing criteria does not reasonably apply to the relevant screen, the
parties will agree to a comparable but different minimum level criteria for the
applicable screen.
5. Hit Compound Licensing.
----------------------
5.1 Availability for License of Hit Compound. Within thirty (30)
----------------------------------------
days of a notification by Schering of its confirmation of a Hit Compound
pursuant to Paragraph 4.1(c), Neurogen will notify Schering whether Neurogen can
exclusively grant its entire right, title and interest, if any, in the Hit
Compound or whether it cannot make such a grant because there are contractual
restrictions, including other screening agreements with third parties (which
shall not conflict with the applicable provisions in Paragraph 3.3 of this
Agreement) which prevent Neurogen from granting such rights to Schering or
because Neurogen has previously identified activity through screening and is
actively pursuing development of such Hit Compound or a Homolog, Isomer, Analog
or Derivative of the Hit Compound with respect to such activity.
5.2 Third Party Restrictions.
------------------------
(a) As of the Effective Date there are no third party agreements,
except and to the extent generally summarized in Exhibit A attached hereto and
made a part of this Agreement, that could impose such third party contractual
restrictions described in Paragraph 5.1. Neurogen will promptly notify Schering
of the existence of any future third party screening agreements which contain
exclusive rights analogous to (but which shall not conflict with) Schering's
Priority Screen rights hereunder. Such analogous third party screen rights
shall be added to Exhibit A effective on the date of Neurogen's notification.
Schering agrees not to thereafter screen Compound Mixtures or Hit Compounds,
Analogs, Homologs, Isomers, and Derivative in any such screens.
(b) It is expressly understood that Neurogen may enter into screening
agreements with other parties with respect to Neurogen Compounds and if any such
party notifies Neurogen of a Hit Mixture prior to any such notification of
Schering, Schering shall have no rights in the Hit Mixture or any Hit Compound
within the Hit Mixture, or Homologs, Isomers, Analogs or Derivatives thereof,
except to the extent (A) the applicable compounds are documented to have been
conceived and reduced to practice by Schering or a Schering Affiliate without
using (x)
7
<PAGE>
any Compound Mixture or Neurogen Compound within a Compound Mixture or (y)
material elements of the intellectual property contained in the Neurogen Patent
Rights or other Neurogen proprietary intellectual property disclosed to Schering
hereunder. If the Hit compound is not available, Neurogen will provide a
general written description of the reasons the Hit Compound is not available.
6. Disclosure of Data on Licensable Neurogen Compound. If Neurogen
--------------------------------------------------
determines that the Hit Compound is available to Schering and pursuant to
Paragraph 5.1 notifies Schering of availability of the Hit Compound, Neurogen
will provide to Schering within sixty (60) days of such notification the Hit
Compound structure, data in its possession, if any, relating to
physical/chemical properties, other biological activities known or tested by
Neurogen, safe handling restrictions, as well as information regarding ownership
rights of the Hit Compound and any proprietary position of Neurogen or possible
third party proprietary position known to Neurogen which may be legally
disclosed by Neurogen to Schering.
7. Notification of Election to License Neurogen Compound. Within
-----------------------------------------------------
sixty (60) days after Neurogen confirmation that it has supplied all of the
information pursuant to Paragraph 6, Schering will confirm in writing to
Neurogen whether or not it will undertake development efforts with respect to
the Hit Compound and will provide a summary of its screening data for the Hit
Compound to Neurogen. If Schering elects not to undertake development, Neurogen
will be free thereafter to use the screening results as it sees fit, and
Schering will not thereafter use or permit the use for drug discovery and
development purposes or otherwise of the Hit Compound or Homologs, Isomers,
Analogs or Derivatives thereof (including any known compound structure
information), except to the extent (A) the applicable compounds are documented
to have been conceived and reduced to practice by Schering or a Schering
Affiliate without using (x) any Compound Mixture or Neurogen Compound within a
Compound Mixture or (y) material elements of the intellectual property contained
within the Neurogen Patent Rights or other Neurogen proprietary intellectual
property disclosed to Schering hereunder. If Schering elects to undertake
development of the Hit Compound, then Neurogen will not thereafter itself use or
thereafter agree with a third party to permit the use of the Hit Compound, any
then existing Homologs, Isomers, Analogs or Derivatives thereof of Neurogen or
an Affiliate, any related drug structure information, or Schering screening
results except to the extent (A) the applicable compounds are documented to have
been conceived and reduced to practice by Neurogen or a Neurogen Affiliate
without using (x) any Compound Mixture or Neurogen Compound within a Compound
Mixture or Homologs, Isomers, Analogs or Derivatives of the Hit Compound
selected by Schering existing
8
<PAGE>
at the time of Schering's election or (y) any material elements of the
intellectual property contained within the Patent Rights, or (B) in the event of
Schering's relinquishment of its rights in such compounds as provided herein, or
(C) notwithstanding anything herein to the contrary, Neurogen shall retain its
rights to discover, develop and commercialize such compounds for CNS activity.
8. Grant of License Rights by Neurogen. Subject to Paragraph 4 and
-----------------------------------
the Neurogen termination rights described below, at the time Schering notifies
Neurogen of Schering's election to develop a Hit Compound, Neurogen will be
deemed to have granted (subject to Paragraph 37 (e)) Schering exclusive royalty
bearing, worldwide license rights (Schering Corporation for the United States,
including its territories and possession, and ScheringPlough Ltd. for the rest
of the world), in and under whatever right, title or interest Neurogen has, if
any, for all pharmaceutical uses (subject to Paragraph 29 herein), other than
for the therapeutic or prophylactic treatment or diagnosis of CNS activity, with
right of sublicense to third parties, in any existing or future Neurogen and
Neurogen Affiliate(s) intellectual property (including without limitation any
applicable patent applications or issued patents) for the limited purpose of
making, using, selling or offering to sell such Hit Compound and Isomers,
Homologs, Analogs and Derivatives thereof. Any such patent applications or
issued patent shall be deemed included in the Neurogen Patent Rights.
Notwithstanding the preceding language in this Paragraph 8, Schering is not
granted licenses hereunder with respect to (i) future intellectual property
licensed to Neurogen or its Affiliates or (ii) future applicable patent
applications or issued patents) for the limited purpose of making, using,
selling or offering to sell such Hit Compound and Isomers, Homologs, Analogs and
Derivatives thereof. Any such patent applications or issued patent shall be
deemed included in the Neurogen Patent Rights. Notwithstanding the preceding
language in this Paragraph 8, Schering is not granted licenses hereunder with
respect to (i) future intellectual property licensed to Neurogen or its
Affiliates or (ii) future intellectual property which relates to making or using
Hit Compounds and Isomers, Homologs, Analogs or Derivatives thereof unless such
intellectual property is created as part of implementing the terms of this
Agreement. Except for the rights specifically granted herein, Neurogen reserves
all rights to Neurogen Compounds, Neurogen Patent Rights and its know-how and
reserves the right to utilize or allow third parties to utilize such compounds
and intellectual property in any manner in its discretion consistent with the
terms of this Agreement. In the event that a Neurogen Royalty Bearing Compound
is discovered to have therapeutic or prophylactic effect for the treatment or
diagnosis of CNS activity, the parties will promptly meet, without obligation,
to discuss licensing terms for license of
9
<PAGE>
such indication(s) to Schering. The right of Schering to grant sublicenses to
unaffiliated persons and to Affiliates under this Agreement is subject to the
conditions that:
(a) Each sublicense shall be consistent with all of the terms and
conditions of this Agreement;
(b) Schering shall remain responsible to Neurogen for all of each
sublicensee's obligations under the sublicense;
(c) Each sublicense shall provide for its continuation, at the sole
option of Neurogen, following early termination of Schering's license rights
from Neurogen and its assignment to Neurogen;
(d) Schering shall advise Neurogen of its intent to grant any
sublicense, including identification of the sublicensee, prior to concluding any
sublicense agreement;
(e) Schering shall forward to Neurogen an accurate and complete copy
of each sublicense promptly following execution thereof.
9. Provision of Schering Compounds. At both the option of Neurogen
-------------------------------
and Schering, Schering will provide a mutually agreeable number of Schering
Compounds, during the two (2) year period after the Effective Date on a mutually
agreeable delivery schedule in reasonable quantities (minimums to be agreed
upon) and formatted for use in up to five (5) Neurogen nonPfizer screens which
shall be mutually agreed upon in advance in writing. Schering will package and
ship the Schering Compounds to Neurogen at Schering expense. Neurogen agrees
not to attempt or permit any structure analysis of the Schering Compounds or any
other compounds described in Paragraph 10.1(b)(2) herein disclosed to Neurogen
hereunder. It is further agreed that Neurogen will have no obligation to accept
for screening any of the Schering Compounds. Any unused samples shall be
destroyed or returned to Schering as directed by Schering and at the expense of
Schering.
10. Screening of Schering Compounds.
-------------------------------
10.1 Notification of Screening Activity of Schering Compound.
-------------------------------------------------------
(a) Initial Hit Mixture. With respect to Schering Compounds where
-------------------
Neurogen identifies screening activity, within thirty (30) days after obtaining
positive screening results, Neurogen will notify Schering of the coded identity
of the Schering Compound along with a summary of the nature of the activity
identified. Minimum levels of activity which must be
10
<PAGE>
obtained before a notification will be made are greater than 50% inhibition at
the screening concentration. If the foregoing criteria does not reasonably
apply to the relevant screen, the parties will agree to a different but
comparable minimum level criteria for the applicable screen.
(b) Schering Notification. Schering shall notify Neurogen within
---------------------
sixty (60) days thereafter disclosing the compound structure and indicating to
Neurogen whether, prior to notification by Neurogen, Schering identified the
same or a different activity for the Schering Compound. Schering shall provide
with the notification reasonable documentation substantiating its position.
Schering will not owe royalties to Neurogen with respect to:
(1) any Schering Compound which Schering has previously identified as
having the same activity and at approximately the same level of activity as
that determined by Neurogen, or
(2) any compounds owned or controlled by Schering having such
activity which has resulted from a logical series of medicinal chemistry
changes to a Schering Compound described in (1) above which would have been
reasonably anticipated by a research chemist skilled in the art, occurring
prior to Neurogen's identification of such activity,
unless and to the extent, in the case of (1) or (2) above, Neurogen's screening
results contain materially different information than Schering's screening
results which materially aid Schering's drug development efforts, in which case
Schering will pay a royalty of
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
hereunder to Neurogen.
In the event that Schering has identified a different activity,
Schering will only owe royalties to Neurogen in the event of later exploitation
exclusively with respect to the activity identified by Neurogen.
11. Royalty Limitations on Schering Compounds. After disclosure of a
-----------------------------------------
Schering Compound structure by Schering to Neurogen, Neurogen will not
thereafter use or permit the use for drug discovery and development purposes or
otherwise of the screening results or the Schering Compound or any other
Schering Royalty Bearing Compound or drug structure information except to
11
<PAGE>
the extent (A) such compounds are documented to have been conceived and reduced
to practice by Neurogen or a Neurogen Affiliate without using (x) any Schering
Compound or any compounds described in Paragraph 10.1(b)(2) herein disclosed to
Neurogen hereunder (including any known compound structure information) or (y)
material elements of the Schering intellectual property disclosed to Neurogen
hereunder. Subject to the royalty payment obligation limitations in Paragraph
10 herein, if Schering commercializes a Schering Compound for activity first
identified by Neurogen in a Neurogen screen pursuant to this Agreement or any
other compound resulting from a logical series of medicinal chemistry
modifications to such compound which would have been reasonably anticipated by a
research chemist skilled in the arts which also has the same activity identified
by Neurogen, Schering will pay Neurogen royalties set out in Paragraph 12.2
herein on Net Sales of pharmaceutical products containing such compound with
respect to the activity identified by Neurogen and with respect to any other
activity, unless and to the extent Schering reasonably establishes, through IMS
or other mutually agreeable pharmaceutical drug sales databases or as otherwise
mutually agreed by the parties, sales for other indication(s), in which case
royalties will be payable only with respect to the Neurogen identified activity.
12. License Fees and Royalty Payments.
---------------------------------
12.1 Royalty Bearing Compounds.
-------------------------
(a) A "Royalty Bearing Compound" shall mean (x) a Neurogen Hit
Compound or Analog, Homolog, Isomer or Derivative thereof, except for compounds
independently discovered by Schering or its Affiliates in the manner expressly
described in this Agreement ("Neurogen Royalty Bearing Compound") or (y) a
Schering Compound or any other compound resulting from a logical series of
medicinal chemistry changes to a Schering Compound
provided commercialization is based on activity first identified by Neurogen
("Schering Royalty Bearing Compound").
(b) A "Schering Relinquished Royalty Bearing Compound" shall mean a
Neurogen Hit Compound or Homolog, Isomer, Analog or Derivative thereof which has
been relinquished by Schering in accordance with Paragraph 25 herein.
12.2 Milestone License Fee. For each Neurogen Royalty Bearing
---------------------
Compound and each Schering Royalty Bearing Compound, Schering will pay Neurogen
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
12
<PAGE>
Each such milestone payment should be paid within thirty (30) days of such IND
submission. Schering shall notify Neurogen of each such benchmark filing within
thirty (30) days of each filing.
12.3 Royalty Rate and Duration.
-------------------------
(a) For any product containing a Royalty Bearing Compound exploited
by or on behalf of Schering, an Affiliate, or Licensee, Schering will pay
(Schering Corporation with respect to Net Sales in the United States, including
its territories and possessions, and Schering-Plough Ltd. with respect to the
rest of the world) Earned Royalty with respect to Net Sales of such product
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
Thereafter, with respect to each country separately, Schering, its Affiliates
and sublicensees shall have no further obligation to pay Neurogen with respect
to continuing Net Sales.
(b) Notwithstanding anything in this Agreement to the contrary if any
product containing a Royalty Bearing Compound
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
the parties shall equitably agree on commercially reasonable Earned Royalty
rates with respect to such sales to provide substantially equivalent payments as
provided in sub-paragraph A of Paragraph 1.6 herein to what would have been paid
if such unfinished product had been converted by Schering to finished product
and Earned Royalty was paid on Net Sales of the finished product.
13. When Royalties Payable. Earned Royalties shall be payable on the
----------------------
last business day
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
during the term of this Agreement, upon the commencement of Net Sales of the
applicable product containing a Royalty Bearing
Compound.
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
13
<PAGE>
SECURITIES AND EXCHANGE COMMISSION.]
14. Direct Affiliate Licenses. Whenever Schering shall reasonably
-------------------------
demonstrate to Neurogen that, in order to facilitate direct royalty payments by
an Affiliate, it is desirable that a separate license agreement be entered into
between Neurogen and such Affiliate, Neurogen will grant such licenses directly
to such Affiliate by means of an agreement which shall be consistent with all of
the provisions hereof, including indemnification directly from such Affiliate,
provided that Schering guarantees the Affiliate's obligations under such
agreement or otherwise provides to Neurogen assurances of performance
satisfactory to Neurogen in its sole discretion.
15. Currency Conversions. Earned Royalty shall be deemed payable by
--------------------
the entity making the Net Sales from the country in which earned in local
currency and subject to foreign exchange regulations then prevailing. Earned
Royalty payments shall be made in United States dollars to the extent that free
conversion to United States dollars is permitted. The rate of exchange to be
used in any such conversion from the currency in the country where such Net
Sales are made shall be the commercial rate of exchange prevailing in the United
States on the last day of the calendar quarter for which such payments are made
as customarily quoted for use for currency conversions between Schering and its
Affiliates. The current applicable Schering policy is attached hereto and made
a part of this Agreement as Exhibit B. No changes to such policy shall result
in a reduction in payments which would have been due in the absence of such
change. If, due to restrictions or prohibitions imposed by national or
international authority, payments cannot be made as aforesaid, the parties shall
consult with a view to finding a prompt and acceptable solution, and Schering
will, from time to time, deal with such monies as Neurogen may lawfully direct
at no additional out-of-pocket expense to Schering. Notwithstanding the
foregoing, if Earned Royalties in any country cannot legally be remitted to
Neurogen within six (6) months after the end of the calendar quarter during
which they are earned, then Schering shall be obligated to deposit the Earned
Royalties in a bank account selected by Neurogen in such country in the name of
Neurogen. If free conversion of such funds to United States dollars is not
possible within twelve (12) months after the end of the calendar quarter in
which such royalties were earned, Schering shall pay to Neurogen at such time
the United States dollar equivalent (calculated as of the time earned) of such
funds (including any interest earned from the deposit of local currency), and
the local currency shall become the property of Schering. Earned Royalty
payable shall be net of any foreign withholding taxes due and payable by
Schering, an Affiliate or sublicensee, as the case may be, it being understood
that such withholding taxes are the obligation of Neurogen. Schering shall
14
<PAGE>
forward to Neurogen in a timely manner all tax receipts relating to such
withholding taxes.
16. Royalties Payable Only on Sales to Third Parties. No Earned
------------------------------------------------
Royalty shall be payable in respect of sales between and among Schering, its
Affiliates and sublicensees, except to Affiliates who are end-user customers, it
being understood that royalties are to be paid only upon resale to independent
third parties.
17. Royalty Payment Records. Schering shall maintain and cause its
-----------------------
Affiliates to maintain books of account and adequate records of all Net Sales,
including those made by sublicensees. Neurogen shall have the right, by an
independent public accounting firm reasonably acceptable to Schering, employed
by Neurogen and at its own expense, to examine pertinent books and records of
Schering (and its Affiliates who are sublicensed hereunder or to whom Neurogen
grants direct licenses hereunder) at all reasonable times (but not more often
than once each calendar year) for the purpose of determining and reporting to
Neurogen the correctness of royalty payments made hereunder; it being understood
that such examination with respect to any quarterly accounting period hereunder
shall take place not later than three (3) years following the expiration of said
period. The costs and expenses of such accounting firm shall be paid by
Schering with respect to any audit disclosing an underpayment by Schering of
more than five percent (5%). Any overpayments shall be promptly refunded to
Schering. The accounting firm representatives shall execute customary
confidential agreements prior to any examination. If it appears that
sublicensees are substantially underpaying royalties or under-reporting Net
Sales based on review of IMS or other similar data available for the sublicensed
territory, Schering will reasonably undertake an audit of the sublicensees
records and will promptly remit Neurogen's share, after collection, of any
under-reported royalties. The provisions of the preceding sentence shall in no
way limit Schering's other obligations under this Agreement (including, without
limitation its obligations under Paragraph 12) or Neurogen's right to seek any
available remedies against Schering, Schering's Affiliates or any Schering
sublicensee.
18. Compulsory Licenses. If Schering, its Affiliates or sublicensees
-------------------
are obliged by any governmental authority in any country in the world to grant
licenses under the Patent Rights to any third party to make, use, sell, or offer
to sell products containing Royalty Bearing Compounds at royalty rates less than
payable pursuant to this Agreement, then the Earned Royalty payable
prospectively hereunder with respect to Net Sales of such products in such
country after the third party has commercially introduced such licensed product
in the country shall be reduced to such lesser rate as long as it remains
effective.
15
<PAGE>
19. Schering Trademark Rights. Schering, its Affiliates and
-------------------------
sublicensees shall be free to use and to register in any trademark office in the
world any trademark for use with products containing Royalty Bearing Compounds
they desire in their sole discretion. Schering shall own all right, title and
interest in and to the trademark(s) in its own name or that of its Affiliates or
sublicensees during and after the term of this Agreement.
20. Patent Extensions. With respect to any issued patent included
-----------------
within the Neurogen Patent Rights licensed to Schering hereunder, Neurogen will
designate Schering as its agent for obtaining an extension of such patent or
governmental equivalent which extends the exclusivity of any of the patent
subject matter where available in any country in the world, or if not feasible,
at Schering's option, permit Schering to file in Neurogen's name or diligently
obtain such extension for Schering, its Affiliate(s) or sublicensee(s) at
Schering's expense. Furthermore, Neurogen agrees to provide reasonable
assistance, at no out-of-pocket expense, to facilitate Schering's efforts to
obtain any extension. Notwithstanding the above, nothing in this Paragraph 20
shall preclude Neurogen from obtaining extensions of Neurogen Patent rights in
the event Schering elects not to.
21. No Relinquishment of Rights by Schering to Schering Compounds.
-------------------------------------------------------------
Schering never relinquishes rights with respect to any Schering Royalty Bearing
Compounds during or after the term of this Agreement and only pays milestones
and royalties if it commercially exploits applicable Royalty Bearing Compounds
herein. Schering shall be obligated to exploit Schering Royalty Bearing
Compound(s) only in its sole discretion.
22. Royalties to Schering on Relinquished Compounds. In the event
-----------------------------------------------
that Schering relinquished rights, as specified in Paragraph 25 herein, to a Hit
Compound or Isomer, Homolog, Analog, or Derivatives thereof for which Schering
initially identified activity, if Neurogen either alone or through a third party
thereafter commercially exploits such Hit Compound or an Isomer, Homolog, Analog
or Derivative thereof, then, subject to additional payments which may be due
pursuant to Paragraph 25 herein, Neurogen will pay Schering royalties of
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
of any pharmaceutical product containing a Schering Relinquished Compound or an
Analog, Homolog, Isomer or Derivative thereof as an Active Ingredient under the
same general terms and conditions and subject to the same general limitations as
described in Paragraphs 11 and 12.3 herein; provided that this duty of royalty
16
<PAGE>
shall not apply to the extent (A) the applicable compounds are documented to
have been conceived and reduced to practice by Neurogen or a Neurogen Affiliate
without using (x) such relinquished compounds (or related compound structure
information) or (y) material elements of the intellectual property contained in
the Patent Rights relating to such relinquished compounds.
23. Medicinal Chemistry Diligence Requirements for Neurogen
-------------------------------------------------------
Compounds. In order for Schering to retain continuing rights hereunder with
respect to a related series (including back-ups) of Neurogen Royalty Bearing
Compounds, Schering must use continuing due diligence to conduct medicinal
chemistry to optimize a lead candidate suitable for clinical testing in humans.
Schering due diligence shall be equivalent to those efforts it uses with its own
compounds of similar value and status. However, in any event, if no medicinal
chemistry activities or other significant pre-phase 1 human clinical trial
activities are conducted for any consecutive six (6) month period or for any
cumulative six (6) months in any consecutive twelve (12) month period after
license of the Hit Compound, then such discontinuance shall be deemed a breach
of Schering's due diligence obligation. Schering will provide annual summary
reports of its development activities to confirm to Neurogen, and to enable
Neurogen to assess, whether Schering is meeting its minimum obligations.
Schering will not be obligated to identify structures of Homologs, Isomer,
Analogs or Derivatives to Hit Compounds in such reports prior to commencement of
applicable preclinical toxicity testing.
24. Diligence Efforts after Commencement of Clinical Trials for
-----------------------------------------------------------
Neurogen Compounds. Once Schering has begun human clinical trials with respect
------------------
to a related series of Neurogen Royalty Bearing Compounds, in order to retain
the license rights granted hereunder to the applicable series of Royalty Bearing
Compounds, Schering will be obligated to use continuing due diligence to develop
and commercialize a pharmaceutical product containing at least one (1) compound
in such series comparable to those efforts it uses for its own pharmaceutical
products of similar value and status. Schering will provide annual salary
reports of its development activities to confirm to Neurogen, and to enable
Neurogen to assets, whether Schering is meeting its minimum diligence
obligations.
25. Termination for Due Diligence Failure. If Schering fails to
-------------------------------------
exercise its due diligence obligations described in Paragraphs 23 or 24 herein,
(i) Neurogen, at its option, as its sole legal or equitable remedy may terminate
all applicable licenses to Schering with respect to the applicable series of
Royalty Bearing Neurogen Compounds, subject, however to the breach and cure and
arbitration provisions of this Agreement,
17
<PAGE>
and thereafter Schering will no longer have rights to such compounds and (ii)
Schering will be deemed to have granted to Neurogen a non-exclusive royalty-free
license under any of its applicable Patent Rights relating solely to making,
using, selling or offering to sell the applicable Neurogen Royalty Bearing
Compounds. Notwithstanding the foregoing, grants to Neurogen which involve
intellectual property rights requiring payment of royalties to third parties
shall be effective only if Neurogen promptly prospectively assumes in writing
the royalty and other obligations in such third party agreement(s) in a form
reasonably acceptable to Schering.
26. Reimbursement for Neurogen Patent Costs. Schering agrees to
---------------------------------------
reimburse Neurogen for reasonable outside attorney fees and other customary out-
of-pocket patent costs on a prospective basis incurred for obtaining patents
included in the Patent Rights for Neurogen Royalty Bearing Compounds in such
countries as Schering designates an interest, but in any event the United States
of America, the European Patent Organization, Japan, Australia and New Zealand,
provided Neurogen permits Schering to actively consult at its option in the
prosecution of applicable patent applications. Prospective payment obligations
shall not commence with respect to a series of related Neurogen Royalty Bearing
Compounds until after they have been licensed to Schering hereunder.
27. Inventorship. Inventorship of all patents related to Neurogen
------------
and Schering originating compounds will be determined as required by law.
However, ownership of all composition-of matter, use and process patents as they
relate to making, using, or selling or offering to sell Neurogen Compounds will
be assigned to Neurogen and ownership of all composition-of matter, use and
process patents as they relate to making, using, selling or offering to sell
Schering Compounds will be assigned to Schering. Such ownership interest and
assignment obligation will also apply to Homologs, Isomers, and Analogs of
Neurogen Compounds and compounds resulting from a logical series of medicinal
chemistry changes to a Schering Compound which would have been reasonably
anticipated by a research chemist skilled in the art, except to the extent
developed independently of disclosures of the intellectual property of the non-
inventing party made to the inventing party, which have substantially the same
activity as the parent compound. Ownership of Derivatives will follow
inventorship. Any assignment of patent ownership will be on an as-is where-is
basis without any express or implied warranties whatsoever from the assigning
party.
28. Enforcement of Neurogen Patents. Each party shall promptly
-------------------------------
notify the other of its knowledge of any potential infringement of the Neurogen
Patent Rights licensed to Schering hereunder by a third party. Neurogen has the
right, but not the
18
<PAGE>
obligation, to take all reasonable legal action necessary to protect the
Neurogen Patent Rights against infringements by third parties. If within three
(3) months following receipt of written notice from Schering, Neurogen fails to
take such action to halt the alleged infringement, Schering shall, in its sole
discretion, have the right to take such action as it deems warranted in its own
name or in the name of Neurogen or jointly. Each party agrees to render such
reasonable assistance as the prosecuting party may request. Costs of
maintaining any such action and damages recovered therefrom shall be paid by and
belong to the party paying for the action. However, if Schering consents to a
sublicense to any third party, which consent it shall not be required to give,
who, but for the license, would be infringing claims of issued patents included
in the Neurogen Patent Rights, then after deduction by Schering of any costs and
expenses of prosecuting any claims against the third party which are incurred by
Schering prior to licensing such party, the sales of such products by such third
party shall be included as a part of Net Sales.
29. No Combinatorial Libraries. Schering agrees that it will not
--------------------------
create or agree to allow any other party to create combinatorial libraries using
any Hit Compound or any Homolog, Analog, Isomer or Derivative of any Hit
Compound except to the extent (A) the applicable compounds are documented to
have been conceived and reduced to practice by Schering or a Schering Affiliate
without using (x) any Compound Mixture or Neurogen Compound within a Compound
Mixture (including any known compound structure) or (y) material elements of the
intellectual property contained in the Neurogen Patent Rights. Schering may,
however, use or optimize Hit Compounds using traditional medicinal chemistry
procedures. Schering agrees that it will not license to any third party any
Royalty Bearing Compound unless such party expressly agrees to be bound by the
provisions of this Paragraph 29. Notwithstanding the foregoing provisions in
this Paragraph, Schering and its Affiliates shall be permitted to supplement
traditional medicinal chemistry efforts with combinatorial chemistry techniques
solely for the purpose of improving the structure/activity relationship of any
Hit Compound or Homolog, Analog, Isomer or Derivative thereof.
30. Term. Subject to Paragraph 42.9, unless sooner canceled or
----
terminated under the provisions hereof, this Agreement shall expire thirty (30)
years after its Effective Date. To the extent not previously granted, Schering,
its Affiliates and sublicensees may after expiration use any remaining
proprietary rights granted by Neurogen pursuant to Article 2 at no additional
cost as they see fit.
31. Termination for Breach. Except as otherwise qualified in the
----------------------
express terms of this Agreement, either party
19
<PAGE>
may terminate this Agreement, at its option, by giving to the other party prior
notice in writing to that effect of not less than ninety (90) days, in the event
that the other party shall commit a material breach of this Agreement and shall
fail to cure such breach during the ninety (90) day period following receipt of
said notice from the non-breaching party, or such longer period as may be
necessary, provided the breaching party has commenced and continues its diligent
efforts to cure. If a breach relates solely to a related series of Neurogen
Royalty Bearing Compounds, then Neurogen or Schering as the case may be, may
terminate the Agreement only with respect to the applicable compound series.
Such cancellation and termination shall not release the breaching party from any
obligations hereunder incurred prior thereto nor prejudice any other rights or
remedies of the non-breaching party. In the event of termination of this
Agreement, or a divisible portion thereof, by a party pursuant to this
Paragraph, Neurogen and Schering shall have the rights and obligations set forth
in the applicable provisions of Paragraphs 33, 34 and 36 hereof.
32. Schering Voluntary Termination. Schering may terminate this
------------------------------
Agreement at any time upon one hundred eighty (180) days prior written notice to
Neurogen, and in such event, the parties shall have the rights and obligations
set forth in the applicable provisions of Paragraphs 33, 34 and 36 hereof;
provided that upon any such voluntary termination by Schering any unpaid amounts
payable pursuant to paragraph 2.8 of the Collaboration and Licensing Agreement
shall become immediately due and payable.
33. Royalty Payments After Termination. Upon any Agreement
----------------------------------
cancellation, expiration or termination, all Earned Royalties due for Net Sales
hereunder to the effective date of said cancellation or termination shall accrue
and become due and payable on the sixtieth (60th) day thereafter.
34. Sale of Inventory After Termination. In the event of the
-----------------------------------
cancellation or termination of any license rights with respect to products
containing Royalty Bearing Compounds other than for reason of material breach of
this Agreement by Schering relating to product safety, prior to the expiration
thereof or termination of this Agreement, inventory of terminated product may be
sold for up to six (6) months after date of termination, provided Earned
Royalties are paid thereon, and (i) the obligations of confidentiality hereunder
shall survive for the period specified herein, (ii) the obligations under
Paragraphs 38, 39, 40 and 41 herein shall survive any termination of the
Agreement, and (iii) all obligations of either party accruing prior to such
termination shall survive.
20
<PAGE>
35. Bankruptcy.
----------
(a) All rights and licenses granted under or pursuant to this
Agreement by Neurogen to Schering are, for all purposes of Section 365(n) of
Title 11 of the U.S. Code ("Title 11"), licenses of rights to intellectual
property as defined in Title 11. Neurogen agrees during the term of this
Agreement to create and maintain current copies or, if not amenable to copying,
detailed descriptions or other appropriate embodiments, to the extent feasible,
of all such intellectual property. If a case is commenced by or against
Neurogen under Title 11, then, unless and until this Agreement is rejected as
provided in Title 11, Neurogen (in any capacity, including debtor-in-possession)
and its successors and assigns (including, without limitation, a Title 11
trustee) shall, as Schering may elect in a written request, immediately upon
such request (i) perform all of the obligations provided in this Agreement to be
performed by Neurogen including, where applicable and without limitation,
providing to Schering portions of such intellectual property (including
embodiments thereof) held by Neurogen and such successors and assigns or
otherwise available to them or (ii) provide to Schering all such intellectual
property (including all embodiments thereof) held by Neurogen and such
successors and assigns or otherwise available to them. If a Title 11 case is
commenced by or against Neurogen, this Agreement is rejected as provided in
Title 11 and Schering elects to retain its rights hereunder as provided in Title
11, then Neurogen (in any capacity, including debtor-in-possession) and its
successors and assigns (including, without limitation, a Title 11 trustee) shall
provide to Schering all such intellectual property (including all embodiments
thereof) held by Neurogen and such successors and assigns or otherwise available
to them immediately upon Schering's written request therefor. Whenever Neurogen
or any of its successors or assigns provides to Schering any of the intellectual
property licensed hereunder (or any embodiment thereof) pursuant to this
Paragraph 37, Schering shall have the right to perform the obligations of
Neurogen hereunder with respect to such intellectual property, but neither such
provision nor such performance by Schering shall release Neurogen from any such
obligation or liability for failing to perform it. All rights, powers and
remedies of Schering provided herein are in addition to and not in substitution
for any and all other rights, powers and remedies now or hereafter existing at
law or in equity (including, without limitation, Title 11) in the event of the
commencement of a Title 11 case by or against Neurogen. Schering, in addition
to the rights, powers and remedies expressly provided herein, shall be entitled
to exercise all other such rights and powers and resort to all other such
remedies as may now or hereafter exist at law or in equity (including, without
limitation, Title 11) in such event. The parties agree that they intend the
foregoing Schering rights to
21
<PAGE>
extend to the maximum extent permitted by law, including without limitation for
purposes of Title 11, (i) the right of access to any intellectual property
(including all embodiments thereof) of Neurogen, or any third party with whom
Neurogen contracts to perform an obligation of Neurogen under the Agreement,
and, in the case of the third party, which is necessary for the development,
registration and manufacture of Licensed Compounds, Licensed Products, and
Licensed Combinations and (ii) the right to contract directly with any third
party described in (i) in this sentence to complete the contracted work.
(b) All rights and licenses granted under or pursuant to this
Agreement by Schering to Neurogen are, for all purposes of Section 365(n) of
Title 11 of the U.S. Code ("Title 11"), licenses of rights to intellectual
property as defined in Title 11. Schering agrees during the term of this
Agreement to create and maintain current copies or, if not amenable to copying,
detailed descriptions or other appropriate embodiments, to the extent feasible,
of all such intellectual property. If a case is commenced by or against
Schering under Title 11, then, unless and until this Agreement is rejected as
provided in Title 11, Schering (in any capacity, including debtor-in-possession)
and its successors and assigns (including, without limitation, a Title 11
trustee) shall, as Neurogen may elect in a written request, immediately upon
such request (i) perform all of the obligations provided in this Agreement to be
performed by Schering including, where applicable and without limitation,
providing to Neurogen portions of such intellectual property (including
embodiments thereof) held by Schering and such successors and assigns or
otherwise available to them or (ii) provide to Neurogen all such intellectual
property (including all embodiments thereof) held by Schering and such
successors and assigns or otherwise available to them. If a Title 11 case is
commenced by or against Schering, this Agreement is rejected as provided in
Title 11 and Neurogen elects to retain its rights hereunder as provided in Title
11, then Schering (in any capacity, including debtor-in-possession) and its
successors and assigns (including, without limitation, a Title 11 trustee) shall
provide to Neurogen all such intellectual property (including all embodiments
thereof) held by Schering and such successors and assigns or otherwise available
to them immediately upon Neurogen's written request therefor. Whenever Schering
or any of its successors or assigns provides to Neurogen any of the intellectual
property licensed hereunder (or any embodiment thereof) pursuant to this
Paragraph 37, Neurogen shall have the right to perform the obligations of
Schering hereunder with respect to such intellectual property, but neither such
provision nor such performance by Neurogen shall release Schering from any such
obligation or liability for failing to perform it. All rights, powers and
remedies of Neurogen provided herein are in addition to and not in substitution
for any and all other rights,
22
<PAGE>
powers and remedies now or hereafter existing at law or in equity (including,
without limitation, Title 11) in the event of the commencement of a Title 11
case by or against Schering. Neurogen, in addition to the rights, powers and
remedies expressly provided herein, shall be entitled to exercise all other such
rights and powers and resort to all other such remedies as may now or hereafter
exist at law or in equity (including, without limitation, Title 11) in such
event. The parties agree that they intend the foregoing Neurogen rights to
extend to the maximum extent permitted by law, including without limitation for
purposes of Title 11, (i) the right of access to any intellectual property
(including all embodiments thereof) of Schering, or any third party with whom
Schering contracts to perform an obligation of Schering under the Agreement,
and, in the case of the third party, which is necessary for the development,
registration and manufacture of Licensed Compounds, Licensed Products, and
Licensed Combinations and (ii) the right to contract directly with any third
party described in (i) in this sentence to complete the contracted work.
36. Licenses Terminated Upon Agreement Termination. In the event of
----------------------------------------------
termination of this Agreement or any portion thereof, the licenses applicable to
the portions terminated shall immediately terminate and all applicable license
rights shall revert to licensing party. Further, with respect to a termination
pursuant to Paragraph 32, Schering shall within ninety (90) days of such
termination grant to Neurogen an exclusive, royalty free world-wide license
(with the right to sublicense) under applicable Schering Patent Rights, and to
the extent feasible in light of then-existing third party rights therein,
(subject to reimbursement to Schering for its reasonable out-of-pocket expenses
in connection with granting such license), to the extent necessary or useful to
make, have made, use and sell products based on any Neurogen Royalty Bearing
Compounds(s) which were the subject of the termination. Notwithstanding the
foregoing, grants to Neurogen which involve intellectual property rights
requiring payments of royalties to third parties shall be effective only if
Neurogen promptly prospectively assumes in writing the royalty and other
obligations in such third party agreement(s) in a form reasonably acceptable to
Schering. Neurogen shall, and shall endeavor to cause its sublicensees to,
indemnify and hold harmless Schering and its Affiliates, employees, officers,
directors, shareholders and agents from and against all liabilities, losses,
damages, costs or expenses, including reasonable attorney's fees which such
party may incur, suffer or be required to pay resulting from or arising in
connection with any product liability or other claims arising from the sale or
use by any person of any such product that was manufactured, marketed, sold or
distributed by Neurogen or any Neurogen Affiliate or sublicensee pursuant to
this Paragraph 36, which obligation of indemnification shall be consistent with
the
23
<PAGE>
procedures set forth in Paragraph 38 hereof. In addition, Schering shall grant
to Neurogen, to the extent consistent with Schering's other marketing efforts,
an exclusive, royalty free world-wide license to utilize Schering Trademarks
which were used with such Neurogen Royalty Bearing Compounds, for a reasonable
period not to exceed eighteen (18) months, to permit Neurogen to phase in its
trademarks. Schering shall further return to Neurogen or dispose of any
applicable Neurogen know-how, to the extent feasible, as requested by Neurogen,
promptly after a termination. Notwithstanding the foregoing, no termination of
this Agreement by Neurogen shall be of any effect with respect to Schering
Royalty Bearing Compound.
37. Warranties. Each party makes the following warranties,
----------
covenants and representations:
(a) Each party represents and warrants to the other party that it has
the legal power, authority and right to enter into this Agreement and to perform
all of its respective obligations set forth herein, including the Exhibits
hereto.
(b) Each party represents and warrants that, as of the Effective
Date, it is not a party to any agreement, arrangement or understanding with any
third party which in any material way conflicts with such party's ability to
fulfill any of its obligations under the terms of this Agreement, including the
Exhibits hereto.
(c) Each party covenants that it will not knowingly commit any
material acts or fail to take any act which would cause a material omission and
that it will use due diligence, at least equivalent to those efforts it would
make with respect to protecting from encumbrance its own unlicensed valuable
intellectual property, to not permit any acts or omissions to occur which would
be in conflict with its obligations under this Agreement and the Exhibits hereto
or to diminish the scope of the grant of rights (subject to any limitations
contained in this Agreement) hereunder in any material respect.
(d) Compliance With Law. Each party shall comply in all material
-------------------
respects with the terms of this Agreement and with all laws, rules and
regulations applicable to the discovery, development, manufacture, distribution,
import and export and sale of pharmaceutical products pursuant to this
Agreement.
(e) Neither party makes any express or implied warranties, statutory
or otherwise, concerning the success of the Neurogen Compounds or Schering
Compounds, as the case may be, or the quality, validity, commercial utility,
freedom from infringement or any other characteristics of any Neurogen Compounds
or Neurogen Patent Rights or Schering Compounds or
24
<PAGE>
Schering Patent Rights, as the case may be, or other intellectual property
rights resulting from matters contemplated by this Agreement. WITHOUT LIMITING
THE FOREGOING, NEITHER PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR USE OR PURPOSE, QUALITY OR USEFULNESS
OF THE NEUROGEN COMPOUNDS OR SCHERING COMPOUNDS, AS THE CASE MAY BE, OR THE
INTELLECTUAL PROPERTY RIGHTS, INCLUDING WITHOUT LIMITATION PATENT RIGHTS,
LICENSED UNDER THIS AGREEMENT. NEUROGEN SHALL NOT BE LIABLE TO SCHERING WITH
RESPECT TO THE MANUFACTURE, USE OR SALE OF NEUROGEN COMPOUNDS. NEITHER PARTY
WILL BE LIABLE TO THE OTHER FOR INDIRECT, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL
DAMAGES OR LOST PROFITS.
38. Indemnities of Schering. Schering will indemnify and hold
-----------------------
harmless Neurogen and its Affiliates, employees, officers, directors,
shareholders and agents (a "Neurogen Indemnified Party") from and against any
and all liabilities, losses, damages, costs, or expenses (including reasonable
attorneys' fees) which the Neurogen Indemnified Party may incur, suffer or be
required to pay resulting from or arising in connection with (i) the breach by
Schering of any covenant, representation or warranty contained in this
Agreement, (ii) any product liability or other claims arising from the use by
any person of any product containing a Royalty Bearing Compound (whether or not
such product has been approved for commercial sale) that was manufactured,
marketed, sold or distributed by or on behalf of Schering or any Affiliate or
sublicensee, or (iii) the successful enforcement by a Neurogen Indemnified Party
of any of the foregoing.
39. Indemnities of Neurogen. Neurogen will indemnify and hold
-----------------------
harmless Schering and its Affiliates, employees, officers, directors,
shareholders and agents (a "Schering Indemnified Party") from and against any
and all liabilities, losses, damages, costs or expenses (including reasonable
attorneys' fees) which the Schering Indemnified Party may incur, suffer or be
required to pay resulting from or arising in connection with (i) the breach by
Neurogen of any covenant, representation or warranty contained in this Agreement
or the successful enforcement of Schering thereof.
40. Qualifications to Indemnity Obligations. The aforesaid
---------------------------------------
obligations of the indemnifying party shall be subject to the indemnified party
fulfilling the following obligations:
(i) The indemnified party shall fully cooperate with the indemnifying
party in the defense of any claims, actions, etc., which defense shall be
controlled by the indemnifying party; provided that if the interests of the
indemnified party and those of the indemnifying party conflict, the indemnified
party shall be allowed to control its own defense (including
25
<PAGE>
obtaining separate legal counsel) and the indemnified party shall assume the
cost of such defense, and the indemnifying party shall reimburse the indemnified
party for its reasonable attorney fees in the event that the indemnified party
is exonerated in any litigation and the indemnifying party is found liable in
such litigation, and
(ii) The indemnified party, shall not, except at its own cost,
voluntarily make any payment or incur any expense with respect to any claim or
suit (except for legal fees incurred by the indemnified party pursuant to (i)
above) without the prior written consent of the indemnifying party, which such
party shall not be required to give.
41. Liability Insurance. Schering shall procure and maintain, at its
-------------------
sole expense, broad form comprehensive general liability insurance, including
products and completed operations coverage in amounts which are commercially
reasonable in light of the business being conducted by Schering pursuant to this
Agreement, which may include self insurance with excess coverage providing
insurance coverage for claims and suits arising from the development,
manufacture, use, distribution or sale of any product containing a Royalty
Bearing Compound. Neurogen shall be named an additional insured on the policy
of insurance, and a certificate of insurance will be provided to Neurogen.
42. Miscellaneous Terms.
-------------------
42.1 Confidentiality. Except as necessary for the proper exercise
---------------
of its rights and obligations under this Agreement, each party agrees that it
and its Affiliates, employees, directors, agents, consultants and outside
contractors (and sublicensees in the case of Schering) will not publish or
otherwise divulge or use for its or their own benefit confidential information
furnished to it by the other party without the prior written approval of such
other party in each instance. The foregoing obligation shall not be imposed on
a party with respect to any information which it can demonstrate (i) was at the
time of disclosure to it (or shall thereafter, but prior to its publication,
divulgence or use for the benefit of a party or any of its Affiliates, become,
through no fault of such party or its Affiliates) a part of the public domain by
publication or otherwise; or (ii) was already properly and lawfully in its
possession at the time it was received from the other party; or (iii) was
lawfully received from a third party who was under no obligation of
confidentiality to the disclosing party with respect thereto; (iv) is required
by law to be disclosed (but only to the extent of such required disclosure); or
(v) is published with the mutual agreement of the parties. This obligation shall
extend until ten (10) years after such disclosure is made. The parties
acknowledge that breach of the
26
<PAGE>
confidentiality restrictions contained in this Paragraph will cause immediate
and irreparable harm for which money damages are an inadequate remedy and agree
that an aggrieved party shall be entitled to seek injunctive relief in a court
of competent jurisdiction, in addition to any other rights to remedies provided
under this Agreement or by law. Moreover, except as reasonably necessary to
commercially exploit products as contemplated hereunder, Neurogen will not
disclose intellectual property licensed to Schering hereunder.
42.2 Waiver. The failure on the part of Schering or Neurogen to
------
exercise or enforce any right conferred upon it hereunder shall not be deemed to
be a waiver of any such right, nor operate to bar the exercise or enforcement
thereof at any time or times thereafter.
42.3 Notices. Any notice required or permitted to be given by the
-------
terms of this Agreement by a party shall be given by prepaid, registered air
mail or by express delivery service, such as Federal Express or DHL properly
addressed to the address of the other party set forth below, or to such other
address as may, from time to time, be designated in writing by such other party,
and shall be deemed to have been given upon receipt:
As to Schering:
Schering Corporation
2000 Galloping Hill Road
Kenilworth, NJ 07033
Attn: President
Schering-Plough Ltd.
Topferstrasse 5
Lucerne, Switzerland
Attn: Managing Director
With copy to:
Senior Legal Director Licensing
Schering-Plough Corporation
2000 Galloping Hill Road
Kenilworth, NJ 07033
As to Neurogen:
Neurogen Corporation
35 Northeast Industrial Road
Branford, CT 06430
Attn: President
27
<PAGE>
With copy to:
Neurogen Corporation
35 Northeast Industrial Road
Branford, CT 06430
Attn: Vice President - Finance
42.4 Applicable Law. This Agreement shall be construed and
--------------
interpreted according to the laws of the State of New Jersey without giving
effect to its conflict of law provisions.
42.5 Arbitration. The parties shall follow the procedures set forth
-----------
below to resolve any dispute or issue under this Agreement to the extent
permitted by applicable law. Upon written notice from either party to the other
of such dispute or issue, the parties shall hold a meeting, attended by
Neurogen's and Scherings respective Directors of Research and Development (or
the equivalent position) (the "Representatives") to attempt in good faith to
negotiate a resolution of the dispute, which resolution shall be subject to
approval by the parties' respective Chief Executive Officers or their designated
representatives ("CEOs"). If, within thirty (30) days after such meeting, the
parties have not succeeded in negotiating a resolution of the dispute, the
matter shall be referred for review and resolution by the CEOs. The
Representatives shall state in writing the specific nature of the dispute and
possible conditions for the resolution of the dispute. The CEOs shall attempt
in good faith to resolve the matter in dispute for a period of thirty (30) days.
If no successful resolution of the dispute has been mutually agreed to the
matter shall be submitted to arbitration in New York, New York. Such
arbitration shall be conducted under the commercial rules of the American
Arbitration Association, and any award or decision made in such arbitration
shall be binding and final upon the parties hereto to the maximum extent
permitted by law. Notwithstanding the foregoing, each party reserves the right
(and the other party agrees not to contest such right) to seek injunctive relief
and other equitable remedies in a court of competent jurisdiction, instead of
arbitration, with respect to a breach by the other party relating to the non-
breaching party's proprietary intellectual property.
42.6 Captions. The captions to the Articles and Paragraphs of this
--------
Agreement are for convenience only, and shall not be deemed of any force or
effect whatsoever in construing this Agreement.
42.7 Entire Agreement and Amendment. The terms and provisions
------------------------------
contained herein, including the Exhibits hereto, and the Collaboration and
Licensing Agreement, constitute the entire agreement between the parties and
shall supersede all previous
28
<PAGE>
communications, representations, agreements or understandings, either oral or
written, between the parties hereto with respect to the subject matter hereof.
No amendment to this Agreement varying or extending the terms hereof will be
binding upon either party hereto unless in writing, signed by duly authorized
officers of the respective parties, and referencing this Agreement.
42.8 Assignment. This Agreement shall not be assignable by either
----------
party, except (i) to an Affiliate of such party, provided the assigning party
guarantees the performance of the Affiliate, (ii) as mutually agreed to in
writing in advance or (iii) to a successor to the entire pharmaceutical business
of such party, whether in a merger, sale of stock, sale of assets or other
transaction. Any permitted assignment shall be binding on the successors of the
assigning party. Any assignment or attempted assignment by either party in
violation of the terms of this Paragraph 42.8, shall be null and void and of no
legal effect.
42.9 Survival of Terms. The provisions of the Paragraphs 38, 39,
-----------------
40, 41, and 42.1 and any other terms of this Agreement which by their intent or
meaning have validity beyond the term of this Agreement shall survive the
termination or expiration of this Agreement.
42.10 No Agency. Nothing herein shall be deemed to constitute either
---------
party as the agent or representative of the other party or both parties as joint
venturers or partners for any purpose. Neurogen shall be an independent
contractor, not an employee or partner of Schering. Neither party shall be
responsible for the acts or omissions of the other party, and neither party will
have authority to speak for, represent or obligate the other party in any way
without prior written authority from the other party.
42.11 Severability. In the event that any provisions of this
------------
Agreement are held by a court of competent jurisdiction to be unenforceable
because it is invalid or in conflict with any law of any relevant jurisdiction,
(i) the validity of the remaining provisions shall not be affected, (ii) the
particular provision shall to the extent permitted by law be reasonably
construed and equitably reformed to be valid and enforceable, and (iii) the
rights and obligations of the parties hereto shall be construed and enforced as
if the Agreement did not contain the unreformed, particular provisions held to
be unenforceable.
42.12 Force Majeure. In the event that either party is prevented
-------------
from performing or is unable to perform any of its obligations under this
Agreement due to any act of God; fire; casualty; flood; any act, exercise,
assertion or requirement of
29
<PAGE>
governmental authority; epidemic; destruction of research or production
facilities; riots; insurrection; inability to procure or use materials, labor,
equipment, transportation or energy; or any other cause beyond the reasonable
control of the party invoking this Paragraph 42.12 if such party shall have used
diligent efforts to avoid such occurrence, such party shall give notice to the
other party in writing promptly, and thereupon the affected party's performance
shall be excused and the time for performance shall be extended for the period
of delay or inability to perform due to such occurrence.
42.13 Publicity. Each party agrees not to issue a press release or
---------
otherwise publicize this Agreement or the contents of this Agreement except (i)
on the advice of its in-
house or outside counsel, as required by law (e.g., any Securities and Exchange
Commission filings and disclosures) and provided the party who will be
disclosing has consulted with the other party to the extent feasible prior to
disclosure with respect to the substance of the disclosure, or (ii) as consented
to in advance by the other party in writing. Notwithstanding the foregoing,
each party shall have the right to issue an initial press release, in the form
attached hereto as Exhibit 2. Any matter disclosed as permitted pursuant to
this Paragraph 42.13 may be thereafter disclosed by either party as it shall see
fit, provided that any such further disclosure shall not be more extensive than
the original disclosure.
42.14 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original.
42.15 Solicitation. Neither party shall solicit the employees (or
------------
former employees for six (6) months after termination of employment) of the
other party for employment during or for six (6) months after the expiration or
termination of the Research Program as defined in the Collaboration and License
Agreement without the prior written consent of the other party.
42.16 Schering Performance. Schering Corporation and Schering-Plough
--------------------
Ltd. shall act as one pursuant to this Agreement; each shall be jointly and
severally responsible for the performance of all of their collective obligations
hereunder, and any breach by one such entity shall constitute a breach by both.
30
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in duplicate by their duly authorized officers as of the date first
above written.
NEUROGEN CORPORATION SCHERING CORPORATION
By:_________________________ By:__________________________
Title:______________________ Title:_______________________
SCHERING PLOUGH LTD.
By:__________________________
Title:_______________________
31
<PAGE>
EXHIBIT A
Third Party Agreements
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
<PAGE>
EXHIBIT B
Schering Currency Conversion Policy
<PAGE>
CURRENCY CONVERSION POLICY
SUBJECT: TRANSLATION OF FOREIGN CURRENCIES
SECTION: ADMINISTRATIVE AND GENERAL
PURPOSE
-------
To provide general guidelines for the translation of foreign currency financial
statements to equivalent U.S. dollars.
See also the following specific-subject policies for additional related
information:
0406.1 Translation of Foreign Currencies: Special Situations - Hyper-
Inflationary Economics
0407 Current Bookkeeping Exchange Rates
5410 Foreign Currency Exposure Reporting
APPLICATION
-----------
Applies to Schering-Plough Corporation, its divisions and all subsidiaries
except those designated by the International Finance Committee and advised by
their respective division. These divisions and subsidiaries should follow
Finance Manual Policy No. 0406.1 - Translation of Foreign Currencies: Special
Situations and Hyper-Inflationary Economies.
DEFINITION
----------
Current Bookkeeping Exchange Rate - as published by Corporate Treasury, the
---------------------------------
exchange rate for assets and liabilities at the balance sheet date. For
revenues and expenses, the exchange rates published at the end of the previous
accounting period (prior month). See Finance Manual Policy No. 0407 - Current
Bookkeeping Exchange Rates.
Historical Exchange Rate - the rate in effect at the time the transaction was
------------------------
recorded in the original books of entry.
POLICY/PROCEDURE
----------------
The procedure for translating foreign currencies follows. Where appropriate,
Divisions will initial and prepare supplemental detailed polices as required.
<PAGE>
Statement of Income
-------------------
All elements of the Statement of Income of foreign subsidiaries, expressed in a
currency other than U.S. dollars, are translated into U.S. dollars at the
current bookkeeping exchange rates in effect at the end of the prior month.
. Exception: The foreign currency value of depreciation expense
applicable to the revaluation of fixed assets is not
translated to U.S. dollars nor reported in the
Statement of Income in accordance with U.S. Generally
Accepted Accounting Principles (GAAP).
Balance Sheet
-------------
Balance sheets of foreign subsidiaries, expressed in a currency other than U.S.
dollars, are translated into U.S. dollars at current bookkeeping exchange rates.
. Exceptions: Intercompany Investments (as defined in the Schering-
Plough Chart of Accounts) and Capital accounts are
translated at historical exchange rates.
Foreign currency values applicable to the revaluation
of fixed assets (i.e., Real Estate, Plant and Equipment
Revaluation and Real Estate, Plant and Equipment,
Allowance for Depreciation Revaluation) are not
translated to U.S. dollars, nor reported in financial
statements prepared in accordance with U.S. GAAP.
The net difference resulting from translating a foreign currency Balance Sheet
to U.S. dollars is recorded and shown in the Foreign Currency Translation
Adjustment account (S-P COA #098-20) in the equity section of the Balance Sheet
and is not included in the determination of net income for the period. See
Financial Manual Policy No. 0406.1 - Translation of Foreign Currencies: Special
Situations and Hyper-Inflationary Economies for special situations.
Retained Earnings
-----------------
Retained Earnings are translated to U.S. dollars at a composite exchange rate
determined by adding the U.S. dollars of all components of Retained Earnings as
follows:
2
<PAGE>
. Beginning of Year Balance (S-P COA #095-10) - the U.S. dollar amount
-------------------------
reported at the end of the prior year as Retained Earnings-Ending
Balance. This figure cannot be restated nor revised. Any changes
must be recorded in the retained earnings adjustment account.
. Net Income (S-P COA #095-20) - from the Statement of Income.
----------------------------
. Dividends Declared (S-P COA #095-30/40) - translated and maintained at
------------------
the current bookkeeping exchange rate in effect at the end of the
month prior to declaration.
. Other Changes (S-P COA #095-90) - translated and maintained at the
-------------
historical rate of exchange.
. Fixed Asset Revaluation: Cumulative (S-P COA #096-00) - no U.S. dollar
------------------------------------
equivalent in accordance with U.S. GAAP.
. Ending Balance - arrived at by adding the U.S. dollar value of all the
--------------
components of Retained Earnings previously described.
Compliance with GAAP
--------------------
Prior to translation, financial statements of subsidiaries must be restated to
conform to GAAP in the United States. GAAP requires assets and liabilities
denominated in a currency other than the book currency of the subsidiary to be
revalued based on the current bookkeeping exchange rates. Any resulting
currency gain or loss is included as foreign exchange expense in the
determination of net income for the period.
Subsidiaries whose books are kept in U.S. dollars will, at the end of the
accounting period, revalue assets and liabilities, including intercompany
accounts denominated in a currency other than the book currency of the
subsidiary based on the current bookkeeping exchange rate. Any resulting U.S.
dollar gain or loss is recorded as foreign exchange expense (S-P COA #820-831)
in the determination of net income for the period.
Sale or Liquidation of Foreign Subsidiary
-----------------------------------------
A sale or complete (or substantially complete) liquidation of the assets of a
foreign subsidiary requires the recognition in income of all or a portion of the
Translation Adjustment account (S-P COA #098-20) attributable to such entity in
measuring the gain or loss on sale or liquidation. For example, if 100%
ownership of a foreign subsidiary with a debit balance of $1 million in its
Translation Adjustment account was sold to a third party, any
3
<PAGE>
gain (loss) on the sale would be reduced (increased) by the $1 million.
A partial sale by the parent of a foreign subsidiary's common shares to an
----
unrelated party would require that a pro-rata portion (based on the percentage
of ownership sold) of the Translation Adjustment account be included in
measuring the gain or loss on the sale, even if the sale involves only a
minority share in the subsidiary. For example, if the parent sold a 20% share
of the subsidiary to a third party, 20% of the Translation Adjustment Account
for that subsidiary would be removed from the balance sheet and charged to
income (or expense). Therefore, if the subsidiary had a $1 million debit
balance in its Translation Adjustment account and 20% of its outstanding stock
was sold to another company at a gain of $500,000, the gain would be reduced by
a $200,000 charge from recognizing 20% of the Translation Adjustment account
into income. This would be reported on the parent company's books.
A liquidation must encompass substantially all of the assets of a subsidiary in
-----------
order to recognize the Translation Adjustment account in income. If the
liquidation is substantially complete even though the legal entity remains, the
entire Translation Adjustment account is recognized in income. A liquidation
that is not substantially complete (e.g., sale of product line) requires no
recognition of the Translation Adjustment account into income. The Translation
Adjustment account is recognized in income if the subsidiary is liquidated in
substance, not merely form. For example, if a legal entity of the company is
liquidated, but the assets and operations of such entity are retained and merely
transferred to another Schering-Plough legal entity, no recognition of the
Translation Adjustment account into income is required. The issue of
liquidation is complex and the financial impact can be significant; therefore,
proposed accounting treatment of all potential liquidations must be reviewed and
approved by the Corporate Vice President -Controller, or designee, prior to
recording an official subsidiary record.
RESPONSIBILITY
--------------
The chief financial officer, or designee of each division/subsidiary is
responsible for implementation and adherence to this policy.
4
<PAGE>
SCHEDULE A
Priority Screens
[CONFIDENTIAL MATERIAL OMITTED
AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.]
